Last updated: 28 Oct 2024 09:00 Posted in: AIA
Maria Antonia Garcia-Benau, Laura Sierra-Garcia and Nicolas Gambetta examine the challenges we face with the assurance of sustainability reporting.
Stakeholders nowadays demand more reliable sustainability information and therefore the assurance of such information is a necessity.
Directive 2014/95/EU already established that an independent assurance service provider could provide assurance on sustainability reporting information. However, only three countries (Spain, France and Italy) have so far made this possibility mandatory, while the rest of the member states maintained a position in line with the Directive. Directive 2022/2464/EU of the European Parliament and of the Council of 14 December 2022 requires the assurance of sustainability information for the companies defined within its scope.
Assurance gives credibility
In an assurance engagement, the assurance practitioner must obtain sufficient and appropriate evidence to express a conclusion designed to increase user confidence in sustainability information. The assurance may be reasonable or limited according to the draft International Standard on Sustainability Assurance 5000 ‘General Requirements for Sustainability Assurance Engagements’ (ISSA 5000).
The great importance and relevance of assurance results from it being a professional activity of public interest. This means that we are at a point where we must define all the elements that revolve around this concept.
The sustainability report
Companies disclose information on social, environmental and governance aspects in their sustainability reports. Sustainability information is presented according to internationally established disclosure standards. The main standards are the European Sustainability Reporting Standards in Europe, and the Global Reporting Initiative and/or the International Financial Reporting Standards S1 and S2 elsewhere. European standards emphasise double materiality (financial materiality and impact materiality), while International Sustainability Standard Board standards only emphasise financial materiality.
Materiality is a crucial concept for sustainability reporting. The most popular corporate reporting trends revolve around presenting materiality matrices. However, given Europe’s commitment to considering double materiality, important work remains on using this concept and its implications for the assurance of such information. Therefore, for this information to be useful and credible to stakeholders, it must be subject to assurance.
Who assures? Independence is the key
Defining who the service provider is involves discussing the personal and professional characteristics that the professional offering these services must have.
From a personal standpoint, the service provider should demonstrate clear moral and ethical principles. Professionally, it is crucial to understand that the credibility of the assurance report rests on the independence of the assurance provider from the company that is subject to assurance. This involves a ‘deep dive’ into concepts like competence, integrity, objectivity, scepticism and professional judgement.
The intricate issue of independence, which necessitates real independence to coexist with apparent independence and its associated risks, must also be defined.
Assurance can be carried out by statutory auditors or – in principle and if they meet a similar set of requirements and controls – by independent providers of assurance services. In both cases, they must possess the necessary characteristics to provide the service, meet the regulatory requirements, and have a background of producing reports for a broad group of users.
What standards govern assurance?
So far, the standards that have primarily been used are AA1000AP, issued by Accountability; and ISAE 3000R, issued by the International Auditing and Assurance Standards Board (IAASB). The international assurance reports presented have been based on these standards, sometimes individually and sometimes jointly.
In summer 2023, the IAASB issued a draft standard and the public consultation period ended in December 2023. On 25 September, the IAASB approved the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements.
Given the significant influence of the IAASB in setting auditing standards internationally, the ISSA 5000 standard is expected to gain widespread acceptance globally. However, in the European context, the Directive’s requirement for the adoption of assurance standards may lead to a regulatory vacuum. This could mean that member states adopt national standards pending the Commission finalising the assurance standards at the EU level.
Preparing the assurer’s report: the challenge of communicating to stakeholders
The final work of the assurer is shown in a report which, according to the ISSA 5000 standard, should have the following minimum content:
One of the crucial aspects in the report’s content is the assurance practitioner’s conclusion and its scope. Limited assurance reports serve as a stepping stone towards a reasonable assurance report. In this sense, reasonable assurance provides stakeholders a higher level of confidence in sustainability information than limited assurance. The International Federation of Accountants (IFAC) has provided examples of the limited assurance reports in its publication ‘What to Expect from Sustainability Assurance’.
The assurance market: the consequences to come
Assurance services entail the logical and standard remuneration of a service. They represent the income that the market can generate with this service and serve to understand the importance of the assurance market and the presence of each of the assurers. The amount paid by each company for assurance services may or may not be publicly disclosed by the company. However, the best proxy is the company’s turnover amount.
One of the most relevant issues with the assurance of sustainability reports is the fact that the structure of the market for this service is still taking shape. The interplay of supply and demand, along with other factors, will be decisive in understanding the guidelines by which this market will be regulated. The factors affecting the selection of your assurance provider are set out in the box.
Perspectives from academia
There are currently three main areas of study for academia which must be addressed in order to gain a full understanding of the assurance market.
Assurance is an activity of public interest, and a wide range of stakeholders are interested in it. Therefore, it is necessary to study whether stakeholders’ expectations are being met from the first stages of implementation.
Ideally, the work of assurers should meet stakeholders’ expectations. However, experience in the business world shows that analysis is required to determine whether there is a gap between what is expected from the assurance service and what is offered by the service provider. In such situations, the causes of the gap and the ways in which it can be reduced or even eliminated should be defined.
Academia should study the expectations of the different stakeholders interested in the assurance of sustainability information.
It is important to recognise that assurance reports are addressed to various stakeholders. This means that users may not always be experts in accounting, environmental, social or governance issues. It is, therefore, essential to consider the readability of the reports signed by the assurance practitioners. For this reason, and using ideas put forward by international organisations in the field of accounting, it would be necessary to study whether the reports are written in ‘plain language’. Further studies examine to what extent they are understood.
The assurance market at the international level operates in such a way that assurance is mandatory for some companies, but for many others it is a service demanded on a voluntary basis. The analysis of the standard’s mandatory or voluntary nature impacts the market configuration itself. Continuous analysis of the evolution of the assurance services market and knowledge of the factors that define it at any given time are essential to ensure that it functions according to desirable parameters. Therefore, academics must study the variables that are appearing and their effect on the market structure so that measures can be taken quickly.
Perspectives from the accounting profession
We believe that for the accounting profession, many of whose members conduct audits and sustainability assurance, there are currently two significant issues to be studied.
Perspectives from the regulator
We believe that from the perspective of regulators, there are currently three fundamental issues that need to be addressed to help inform the assurance process:
Originally published by Economistas.
Author biography
Maria Antonia Garcia- Benau is the Professor of Accounting and Auditing at the University of Valencia. Her research focuses on corporate reporting, auditing and assurance.
Laura Sierra-Garcia is an Associate Professor at the University of Pablo de Olavide, working on corporate social responsibility, corporate governance, assurance and auditing.
Nicolas Gambetta is the Director of Postgraduate Degrees in Accounting and Taxation at the University ORT Uruguay.