Evolving sustainability assurance

Sustainability information is seen as the next stage of evolution for corporate reporting. Investors want clear and reliable sustainability information, and companies (mostly) are eager to provide it. Yet the regulatory landscape for sustainability reporting is still very much in a development phase.

So what does this mean for auditors? How can they provide assurance of sustainability reporting in such a fluid environment? This is the question tackled in a new ACCA report, Sustainability assurance – rising to the challenge, which describes developments in sustainability reporting as ‘both a challenge and a massive opportunity for the accountancy profession’.

The report lays out the current regulatory landscape and requirements of the various national and international bodies around sustainability reporting, and examines (with input from roundtable discussions with assurance practitioners) the challenges that auditors face in assuring sustainability information.

Call for cohesion

The report calls for rapid international consensus on sustainability reporting, pointing out that there is no universally accepted definition. The two major standard-setters – the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG) – have different definitions of what constitutes sustainability reporting and different views on how to report on sustainability information.

While recent moves to consolidate and harmonise the main voluntary frameworks and guidance, including the Task Force on Climate-Related Disclosures’ recommendations and the International Integrated Reporting Framework, are welcome, the report adds that ‘there is continued significant divergence in reporting standards that will potentially have an impact on assurance’.

Key guidance, including the ISSB’s general requirements for the disclosure of sustainability-related financial information, is emerging. While this is a step in the right direction, says the report, ‘the option of choosing from different reporting standards does introduce the risk of fragmentation’. If this is to be avoided, it adds, international sustainability reporting standards, similar to the International Financial Reporting Standards, must be agreed.

How to quantify?

The report also identifies the key challenges that assurance professionals face, including the subjective nature of much of the qualitative information included in sustainability reports. Statements such as ‘we have helped make people happier, healthier and more resilient’ are clearly not assurable.

However, a statement such as ‘we have equal pay for our workforce’ can be assured as long as ‘equal’ and ‘workforce’ are defined in the context. ‘Getting the reporting criteria right is fundamental,’ says the report.

On this topic, participants in the roundtables argued that the reporting criteria issued by the ISSB needs further development, as the standards guide preparers on what to report, but not necessarily on how to report it. ‘This makes assurance more challenging, as it could introduce too much subjectivity and, therefore, could reduce the assurability of the information,’ says the report.

Auditor’s rigour

The roundtables also discussed the competencies and assurance skills needed for sustainability assurance engagements. Participants emphasised that the assurance skills obtained via experience in financial statement audits is transferable and highly valuable in sustainability assurance engagements.

Some capabilities were identified as more critical for sustainability reporting, including professional scepticism – in fact, some argued that given the immaturity of sustainability reporting, professional scepticism is even more important.

Other capabilities identified as important are ethical requirements, and an understanding of the link between financial and sustainability information. ‘Sustainability assurance providers with experience in financial audits are usually very well placed to link the financial information that is reported in the financial statements with the information reported in sustainability reports. This helps them identify areas that could be more susceptible to misstatements.’

Here are just some of the report’s recommendations:

• The International Auditing and Assurance Standards Board (IAASB) and national standard-setters should find the right communication channels to create awareness of some of the key differences between ‘limited’ and ‘reasonable’ assurance to avoid creating a new expectation gap.
• ISAE 3000 (Revised) and the Sustainability/Extended External Reporting (EER) guidance provide a strong foundation for sustainability assurance engagements before the IAASB’s standard is finalised.
• In developing both reporting and assurance standards, standard-setters need to consider the risk of misleading reporting via greenwashing, in a similar way to the consideration of fraud in relation to auditing financial statements.
• Estimates covered by sustainability assurance engagements are likely to be based on hypothetical scenarios, rather than historical information. A concept dealing with estimates and scenario analysis should be an area of future focus for the IAASB.
• Using of the work of experts is more prevalent in sustainability assurance engagements than in financial audit, so additional standards or guidance might be needed beyond ISA 620.