Give me comfort: Introduction to the assurance of ESG data
With the growing majority of large businesses reporting on ESG metrics, Verco’s Emilija Emma discusses what is driving this and why businesses are seeking external verification.
Globally, both ESG disclosure and assurance are experiencing a moment of massive expansion
A stunning 98% of the 1,400 large companies reviewed by IFAC (International Federation of Accountants) made public disclosures of at least some ESG metrics in 2022 – up from 91% in 2020.
As many as 69% of these companies obtained some level of third-party verification or assurance on at least some of the information reported.
Sustainability is now seen as a financial issue as well as a moral one – this drives disclosure and assurance
As the natural systems which sustain our growing global population come under threat, ability to understand social and environmental risks and adapt to them becomes crucial to the survival of a business.
Governments increasingly regulate companies with high ESG impacts, imposing reporting requirements, controls and limitations which can become a significant burden or impede a business’s ability to operate in some jurisdictions. Conversely, failing to make use of government support for sustainable activities, such as that provided by the US Inflation Reduction Act or the EU’s Foreign Subsidies Regulation, can erode a company’s competitive advantage.
Consequently, to assess the likely return on a potential investment, it is now highly important to thoroughly understand the ESG-related risks it is exposed to, the ESG impacts it has or will have, what it is doing to address them, and its strategic planning to adapt to the rapidly changing ESG landscape.
As the perceived importance of sustainability grows, all investors are increasingly exposed to sustainability figures and narratives. These are presented not only in stand-alone sustainability reports, the importance and prevalence of which is dwindling according to IFAC’s review, but more and more in financial statements, annual reporting, and integrated reporting – where assured information has historically been seen as standard.
What is assurance and why is it needed for ESG data?
One of the Global Reporting Initiative’s (GRI) definitions of external assurance as applied to sustainability is “the use of external, independent reviews of sustainability management processes and final disclosures intended to increase the robustness, accuracy and trustworthiness of disclosed information.”
Generally, the process of conducting the review to attain the assurance conclusion is referred to as verification, although often the term ‘assurance’ is used interchangeably for both the process and the conclusion.
This may all sound familiar to people who have dealt with financial audits and encountered the terminology. However, unlike financial auditing, the assurance of sustainability data is still in its infancy as far as procedures, standards and regulations are concerned – and it may be too soon to transpose the rules without modification.
The difference between limited and reasonable assurance
Reasonable assurance – a requirement for financial reporting – is at the moment very difficult to achieve for most companies when it comes to sustainability data, as the reliance on estimations and gap-filling is much more significant than seen in financial reporting. As a result, limited assurance is generally the highest level achieved at present.
The methodology behind limited assurance is similar to that of reasonable assurance, but less thorough. The professional carrying out the assurance collects less evidence and conducts a more limited review of a smaller sample of data, which results in a weaker conclusion. This conclusion must be expressed in negative sense: “nothing came to our attention to indicate that XYZ is materially misstated”, rather than the positive statement “in our opinion, XYZ is reasonably stated” which is the result of reasonable assurance.
Globally there are a significant number of guidelines and frameworks available to base sustainability assurance on, and very little in the way of mandatory regulation. Perhaps as a result, the assurance landscape, in terms of how much assurance is done, what standards it follows, and who completes it, varies across countries.
Broadly though, it is very clear that as investors increasingly grapple with how to interpret and use sustainability data to make informed investment decisions, more and more companies reach for assurance as a way to give investors comfort over the information they share in their reporting.
Assurance is variously encouraged, rewarded, or mandated
A variety of sustainability benchmarks, standards, and regulations reward assurance of sustainability data. For instance, the Global Reporting Initiative (GRI) requires organisations reporting in line with its standards to state whether their disclosures have been assured. Meanwhile the Global Real Estate Sustainability Benchmark (GRESB) awards points for obtaining a third-party review of the disclosed data in several parts of its assessments – and so does the Carbon Disclosure Project (CDP). The EU SFDR, the proposed US SEC climate rules, the Californian Bills SB 253 and SB 261, the EU CSRD, all have at least some assurance-related requirements.
For a glossary of all the acronyms, download the net zero glossary
and for a handy one-pager download of how assurance is variously treated in each, click here:
Assurance for benchmarks, standards and regulations
Increased assurance is a signal of sustainability data becoming operational
The above is just a sample of how different benchmarking schemes, legislations, and standards treat assurance, and the level of importance placed on it.
The regulatory landscape is becoming more complex by the day, and the reporting burden may seem daunting. It is, however, an encouraging sign that sustainability disclosures are leaving the sidelines are entering centre stage to become an integral part of decision making.
After all, the goal of providing assured sustainability information underpinned by solid data and quality methodologies is to enable the end users of the reports to trust it and use it to make decisions that bring benefits in the long as well as the short term.
Contact our reporting team to find out more about assurance or any of the schemes and standards mentioned above. We will be happy to discuss whether they are appropriate for your organisation, and help you with setting up data collection and reporting systems that can withstand scrutiny.
To learn more about the complexities that exist in sustainability assurance, and the direction the market is travelling in, take a look at our second article in this series:
The importance of sustainability expertise in sustainability reporting and assurance
