Focus

Revitalizing Internal Control: Management of Sustainability Information

Vera Chen
Senior Associate at TWSE

Rising Importance of Sustainable Information

<中文版>

Over the past few years, the world has been facing increasing pressure to address the climate change crisis. The World Economic Forum (WEF) highlighted in its latest 2024 Global Risks Report that the most serious risk factor for the next decade globally is environmental risk. The 28th UN Climate Change Conference (COP28) in 2023 was the first to conduct a Global Stocktake (GST), which focused on information gathering and preparation(see footnote 1). In addition, the Organization for Economic Cooperation and Development (OECD) released a new version of Principles of Corporate Governance in 2023, adding the section “Sustainability and Resilience” which emphasizes that the sustainability information disclosed by enterprises should be reliable and comparable.

In response to the global demand from stakeholders for high-quality disclosure of sustainability information and to strengthen the quality of Sustainability Reports, the Taiwan Stock Exchange (hereinafter referred to as the TWSE) revised the “Rules Governing the Preparation and Filing of Sustainability Reports by TWSE Listed Companies” as early as December 7, 2021 to standardize the establishment of relevant operating procedures for the preparation and verification of sustainability reports by listed companies, and to incorporate them into the internal control system. The requirement of the Taipei Exchange (hereinafter referred to as the TPEx) on OTC companies are the same.

The International Sustainability Standards Board (ISSB), established by the International Financial Reporting Standards Foundation (IFRS Foundation), formulates internationally consistent disclosure standards to increase the comparability of sustainability information and prevent greenwashing. To meet the needs of investors related to sustainability information, the ISSB issued sustainability disclosure standards in June 2023.

The Financial Supervisory Commission (hereinafter referred to as the FSC) has also actively complied with international norms and released the “Roadmap for Taiwan listed companies to align with IFRS Sustainability Disclosure Standards” on August 17, 2023. This roadmap aims to adopt IFRS Sustainability Disclosure Standards to strengthen the quality and comparability of sustainability information with the goal of enhancing international trust in sustainability information within Taiwan’s capital market.

Strengthening Sustainable Information Management

In March 2023, the Committee of Sponsoring Organizations (COSO) of the Treadway Commission applied the framework of the 2013 version, and issued the “ACHIEVING EFFECTIVE INTERNAL CONTROL OVER SUSTAINABILITY REPORTING (ICSR): Building Trust and Confidence through COSO Internal Control – Integrated Framework” (hereinafter referred to as COSO ICSR). This document specifically focusing on constructing an internal control framework for sustainability information, which has become the key to improving the quality of sustainability information.

In order to assist companies in implementing effective internal control over sustainability information respond to its challenges, the FSC has revised the “Regulations Governing Establishment of Internal Control Systems by Public Companies” and the “Evaluation Items for Assessing the Effectiveness of Internal Control Systems of Public Companies” (hereinafter referred to as “Evaluation Items”) on April 22, 2024 to standardize the management of sustainability information for TWSE/TPEx listed companies, requiring them to include them as necessary audit items in the annual audit plan. This will be implemented on January 1, 2025, providing sufficient response time for companies.

Considering the facts that sustainability information comes from  diverse sources, belongs to cross-disciplinary information, and involves qualitative, estimated and hypothetical matters, the TWSE and the TPEx have used the “Evaluation Items for Assessing the Effectiveness of Internal Control Systems of Public Companies” released by the FSC . They  also referred to the “Core Principles for Establishing Internal Control Systems,” relevant laws, regulations and codes of conduct, the 2013 version of COSO’s “Internal Control-Integrated Framework,” COSO ICSR, and the “International Standards for the Professional Practice of Internal Auditing(Standards)” of the Institute of Internal Auditors (the IIA) to jointly revise the examples of the “Reference Items for Assessing the Effectiveness of Internal Control Systems” (hereinafter referred to as Reference Items), expecting to promote collaboration companies through internal control, and integrate their existing internal control framework.

The purpose of this revision is to assist management and other stakeholders in fulfilling their respective responsibilities. Other than the addition and revision of some items, companies should identify and evaluate their internal control systems related to sustainability information, in order to integrate their quality and efficiency of internal control, strengthen their ability to collect, apply and compile sustainability information, and enhance their credibility. The key points are summarized as follows:

Definition:

Sustainability information (including sustainability reporting) refers to data or information that reflects an organization’s sustainability activities and transactions, usually divided into three categories: environmental, social, and governance.

Scope of application:

The sustainability disclosure in the annual report and the sustainability report; it is also recommended to include the sustainability information disclosed by the company on its website.

The revised architecture is described as follows:

First and foremost, by making "Control Environment" the bedrock, enterprises must exhibit a dedication to sustainable practices and extend this commitment to all members of the organization and key stakeholders within the value chain. The board of directors, supported by a supervisory framework, ensures the efficient operation of internal controls pertaining to sustainability information. The effectiveness of a company's reporting system hinges on its most valuable asset—its employees—along with the establishment of its organizational structure, hierarchical responsibilities, and internal control system. Hence, attracting and nurturing sustainability talent emerges as a crucial consideration for enterprises. They must also ensure that their salary policies align with sustainable business objectives to effectively implement accountability systems.

Under the framework of “Risk Assessment,” enterprises connect their sustainable business objectives with their overall goals, and incorporate ESG factors into the assessment of enterprise risk management to establish the materiality assessment principle; they must also consider the factors and pressures that may lead to sustainability information fraud, as well as changes and risks such as domestic and international emerging trends, and adjust their internal control systems accordingly.

In the aspect of “Control Activities,” based on the results of the risk assessment above, enterprises should examine the characteristics of sustainability information, establish corresponding internal control and IT general control (ITGC), ensure the completeness, accuracy and reliability of sustainability information through the source, collection, recording, processing, preparation, adjustment, approval and release, and review the implementation status continuously.

High-quality sustainability information relies on the elements of “Information and Communication.” Enterprises need to retain records and trails for auditing, and establish a sound communication mechanism to facilitate internal or external communication. They should also establish operating procedures for disclosing sustainability information externally to ensure the integrity, accuracy and reliability of sustainability information.

In terms of “Monitoring Activities,” as sustainability information comes from a rapidly changing environment and involves the implementation of future sustainability goals, the monitoring function is particularly important. Enterprises should establish ongoing and separate evaluations, and make adjustments and improvements for their deficiencies. Internal auditors should play an independent and objective role to assist enterprises in inspecting and reviewing the oversight system, providing timely improvement suggestions, and continuously improving and communicating through rigorous exploration and insight to enhance the quality of sustainability information disclosure of enterprises.

Conclusion

With the development of international trends, the world is increasingly concerned about climate risk and the quality of sustainability information disclosure. ISSB continues to integrate sustainability information standards such as TCFD and SASB, and further combines sustainability information with financial information to improve the consistency and comparability of sustainability reporting. The FSC, together with the TWSE and peripheral units, assists enterprises in directly aligning with IFRS sustainability disclosure standards, which is expected to make the development of Taiwan’s capital market more internationally competitive and sustainable.

However, in facing the emerging international trends and changes in legal compliance arising from sustainability issues, enterprises need to overcome numerous challenges in establishing effective data governance structures, developing reliable information technologies, and collaborating across departments. The TWSE and the TPEx integrated international standards and local regulations, releasing reference item examples to assist enterprises in forming cross-functional teams and integrating existing internal control systems based on their practical operations. They aim to establish sustainable development business goals, identify and evaluate risks, and establish internal control workflows such as collecting, applying, and compiling sustainability information. They also aim to improve the quality of sustainability information disclosure through effective communication and supervision under their internal control systems.

Of course, the top priority for enterprises to improve their sustainability information is to establish a culture of sustainable governance. The TWSE has established the “Sample Template for XXX Co., Ltd. Sustainable Development Committee Charter” to guide enterprises to establish sustainable development committees (Chief Sustainability Officer) and encourage the preparation and application of sustainability reports through corporate governance evaluation. The sustainability report should be approved by the board of director to strengthen its monitoring function on sustainable governance, and guide enterprises to deepen sustainable governance from top to bottom. The TWSE will also continue to assist companies in improving their management practices for sustainability information, in order to enhance the disclosure of sustainability information and jointly move towards the “2050 Net-Zero Transition”.

Footnote1:Summary of the intersessional workshop to develop elements and inform the work of the joint contact group of the first global stocktake under the Paris Agreement Page 1

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