Auditors urge companies to do more to tackle ESG supply chain risk

Businesses should do more to tackle climate hazards running through supply chains, says the Chartered Institute of Internal Auditors (CIIA). It urges boards to put new requirements on suppliers to decarbonise in line with their own firms’ net-zero targets, and ensure business continuity is in place against climate risks and events affecting their supply chains. The CIIA argues that internal audit functions can flag early warning signs of potential ESG-related supply chain risks to allow companies to put in place proactive mitigation measures. But it voices concern that boards do not use their internal audit function to its full advantage. “With the ability to examine all parts of an organisation that are involved in the supply chain, internal auditors are in a unique and strong position to help drive meaningful action on supply chain risks,” it explains. Publishing a report, Supply Chain ESG Risks, ahead of the COP28 conference in Dubai next week, the CIIA warns that businesses are at risk from exposure to greenwashing, legislation and regulatory changes through their suppliers, as well as climate change-related disaster risk. “Stronger legislative requirements and public scrutiny mean greenwashing can no longer mask the need for real action. This latest report unveils a stark reality: the need for a genuine commitment to ethical and sustainable practices within supply chains,” the CIIA says. It advises businesses to step up due diligence on suppliers and “take immediate and comprehensive action on climate change, as well as other environmental, social and governance risks within their supply chains”. Amid a range of recommendations, the CIIA proposes boards should open conversations with audit committees and internal audit functions about their work to check decarbonisation measures in their supply chains. It also advises boards to assess the effectiveness of business continuity and crisis management plans against the risk of supply chain failures from climate-related weather events, including stress testing resilience to supply chain disruption. Boards should leverage internal audit functions to evaluate their organisation’s compliance with new law and regulations on ESG responsibilities in their supply chains, says the CIIA. They should also undertake due diligence when selecting suppliers and work with the internal audit function for independent assurance that due diligence processes are effective across the supply chain, it adds. The report says boards should use data analytics, AI and other new technologies to enhance their internal audit capabilities to evaluate supply chain ESG risks. Anne Kiem, chief executive of the CIIA, says: “The climate crisis is already having a significant impact on supply chains, and boards need to ensure they have robust risk management and business resilience strategies in place to cope with this. At the same time, businesses need to focus on ensuring supply chains are decarbonising and not sabotaging their transition to net zero.” “Internal audit has a key role to play by providing the board and senior management with independent assurance that climate hazards in the supply chain are being addressed effectively,” she adds. Richard Chambers, senior internal audit advisor at AuditBoard, says: “Accelerating climate change means the risk of havoc caused by supply chain disruption is growing by the day.” At the same time, regulators and other stakeholders are pressuring businesses to ensure their supply chains are more environmentally and socially responsible, he said. “By harnessing the power of internal audit, organisations can enhance their ability to identify, mitigate, and manage climate-related and other ESG supply chain risks effectively,” Chambers adds.

Auditors urge companies to do more to tackle ESG supply chain risk

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