Ensuring the Credibility of Reported ESG Information
A tide of pressure for reporting on environmental, social, and governance (ESG) issues continues to gain momentum. Investors, in particular, are pushing for companies to incorporate a holistic mind-set to ESG in decisions that are made and related reporting.
In the absence of regulations for reporting ESG-related information, the content and scope of ESG reporting are choices made by companies, with consideration given to who will use the information as well as how they will use the information. There is also flexibility, for now, with respect to how and where the information is presented. Some of this choice and flexibility will soon change as regulations are enacted to enhance trust and confidence in what is being achieved in relation to climate and sustainability goals.
New reporting regulations will be supported by frameworks and standards that are also being developed to support the required disclosures, globally (e.g., by the International Sustainability Standards Board) or jurisdictionally (e.g., the US Securities Exchange Commission’s expected new rules for climate-related disclosures), with much effort to ensure these frameworks and standards are developed in a timely way to meet the growing demand for ESG information. If not already providing relevant ESG information, companies will need to be ready to provide this information when any new regulations take effect.
A lack of regulation and legislation about required reporting on ESG has led to frustration for investors with inconsistent disclosures that make comparability hard and with questionable reliability of the data reported. While reporting frameworks and standards will enhance the comparability of ESG information reported, credibility of the information being reported will come from assurance. Regardless of the requirement for assurance, an opinion or conclusion from an independent practitioner on the ESG-related information will provide the credibility and trust in a company’s ESG information that investors and others seek.
But what does assurance on ESG disclosures mean for directors?
For some companies there will not be a choice about obtaining assurance on ESG-related information as some of the new regulations are expected to mandate assurance. Regardless, the following considerations will be relevant to boards that seek assurance:
Type of assurance needed. There are two options: reasonable or limited assurance. Regulation will in some cases stipulate the type, otherwise a decision about the type of assurance needed will need to be made considering all of a company’s stakeholders.
Costs. An independent verification of ESG-related disclosures will come with incremental costs. This includes direct costs of the engagement (paid to the practitioner providing the services) and indirect costs (including the time of company personnel and costs of other resources needed to generate the information). These costs are expected to be more significant the first year a company solicits assurance and can vary widely depending on the type of assurance as well as the depth and breadth of information provided.
What information is to be reported. The scope of what is being reported may not only depend on required regulatory disclosures, but also the ability of a third party to provide assurance on the disclosed information.
Governance. How can ESG be holistically incorporated into all aspects of the company’s governance principles, in particular to demonstrate a focus on “tone at the top” for ESG matters?
Processes and systems to generate the information. Thisincludes considerations about the source of the information, as well as adopting suitable criteria for developing the disclosures. Criteria are the benchmarks against which the information is evaluated and are essential for the conduct of an assurance engagement to ensure the information is complete, relevant, and reliable.
Controls. This involvesensuring adequate controls and related policies and procedures over the development of ESG information reported.
The third party engaged to provide assurance services. Using professional accountants who provide assurance services as part of their business will ensure that the individual has the essential skills, including sound judgment and expertise, to provide a quality engagement. Professional accountants will also use an accepted assurance framework that is commonly understood, such as International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, or ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, as relevant to the engagement. Other types of practitioners may be able to provide independent verification, but such engagements may not necessarily align with commonly accepted professional standards including a comprehensive system of quality control.
Timing. Timely efforts by companies will be needed to ensure that consideration is given to the needs of the assurance provider to be able to perform a quality engagement and report accordingly.
Considering the credibility of your ESG disclosures and how that can be achieved is becoming a crucial need of investors and other stakeholders, and an area that cannot be ignored.
Bev Bahlmann is a senior director in RSM’s National Professional Standards Group, focusing on technical communications.