As EU nations row over CSDDD, UK auditors outline revamped code to enhance ESG performance

In a statement, the Chartered IIA said its proposed changes would “represent one of the most significant changes for the profession in recent years” and will serve to enhance corporate governance standards.

The new draft Code proposes that internal auditors should not be able to deem risks relating to climate change and other environmental sustainability issues beyond their remit. They should also enhance risk considerations relating to social issues, including reputational risk from the poor treatment of customers and communities.

It also stipulates that internal auditors should support any risk-related disclosures made by their company’s board.

The Chartered IIA said these changes and others proposed will bring its Codes in line with the revised UK Corporate Governance Code plus new Global Internal Audit Standards.

The Bank of England, Central Bank of Ireland, the Financial Conduct Authority (FCA) and the Financial Reporting Council were all involved in the design of the revised code, which is open for consultation until 8 May 2024.

Sally Clark, chair of the Internal Audit Code of Practice Independent Committee, said: “Whether it’s supporting greater financial resilience, assessing corporate culture, or keeping companies honest on their ESG commitments, the internal audit profession needs to be bold and courageous to remain relevant and deliver value.

“Through this Code, we want to empower internal audit to have a key voice and opinion as it helps to protect the assets, reputation, and sustainability of our organisations.”

Disarray over the CSDDD

With new EU regulations anticipated to come into force this year, including the Corporate Sustainability Due Diligence Directive (CSDDD), and some regulations already in place, such as the Corporate Sustainability Reporting Directive (CSRD), some British businesses are making changes in their sustainability governance capabilities to get ahead of the curve.

The CSDDD aims to hold big companies responsible for violations of human rights and environmental standards in their value chains. It will establish a new due diligence duty for all large businesses, plus mandate corporate climate transition plans aligned with the Paris Agreement’s 1.5C pathway.

A key vote on the Directive, tabled for last week, was delayed due to some EU member states arguing that it paves the way for such mandates to be applied to SMEs and will ultimately over-burden them.

The Belgian EU presidence has already re-worded the Directive to ensure that it only applies to businesses with 1,000 or more staff plus annual turnovers of €300m or more. Other amendments were made to confirm a multi-year delay in implementation for smaller firms.

Opponents of the Directive in its current form include Italy, Austria, Sweden, Estonia and Germany. A vote on the legislation in February failed to push it forward and concerns are now mounting around its fate with the European elections on the horizon.

Richard Howitt, former MEP and former chief of the International Integrated Reporting Council, said the failure to pass the legislation “does not lift any burdens from businesses, which will continue to have to respect national due diligence regulations”.

Howitt said: “The advancement of business and human rights through mandatory due diligence will not go away, as current initiatives in Brazil, Norway, South Korea, Japan, the UK and the USA prove.

“It simply means that the European Union is likely to be passing the mantle on responsible business conduct to others in the world and could lose probably five years in setting the standard for European business to uphold its role globally.”

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