How to achieve assurance on sustainability reporting

Regulators, suppliers and customers increasingly expect accurate and focused sustainability reporting. Businesses, in turn, need to make sure they are capable of delivering reports that are capable of passing the assurance process. In doing so, companies stand to gain reputationally and commercially from acting transparently on environmental, social and governance issues.

However, as businesses navigate sustainability standards, conflicts of interest and materiality, sustainability reporting is far from straightforward. To help improve the meaningfulness of reporting and provide credibility and reliability, reports should be verified by an independent assurance provider.

The current status of the quality and transparency of sustainability reports is leading to unbalanced information, often delivered with excessive optimism. To produce an accurate and trusted sustainability report that meets or even surpasses expectations, the following sets out some of the standards, questions and challenges a business and its third party assurer need to address.

International standards and frameworks

Delivering a meaningful sustainability report for stakeholders should be based on one of the existing international standards or frameworks. Applying a standard or framework allows the organization to disclose comparable information, while the assurance provider will be able to validate the correct application of the standard or framework. The most widely used standards in sustainability reporting are the Global Reporting Initiative (GRI), AccountAbility International (AAI), SASB (in the USA) and ISO 26000 - Guidance on Social Responsibility.

Sustainability assurance

Sustainability assurance activities should also follow international guidelines. There are national and international standards for assurance of sustainability reporting, notably ISAE 3000 and AA1000 AS (Accountability): they are complementary, and assurance reports can be issued under both. The ISAE 3000, developed by the International Auditing and Assurance Standards Board (IAASB), establishes a series of ethical and internal control requirements, meaning that an assurance report ‘in accordance with ISAE 3000’ can only be issued by professional accountants.

Assurance of such reports can be either limited or reasonable. Based on the current maturity of sustainability reporting and their related internal control system for non-financial information, limited assurance reports are likely to be the norm whilst progressing towards reasonable assurance.

Limited assurance reporting is particularly useful when companies are beginning to have their reports assured; it’s a great first step on the journey towards reasonable assurance and it helps companies that might otherwise be prevented from reasonable assurance because of the time and cost potentially involved.

The difference between reasonable and limited assurance

Reasonable assurance reduces risk to an acceptably low level as the basis for a positive form of expression on the assurance provider’s conclusion.
Limited assurance reduces risk, but to a level that is greater than for reasonable assurance and provides the basis for a negative form of expression i.e. ‘based on the procedures that we have performed, nothing has come to our attention that causes us to believe that in all material respects the selected statements are not fairly stated in accordance with the reporting criteria.’

Take the time to plan

Appropriate planning is critical to guarantee the success of sustainability reporting assurance. The assurance provider must demonstrate a high level of knowledge of criteria on which the sustainability report has been prepared (e.g. GRI standards) as well as a deep understanding of the entity and its sector in order to identify the main risks and areas on which to focus. It is not surprising that the risks for an oil and gas company are not the same as those for a retail company or an insurer. The preliminary planning and risk analysis will determine the assurance strategy, scope, and the type of tests.

Scope of sustainability

Identification of entities included in the scope of a sustainability report will be crucial to ensure the report’s quality and the ability to compare with the information presented in the financial statements. It will be essential to clearly identify the flow of information and responsibilities between different entities, countries and KPIs between generation and consolidation at group level. The larger a group is, the more robust the reporting system should be, and the greater the complexity it represents for the auditor to be able to trace information back to the source (site, facility or office, for instance.)

Defining the scope of the report should be one of the first elements and is one of the main challenges. It is not uncommon to observe inaccuracies in certain indicators and omissions in the scope, which are not adequately reflected in the methodological sections of sustainability reports.

Materiality – the magnitude of error

There are various definitions of materiality in sustainability reporting. It could be considered as the magnitude of error that may influence stakeholders’ perceptions (e.g. could a 5% deviation affect the understanding of a certain indicator?). Alternatively, materiality could apply to the disclosure of those topics prioritized in the report. This prioritization process must consider the significance of economic, environmental and social impacts for the organization and its stakeholders.

Professional skepticism is key

Skepticism is fundamental to ensure the success of sustainability reporting assurance as the assurance provider needs to make a critical assessment of the relevant evidence, including questioning the reliability of documents or responses provided, and should reduce the risk of overlooking unusual circumstances, generalizations or making inappropriate assumptions.

The internal control for information disclosed in sustainability reports is usually less developed than controls over financial reporting. Some KPIs can be easily extracted from payroll or accounting software, while others can be compiled through Excel files and databases. The assurance will need to be relevant to each company and its circumstances and adapt procedures accordingly.

Recommendations and continuous improvement

One of the key benefits of the assurance process is that the organization will be able to learn from the experience of the assurance provider who will be making recommendations. And currently, there is plenty of scope for improvement in sustainability reporting.