Quick Summary:
This article posits that with ESG and sustainability now crucial for businesses worldwide, third-party assurance is rapidly increasing in importance.
It details how assurance currently comes in two levels: limited and reasonable, with regulations like the EU’s CSRD mandating a shift to reasonable assurance, and also notes how various factors such as budget, materiality considerations, investor demands, and competitive differentiation can influence assurance level.
Finally, it mentions that ESG software like IsoMetrix Lumina aids in streamlining assurance processes and improving data accuracy.
It’s no stretch to say that ESG and sustainability considerations have become integral to business operations around the world. With new corporate sustainability regulations across global markets being announced regularly, meeting compliance demands has never been more difficult.
Compounding on this challenge are assurance expectations to validate claims of corporate sustainability disclosures.
According to the International Federation of Accountants (IFAC) State of Play report on Sustainability Disclosure and Assurance, companies reporting some level of ESG information has increased from 91% in 2019 to 98% in reporting year 2022. Firms obtaining some level of assurance has also increased five percent from 2021 to 69%, an 18% increase from reporting year 2019 across the 22 international jurisdictions researched.
Requirements from regulations like the European Union’s Corporate Sustainability Reporting Directive (CSRD) and standards like CDP (formerly Carbon Disclosure Project), have undoubtedly driven organizations to obtain third-party assurance for sustainability disclosures.
It’s becoming less of the Wild West when it comes to ESG reporting, but determining the right kind of assurance for your firm requires key considerations of your situation.
The need for ESG data confidence
You don’t need to research or cite Sarbanes-Oxley to know accounting can be inaccurate or misrepresented. While most businesses do not report their sustainability performances with deceitful intent, it’s important to acknowledge how nascent sustainability-related disclosures are, and the disparate nature of the data required for comprehensive ESG reporting.
Organizations want to feel confident in their data to provide accurate external reports. Likewise, investors, regulators, and other stakeholders want to trust corporate sustainability reports are accurate for their own ends. Expert and independent auditing has historically been the reliable means for validating data accuracy. In essence, does a company’s data back up its ESG and sustainability-related claims?
In most cases, ESG assurance is conducted by an external audit firm or specialized ESG consultancy, that evaluates the quality, accuracy, completeness, and consistency of an organization’s ESG reporting against relevant standards, frameworks, guidelines, or regulatory requirements.
Companies can also conduct assurance on their own ESG activities via a process known as self-assurance or internal assurance, which usually takes the form of internal audits, reviews, and assessments.
However, in the same way that external financial audits lend an extra measure of credibility to company financial results and provide a reliable means by which investors and stakeholders can base their decisions, so the same applies to external, independent validation of ESG and sustainability data.
Understanding assurance levels
Two main levels exist regarding assurance; the lower, less comprehensive type is commonly known as ‘limited assurance’ while the more comprehensive, stringent version is termed ‘reasonable assurance’.
For limited assurance, the independent auditor/agency is primarily occupied with establishing whether certain conditions around controls, processes, and frameworks have been met by the organization. This results in fewer tests and less evidence gathering than reasonable assurance.
Reasonable assurance, on the other hand, follows a more comprehensive methodology, and may include processes like understanding the company, evaluating underlying assumptions, identifying risks, assessing internal controls, performing reconciliations, and validating and verifying relevant data.
Reasonable assurance can perhaps be thought of as analogous to the types of audits conducted on corporate financial statements in terms of its rigor, and provides a higher level of confidence to investors and stakeholders that an organization’s ESG and sustainability information is free from material (significant) misstatement than limited assurance does.
Assurance level drivers
Historically, companies have been able to determine which level of assurance they wish to achieve and provide to their investors, stakeholders, and the market. As the ESG landscape has grown and matured, however, new assurance drivers are coming into play, and recent rules and regulations are beginning to dictate corporate efforts in this area.
The EU’s CSRD, for example, requires large companies to publicly disclose detailed information on their ESG performance and impacts, and is introducing a staggered approach to its assurance requirements in that companies may begin reporting with limited assurance, but must transition to providing reasonable assurance within a four-year timeframe.
On a broader scale, there has also been discussion around the European Commission (EC) planning to adopt a limited assurance standard by October 2026, and a reasonable assurance standard by October 2028. This will be a big shift for most firms, as only 18% of companies in the IFAC study that obtained assurance, obtained reasonable assurance. Consequently, the expectation is that demand for assurance services will increase as requirements heighten.
Considerations when choosing your assurance level
Notwithstanding the compliance standards detailed above, there are various other factors to weigh in choosing the appropriate level of assurance to apply to ESG and sustainability data and disclosures.
These may include some or all of the following:
Budget and time commitment: Perhaps the most practical of all considerations is how much time and money can the business allocate to the assurance process. Early stage and/or small companies don’t tend to have robust and well-developed ESG programs and may not have the available resources to obtain anything beyond limited assurance, if that. Fortunately, these types of companies may not face stringent assurance requirements, at least not initially, and may have the option to opt out of assurance if they don’t believe it’s worthwhile.
Materiality considerations: By focusing any assurance efforts on material ESG issues, organizations can provide their stakeholders with reliable information about topics that are most relevant and significant to their decision-making processes. They may therefore choose to provide a higher level of assurance in some areas of their business than others, following the creation of a materiality assessment to help them identify where to focus their attention and efforts.
Investor and stakeholder demands: Investors and stakeholders may hold varying levels of assurance needs depending on both their individual circumstances and those of the business. A national mining organization with the capacity to cause major environmental, social, and reputational damage will more likely be held to higher safety and sustainability assurance standards by its stakeholders than a retail chain selling sports equipment, for example.
Benchmarking and competitive differentiation: ESG and sustainability represent areas for businesses to differentiate themselves amongst their competitors and peers. By voluntarily applying a higher level of assurance to its sustainability activities, an organization may attempt to foster trust between itself and its customer base, as well as potentially use it as a unique selling point and competitive differentiator.
How technology can assist companies with their ESG assurance
As assurance services tend to follow billable hours models, reducing the amount of time and work these professionals provide to your firm will help lower the overall cost via more accurate data and more organized records.
Modern ESG software such as IsoMetrix Lumina can play an indispensable role in helping businesses achieve their desired level of sustainability assurance.
By streamlining data collection, analysis, reporting, and assurance processes, Lumina can enable companies to efficiently manage large amounts of ESG data from multiple sources, including internal systems, third-party documents, and stakeholder feedback.
Automating data collection and aggregation means that IsoMetrix Lumina helps to improve data accuracy, completeness, and consistency as well.
Lumina also facilitates collaboration and communication among internal teams and with external stakeholders, enhancing the transparency, engagement, accountability, and comprehensiveness of ESG and sustainability data.
Learn more about IsoMetrix Lumina.
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