96% of the world’s largest 500 companies are expected to prepare sustainability reports in 2024. The reporting framework has existed for a while, but it is only with the recent publication of ISSA 5000 that we have guidelines for external, independent verification of the reports. This technical briefing provides a in depth introduction to the new assurance guidelines.
Sustainability Assurance TECHNICAL BRIEFINGS 96% of the world’s largest 500 companies are expected to prepare sustainability reports in 2024. The reporting framework has existed for a while, but it is only with the recent publication of ISSA 5000 that we have guidelines for external, independent verification of the reports. This technical briefing provides an in-depth introduction to the new assurance guidelines.
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Contents List
4 5 6 7 8 9
Why does this matter?
What do we mean by sustainability?
A brief history of sustainability
Standards
Assurance: an introduction Assurance: a reminder of the principles
10 11 13 14 16 18 20
What is “sustainability”?
The reporting frameworks
The assurance framework
The key features of ISSA 5000
Greenwashing and sustainability reporting risks
The ethical angle
Summary
Why does this matter?
The demand for these assurance services is growing rapidly. This technical briefing provides an in-depth introduction to the new regulatory landscape, to help you prepare to provide these services or to use them to validate your own sustainability reports.
The demand for assurance services is growing rapidly.
96% of the world’s largest 500 companies are expected to prepare sustainability reports in 2024. For these to be meaningful they need to follow commonly accepted standards and be assured by appropriate external independent professionals. IFRS S1 on sustainability disclosures and IFRS S2 on climate related disclosures provide the framework governing sustainability reporting. The new proposed International Standard on Sustainability Assurance (ISSA 5000) provides the guidelines needed for providing an external independent validation of the numbers.
SUSTAINABILITY ASSURANCE | WHY DOES THIS MATTER?
4
What do we mean by sustainability?
It is tempting to think that sustainability is all about climate change. That is an important part of it, but sustainability is about more than climate alone. It is about whether an organisation can continue to do what it does, remaining profitable, whilst avoiding having a detrimental impact on the society around it and on the environment. People often use the shorthand: profits, people and planet. Many countries have introduced increasingly tight rules to protect the environment, employee welfare or the well-being of the communities that interact with businesses.
Fines and penalties are one obvious direct consequence of breaking those rules, but businesses can suffer in other ways too. Investors who take sustainability seriously will shun such companies, as will customers. It may take a very long time to recover from reputational damage.
Sustainability is about more than climate change alone.
SUSTAINABILITY ASSURANCE | WHAT DO WE MEAN BY SUSTAINABILITY?
5
A brief history of sustainability
Sustainability has a longer history than many people realise. As long ago as 1983, the UN set up the World Commission on Environment and Development to examine the relationship between economic development, environmental health and social equity. The 2015 Paris Agreement committed 196 signatories to limiting increases in global average temperatures to below 2°C above pre-industrial levels. Unfortunately, it looks increasingly unlikely that the immediate specific target of 1.5°C will be met. Regulation combines with investor demands to put pressure on companies to have a positive story to tell on sustainability.
This has undoubtedly had an influence in promoting sustainable practices, but there are also instances of companies claiming to be one thing whilst in reality being something quite different. Accountants and auditors have a crucial role to play in preventing these practices which have become known as greenwashing. Accountants and auditors have a crucial role to play.
SUSTAINABILITY ASSURANCE | A BRIEF HISTORY OF SUSTAINABILITY
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Standards
Sustainability standards provide guidance on how organisations should present information about how they deal with environmental risks, opportunities and practices. You may come across all sorts of standards that deal with particular types of business activity. If you’re operating in a particular business vertical or sector, you should acquaint yourself with the relevant rules that exist governing that type of activity. However, there are three standards that are aimed specifically at accountants: IFRS S1 Focuses on sustainability risks and opportunities, and the disclosures that companies should make concerning them and their likely impact on future cash
flows, access to capital, and cost of borrowing. IFRS S2 Looks specifically at climate related disclosures. ISSA 5000 Governs sustainability assurance engagements. Together these standards make up the current financial reporting framework (IFRS S1 & S2) and the guidelines for providing an external independent validation of the numbers – giving them a stamp of approval (ISSA 5000).
SUSTAINABILITY ASSURANCE | STANDARDS
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Assurance: an introduction
Members of the accountancy profession are well placed to provide assurance on a wide range of financial matters as we are trained in analysing and evaluating the systems and processes that drive disclosure of financial information. We are used to obtaining evidence and providing an opinion or conclusion on qualitative and quantitative financial disclosures. The same skills can be applied to other disclosures, including those relating to sustainability. Organisations now report on a wide range of non-financial matters, including those relating to the environment like carbon footprint and biodiversity, social issues such as human rights, equality and education, and wider impacts, e.g. on local communities. They are increasingly seeking to obtain assurance on the completeness, accuracy and relevance of these disclosures.
The incoming regulations will help assurance providers who are working on sustainability information, as well as considering some of the ethical issues that are relevant, examining the proposed ISSA 5000 and the International Auditing and Assurance Standards Board’s International Framework for Assurance Engagements amongst other useful regulations. There are challenges in undertaking such engagements, but there are still steps that the assurance provider can take to mitigate any obstructions.
Accountants’ skills can easily be applied to other disclosures such as sustainability.
SUSTAINABILITY ASSURANCE | ASSURANCE: AN INTRODUCTION
8
Assurance: a reminder of the principles
Assurance providers follow the International Framework for Assurance Engagements, which sets out some high-level principles. In an assurance engagement, five elements must be present:
The conclusion is usually one of “limited assurance”, stating that nothing has come to the practitioner’s attention that causes them to believe the subject matter is not prepared, in all material respects, in accordance with the relevant reporting criteria. However, a higher level of assurance, known as “reasonable assurance” can be provided. Whether a limited, or reasonable assurance is provided depends on the extent and nature of the evidence obtained. Until now, most assurance on sustainability information is limited in nature, but as sustainability disclosures come under increased scrutiny, a higher level of assurance is likely to be required.
A three-party relationship involving a practitioner, a responsible party and intended users. An appropriate subject matter. Suitable criteria. Sufficient and appropriate evidence. A conclusion or opinion, expressed in a written report.
1.
2. 3. 4. 5.
The suitable criteria relate to the reporting framework applied to the disclosures. This is a dynamic area of corporate reporting and there are many frameworks that could be adopted, which we will also explore.
SUSTAINABILITY ASSURANCE | ASSURANCE: A REMINDER OF THE PRINCIPLES
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What is “sustainability”?
It is worth noting how the standards setters define sustainability in the context of assurance. ISSA 5000 General Requirements for Sustainability Assurance Engagements defines sustainability matters as “environmental, social, economic and cultural matters, including the impacts of an entity’s activities, products and services on the environment, society, economy or culture, or the impacts on the entity; and the entity’s policies, performance, plans, goals and governance relating to such matters.” The Standard goes further and provides examples of topics that may be included in sustainability information: Climate, including emissions. Energy, such as type of energy and consumption.
Biodiversity, such as impacts on biodiversity or habitats, protected and restored. Labour practices, such as diversity and equal opportunities, training and education, and occupational health and safety. Human rights and community relations, such as local community engagement, impact assessments and development programs. Customer health and safety. Economic impacts, such as government assistance, tax strategy, anti-competitive behaviour, anti- corruption and market presence. This wide range of information could be provided in various ways, e.g. in narrative disclosures, tables of figures including performance indicators, and diagrams or graphics.
Water and effluents, such as water consumption and water discharge.
SUSTAINABILITY ASSURANCE | WHAT IS “SUSTAINABILITY”?
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The reporting frameworks
Organisations have been producing sustainability information for many years – sustainability reporting is not a new phenomenon – and the reporting frameworks regarding the issue have evolved over time. Regardless of the existence of mandatory reporting requirements, shareholders, especially institutional investors, are increasingly demanding more information so they can evaluate the impact of an organisation’s activities on the environment and society. In addition, organisations may see a competitive advantage in publishing their “green credentials” as key performance indicators, driving a wider range of sustainability disclosures in published corporate information. Many reporting frameworks have developed over time, e.g. the Global Reporting Initiative, Integrated
Reporting and the now-disbanded Task Force on Climate-Related Financial Disclosures. Recently the International Sustainability Standards Board (ISSB) issued the first two Sustainability Reporting Standards – IFRS S1 andIFRS S2.
Shareholders are demanding more
information so they can evaluate the impact of an organisation’s activities on the environment and society.
SUSTAINABILITY ASSURANCE | THE REPORTING FRAMEWORKS
11
There is a great deal of work going on to align the various sustainability reporting frameworks, which will improve consistency and comparability in the disclosures provided by organisations. It is significant that the International Organization of Securities Commissions (IOSCO) has endorsed these ISSB standards, meaning that mandatory adoption at a global level is on the way. When IOSCO’s endorsement was announced, the Chair of the IFRS Foundation stated: “ Financial statements and sustainability disclosures were once separate entities. Today, they are two sides of the same coin.
This stresses how interconnected financial reporting and sustainability reporting have become. There are local regulations too. For example, the EU has endorsed European Sustainability Reporting Standards (ESRS), and the regulators are looking to align these reporting standards with the ISSB standards as far as possible. In the EU, as part of the Corporate Sustainability Reporting Directive (CSRD), which is expected to impact 49,000 reporting entities, there is also a requirement for limited assurance on sustainability reporting for the largest companies from 2024.
SUSTAINABILITY ASSURANCE | THE REPORTING FRAMEWORKS
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The assurance framework
ISSA 5000 is designed to serve as a comprehensive, stand-alone standard, suitable for any sustainability assurance engagement. It is described as “framework agnostic”, meaning that its principles can be applied to any suitable reporting framework. When developing the standard, regulators ensured its compatibility with IFRS S1 and S2, mindful that these standards will be It is also described as “profession agnostic” which means that it can be used by any assurance practitioner, as long as they adhere to relevant ethical requirements and apply a quality management system that is at least as rigorous as those used by accounting practitioners. applied by a large number of organisations in coming years.
This means that non-accountancy professionals can use ISSA 5000, e.g. experts in environmental matters or legal experts. The standard can be applied whether the engagement is designed to provide limited or reasonable assurance, and it can be applied to all of an organisation’s sustainability disclosures, or to just part of them.
ISSA 5000 is both framework agnostic and profession agnostic.
SUSTAINABILITY ASSURANCE | THE ASSURANCE FRAMEWORK
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The key features of ISSA 5000
ISSA 5000 emphasises the significance of both firm-level and engagement-level quality management. The engagement leader is responsible for managing and achieving quality on the engagement. It is stated as critical that they have competence and capabilities in assurance skills and techniques. Reflecting the multi-disciplinary nature of sustainability work, the relationship between the engagement team and ‘other practitioners’ is highlighted. Because information on which assurance is provided often comes from across the value chain of the reporting entity, careful planning is required to ensure that the assurance team can obtain sufficient appropriate evidence in a timely manner.
The key features of ISSA 5000 are:
Scope The scope of the engagement must be considered, including the reporting boundary of the sustainability information. reported, the existence of suitable criteria and determining the level of assurance to be provided. Preconditions Assurance practitioners should evaluate whether pre-conditions are present as part of their engagement acceptance procedures. Preconditions include understanding the scope of the work, the sustainability information to be
SUSTAINABILITY ASSURANCE | THE KEY FEATURES OF ISSA 5000
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Information sources There is detailed guidance relating to the assurance team, with particular emphasis
Risk assessments Risk assessment, including fraud, should be undertaken, although the requirements vary depending on whether the engagement is to provide limited or reasonable assurance. For example, in reasonable assurance engagements, more work is needed understanding the system of internal control. ISSA 5000 particularly notes the elevated risk of fraud in respect of “greenwashing”, which is another area we will explore. Evidence In terms of evidence, ISSA 5000 acknowledges that qualitative sustainability information and estimates and forward-looking sustainability information are potentially difficult areas in which to obtain evidence. The assurance practitioner needs to exercise significant professional judgement in evaluating what constitutes sufficient appropriate evidence in these circumstances.
on the relationship between the engagement team and “other practitioners”, and whether it is
appropriate to use the work of others. There is also recognition that information on which assurance is provided is often derived from sources up and down the value chain of the reporting entity. Materiality Materiality is a significant issue and it needs to be applied using a “bifurcated” approach. This means considering materiality for qualitative disclosures and determining materiality for quantitative disclosures. ISSA 5000 clarifies the concept of “double materiality”, which relates to how the entity identified topics to the reported and relevant boundaries, in addition to setting a materiality level.
SUSTAINABILITY ASSURANCE | THE KEY FEATURES OF ISSA 5000
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Greenwashing and sustainability reporting risks
Greenwashing is when an organisation makes false or misleading statements about sustainability information. Green spotlighting/dazzling is where an organisation highlights one very positive aspect of its sustainability practices or impacts, hoping to detract from less positive issues. For example, individuals might rationalise deliberate greenwashing if providing certain disclosures or meeting particular environmental targets would result in the provision of finance to the organisation, or positive publicity leading to enhancement of income streams. Those responsible for preparing sustainability information in an organisation might be consciously or subconsciously influenced to greenwash.
The risk is elevated if people receive an element of their remuneration in the form of a bonus that is linked to sustainability information being reported. You can see that this concept is very similar to that of creative accounting, where financial information is manipulated to serve the needs of the preparer of the information, rather than for the needs of the users of that information. All of this means that providing assurance on sustainability information can be quite The risk of greenwashing is elevated if people’s remuneration is linked to sustainability information being reported.
SUSTAINABILITY ASSURANCE | GREENWASHING AND SUSTAINABILITY REPORTING RISKS
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high risk. The danger of greenwashing, which, when coupled with the potential lack of evidence and the assurance provider’s possible lack of familiarity with the subject matter and reporting framework, means that there is a high risk of issuing an inappropriate assurance opinion. There is a reputation risk for the assurance provider if they report positively on sustainability information that turns out to be incorrect, inaccurate or exaggerated. Added to this, the systems and processes generating sustainability information are quite new and therefore subject to change as the reporting landscape quickly evolves. Consequently, there is a higher risk of error in the information produced, although the public may be more forgiving of genuine mistakes than of deliberate manipulation of disclosures.
Providing assurance on sustainability information can be high risk.
SUSTAINABILITY ASSURANCE | GREENWASHING AND SUSTAINABILITY REPORTING RISKS
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The ethical angle
Professional competence and due care There is a real danger that professional accountants won’t have the necessary knowledge to provide assurance on sustainability information. Competency washing can also be an issue – whereby assurance providers exaggerate their level of expertise. While many companies have been reporting on sustainability matters for Assurance providers need to adhere to relevant ethical codes of practice, just as when they are performing other professional engagements. The IESBA Code of Ethics includes the principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour and these all apply to sustainability matters.
Objectivity There are many ways that objectivity can be threatened. For example, if a medium-sized company asks its audit provider to help with its sustainability reporting, a number of ethical issues arise regarding objectivity. The audit firm could be at risk from a self-interest threat, in that providing the work could be a strategic win, giving the firm exposure in this new, dynamic and potentially lucrative field of work. And advertising their experience in the area could help them win more clients. The years, for assurance providers the new reporting standards are largely unfamiliar territory, so there is a real issue that professional accountants won’t have the necessary knowledge to provide assurance on sustainability information. Knowledge can be developed, but a deeper level of understanding can’t be developed overnight.
SUSTAINABILITY ASSURANCE | THE ETHICAL ANGLE
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Ultimately the audit firm would need to apply appropriate professional behaviour, ensuring that commercial objectives are not prioritised over principles of integrity. working with other practitioners, or with entities up and down the supply chain. Care must be taken to prevent data leaks as well as to ensure that information is only made available in appropriate circumstances. Confidentiality Confidentiality is at risk, given that the assurance provider is likely to be
audit firm might then take on the job for purely commercial reasons, even if they are not sufficiently competent to do it. There could also be a self-review threat if the assurance provider is carrying out the external audit of financial statements as well as working on the sustainability information of the organisation. To avoid this, the assurance provider should make sure that separate teams are used for the different aspects of work. Another risk is that the assurance provider might be inclined to support their client, and perhaps overlook problems in their sustainability reporting. This is linked again to the threat of self-interest for the audit firm. Given the risks of greenwashing mentioned previously, there is a need to apply professional scepticism, and to go so far as to document how this has been applied as part of obtaining the evidence that backs up the assurance conclusion.
SUSTAINABILITY ASSURANCE | THE ETHICAL ANGLE
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Summary
Obtaining evidence and providing an opinion or conclusion on qualitative and quantitative financial disclosures are skills that can be applied to other disclosures, including those relating to matters of sustainability. Organisations now report on a wide range of non-financial matters, including those relating to the environment like carbon footprint and biodiversity, social issues such as human rights and equality and education, and many wider community impacts, and need to obtain assurance on the completeness, accuracy and relevance of these disclosures from competent practitioners. You should now be aware of some of the incoming regulations that will help assurance providers working on sustainability information. You should have an understanding of some of the relevant ethical issues, and the kind of steps assurance providers can take to mitigate such threats.
SUSTAINABILITY ASSURANCE | SUMMARY
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About the author
In 2015 Lisa was awarded Senior Fellowship of the Higher Education Academy in recognition of her excellence in teaching practice and commitment to building the development of professional skills and competencies into teaching. In 2014, Lisa published a practitioner’s guide to successful implementation of IFRS, and in 2023 co-authored with ACCA the report ‘Ethical Dilemmas in an Era of Sustainability Reporting’. She is the author of the ACCA Integrated Reporting Programme, co-published with accountingcpd, for whom she has also written CPD courses on Corporate Governance, Professional Scepticism, Narrative Reporting and IFRS.
This technical briefing is based on material written by Professor Lisa Weaver, taken from the accountingcpd.net course, Sustainability Reporting and Assurance, which she co-authored with Dr Wayne Bartlett. Lisa Weaver is Professor of Accounting at Warwick Business School. After qualifying (ICAEW), she spent several years in audit practice with Deloitte and was part of the national audit training faculty at KPMG.
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