Sustainability largely remains an area of doubt for many enterprises. Will the investments be worth the returns? Can the benefits be shown with numbers? Why take up new initiatives to serve a long-term goal when things seem to be just fine right now? These are just some of the questions that stop sustainability to be considered seriously when making corporate policy adjustments.
However, sustainability-related risks can be a flashlight. It exposes hidden hazards, operational inefficiencies and cost pressures that can directly create a dent in a company’s earnings. These risks are now a threat to every industry. While manufacturers and energy firms are directly impacted by physical climate threats, technology groups have to face tighter scrutiny over data privacy and responsible information use and consumer‑facing businesses feel pressure from supply‑chain transparency and shifting customer expectations.
Regulation in Action
In India, regulators are making sure that sustainability becomes part of the audit process. The Comptroller and Auditor General (CAG) has begun applying SEBI’s Business Responsibility and Sustainability Reporting (BRSR) criteria to audits of state‑run entities, moving ESG assessment from an accessorising “nice-to-have” point to something that is mandatory.
Now, let us look at things from a more macro, global perspective. In 2023, the Irish Data Protection Commission fined a large US-based social media and technology conglomerate €1.2 billion for General Data Protection Regulation (GDPR) breaches tied to a major data leak. This proves that a governance lapse that looks non‑financial can result in a huge financial penalty. Sustainability is now a core business consideration.
Global reporting mandates have now cemented whatever link was there between narrative risk and financial impact. The Corporate Sustainability Reporting Directive and the IFRS Sustainability Disclosure Standards now require companies to explicitly disclose the financial effects of sustainability-related risks. What does it result in? It forces tighter alignment between narrative disclosures and the financial statements, making non‑financial risk highly relevant to audit planning and execution.
Tangible Risk Warrants Practical Mitigation Strategies
When auditors form an understanding of an entity, they must look beyond the balance sheet towards external forces that reshape the business model and its risk profile. Only making strategic pledges, such as carbon-reduction targets or responsible-sourcing policies, adds operational complexity and increases estimation uncertainty.
Sustainability-related risks are not hypothetical. A 2019 CDP study of 215 of the world’s largest firms estimated that nearly US$1 trillion of enterprise value is at risk from climate‑related impacts, with many likely to materialise within five years. It also flagged about US$250 billion in potential stranded‑asset losses as economies pivoted to low‑carbon pathways. These exposures directly affect asset‑impairment testing, useful‑life assessments and forward‑looking cash‑flow models.
Various forecasts and valuation assumptions should incorporate climate‑driven changes in demand, pricing, regulatory costs or asset utilisation. Provisions and contingent liabilities which arise from litigation, environmental obligations or regulatory enforcement must be appropriately recognised.
Let us look at the experience of a large multinational life sciences and agriculture corporation to illustrate this point. After acquiring a well‑known agrochemical firm, it faced extensive US litigation over claims that a widely used herbicide causes cancer. To date, the company has paid roughly US$10 billion in settlements, with an additional US$ 7.25 billion proposed to resolve the remaining cases. Those outflows have heavily weighed on its balance sheet and market valuation, demonstrating how social and product‑governance risks can become material financial liabilities.
Sustainability‑Related Risks and Going‑Concern Considerations
It is true that multiple factors such as shifts in market dynamics, evolving regulatory expectations, exposure to physical weather events, supply‑chain fragility and social‑labour disruptions, are risky that can end up affecting an organisation’s financial performance.
In extreme cases, these risks go beyond accounting adjustments and raise a much larger question. Massive litigation payouts, steep fines, stranded‑asset write‑downs or rapid transition pressures can all affect a firm’s ability to continue as a going-concern, and auditors must rigorously assess the entity’s financial resilience. Such issues have moved from peripheral compliance notes to core boardroom discussions of risk, strategy and oversight.
Stakeholders now demand a complete, accurate picture of a company’s affairs, and auditors are pivotal in ensuring the financial statements capture these emerging exposures. Embedding non-financial risk within risk assessment, audit planning and evidence evaluation elevates audit quality, reinforces confidence in the numbers and underpins the long‑term viability of the entities audited.
About the Authors: Dr Gargi Ghorpade, Partner, Deloitte India, Nikhil Poddar, Director, Deloitte India and Nishi Jhaveri, Manager, Deloitte India
