ICAS report explores the key factors to be considered in relation of assurance on sustainability related information
By James E Barbour, Director, Policy Leadership
19 May 2022
James Barbour CA provides an overview of a recent report from ICAS titled 'Sustainability Assurance: Factors to consider'
The report explores the following areas as part of the need for reliable and credible assurance over sustainability-related information:
i. What is assurance?
ii. What are the requirements for providing assurance?
iii. Sustainability assurance: the key issues.
The paper was produced by an expert working group representing investors, academics, preparers, auditors and non-executive directors. The group was chaired by current ICAS Deputy President, Clive Bellingham CA. The paper follows on from the Working Group’s earlier paper 'Sustainability: the necessary conditions for the reporting of high-quality information' which highlighted that the need for transparency and accountability on sustainability-related information has never been greater.
Clive Bellingham CA said: ‘The demand for external assurance on sustainability-related disclosures already exists and is set to increase significantly as requirements for mandated disclosures on aspects of sustainability, such as climate change, continue to grow apace. This is being recognised in some jurisdictions which are mandating the provision of assurance on certain disclosure requirements. The paper highlights a number of issues that require careful consideration by stakeholders to help facilitate an environment in which high quality assurance on sustainability related information can be provided ”
Some of the key points from the report are set out below:
The likelihood for assurance to be provided over sustainability-related information will depend, at least in part, on the organisation’s attitude to sustainability and the extent to which it is embedded in an organisation’s culture. This behaviour and attitude should be led by the board and senior management and pervade all levels of the organisation.
Given recent developments in sustainability reporting standards, there is an urgent need for a globally recognised assurance standard on sustainability-related information. The International Auditing and Assurance Standards Board (IAASB) is well placed to meet that need. Some stakeholders use the term ESG (Environmental, Social and Governance), when referring to sustainability-related information. The ICAS preference is for the IAASB to align with the use of the term “Sustainability” by the International Sustainability Standards Board (ISSB) and by the European Commission in its proposed Corporate Sustainability Reporting Directive (CSRD).
In the absence of any mandatory requirements for external assurance, boards need to determine where the benefit to stakeholders, including shareholders, of having such assurance would outweigh the related costs. Stakeholders need to have confidence in the reliability of information that is reported by the company and, and this needs to be taken into account by the board, in addition to its own needs, in determining which information should be subject to assurance by an external party.
As the market in sustainability-related assurance continues to grow, there will be a need for a consistent regulatory framework to ensure that all sustainability-related assurance providers are subject to appropriate regulations and standards. This includes the need for all such providers to be subject to high-quality ethical (including independence) and quality management standards. Each jurisdiction will of course have its own approach to achieving this, but a level regulatory playing field is essential in the public interest.
Whilst there appears to be greater clarity amongst stakeholders as to what is meant by “reasonable assurance” this does not appear to be the case with regards to “limited assurance.” This is not a new issue but is one that has become more significant given the current prevalence of “limited assurance” engagements on sustainability-related information. The IAASB may need to revisit the definition of “limited assurance” as its current spectrum, ranging from “not inconsequential to less than reasonable”, is perceived by some as diluting the benefits of obtaining limited assurance. It is appreciated that this may need to be a longer-term project for the IAASB that could be informed by academic research. ICAS explored this area in its 2013 ‘Balanced and Reasonable’ discussion paper on the provision of positive assurance on management commentary.
There is increasing demand for sustainability-related information to be subject to a “double materiality” assessment that considers both the impact of, and the impact on, the organisation. Traditional financial reporting frameworks focus on the latter, whereas the Global Reporting Initiative (GRI) standards require consideration of both an entity’s impact on economies, society and the environment as well as matters that would substantively influence the assessments and decisions of stakeholders (including, but not limited to, investors). The subject of materiality, therefore, needs to be considered when producing a globally accepted assurance standard on sustainability-related information, that will meet the needs of a broad group of stakeholders.
The suitability of criteria for an assurance engagement is independent of which type of assurance engagement is to be performed. If criteria are deemed unsuitable for a reasonable assurance engagement, then they are also not suitable for a limited assurance engagement. This is an important point that sometimes appears overlooked in the debate on assurance on sustainability-related information.
Whether the auditor should be permitted to provide the assurance service on sustainability-related information is causing considerable debate in certain jurisdictions. Given the auditor’s knowledge of the business and its operations, it would appear appropriate to allow an option permitting the auditor to provide this assurance service.