ESG and sustainability considerations have become integral to business operations around the world. New corporate sustainability regulations across global markets are being announced regularly, and this is making organizations difficult to meet required compliance. Compounding on this challenge are assurance expectations to validate claims of corporate sustainability disclosures.
The State of Play report prepared by the International Federation of Accountants (IFAC) on Sustainability Disclosure and Assurance disclosed that companies reporting some level of ESG information have increased from 91% in 2019 to 98% in the reporting year 2022. Out of the 22 international jurisdictions researched, organizations obtaining some level of assurance has also increased to 69% in 2022, which is 5% more than that of 2021 and 18% more than that of 2019.
Requirements from regulations like the European Sustainability Reporting Standards (ESRS) of the EU's Corporate Sustainability Reporting Directive (CSRD) and standards like CDP (formerly Carbon Disclosure Project) have driven organizations to obtain third-party assurance for sustainability disclosures. So, determining the right kind of assurance for an organization requires key considerations of its situation.
Need for data confidence
Organizations want to feel confident in their data to provide accurate external reports. Similarly, investors, regulators, and other stakeholders want to trust corporate sustainability reports are correct for their ends. Expert and independent auditing has historically been the reliable means for validating data accuracy.
Read more: An Overview of ESRS 1 and ESRS 2 cross cutting standards
Companies can conduct assurance on their own ESG activities via internal assurance or self-assurance, which usually takes the form of internal audits, reviews, and assessments. Generally, 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.
External financial audits lend an extra measure of credibility to a company's financial results and provide data reliability on which investors and stakeholders can base their decisions, so the same applies to external, independent validation of ESG and sustainability data.
Assurance levels
Two main levels exist regarding assurance:
- Limited assurance - the less comprehensive type
- Reasonable assurance - the comprehensive and stringent version
The ESRS of the European Union's CSRD will apply a gradual approach to the assurance of sustainability information, allowing organizations to use ‘limited assurance’ for disclosures from 2025, with an expectation of ‘reasonable assurance’ by 2028.
For limited assurance, the independent auditor is primarily occupied with establishing whether the organization has met certain conditions around controls, processes, and frameworks. 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 considered similar to the audits conducted on corporate financial statements in terms of its rigour 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.
Factors that drive assurance
Historically, companies have been able to determine the level of assurance they wish to achieve and provide to their investors, stakeholders, and the market. As the ESG landscape has grown and matured, new assurance drivers are coming into play, and recent rules and regulations are beginning to dictate this area. For example, The US SEC has proposed phasing in assurance requirements for greenhouse gas emissions one year after the compliance date, which possibly starts in fiscal year 2023.
Read more: How CSRD impacts your Supply Chain: Ensuring Supplier Compliance
This will be a big shift for most firms, as only 18% of companies obtaining the assurance as per the IFAC study had opted for reasonable assurance. Consequently, the expectation is that demand for assurance services will increase as requirements heighten.
How technology will assist in ESG assurance
As assurance services tend to follow billable hours models, to reduce the amount of time and work, software and platforms like ecoPRISM will help lower the overall cost via more accurate data and more organized records.
ESG software and platforms can play an indispensable role in helping businesses achieve their desired level of sustainability assurance. By streamlining data collection, analysis, reporting, and assurance processes, software and platforms can enable companies to efficiently manage large amounts of ESG data from multiple sources, including internal systems, third-party documents, and stakeholder feedback.
By utilizing ESG assurance through platforms like ecoPRISM, businesses can enhance their ESG disclosure processes, ensuring data accuracy and meeting CSRD compliance requirements with both limited assurance and reasonable assurance options.
Automating data collection and aggregation will help improve data accuracy, completeness, and consistency. ESG software and platforms can also facilitate collaboration and communication among internal teams and with external stakeholders, enhancing the transparency, engagement, accountability, and comprehensiveness of ESG and sustainability data.