A tide of pressure for reporting on ESG continues to gain momentum – investors in particular are pushing for companies to incorporate a holistic mindset to ESG in the decisions that are made and reporting thereon. In the absence of regulations for reporting ESG-related information, the content and scope of ESG reporting is, for now, a choice 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 SEC’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 or legislation about required reporting on ESG has led to frustrations for investors with inconsistent disclosures that make comparability hard, and 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 the ESG information that investors and others seek.
We have heard a lot about the disclosure of ESG information and getting ready for such disclosures, but what does assurance on ESG disclosures mean for directors?
For some companies, there will not be a choice about assurance on ESG-related information (some of the new regulations are expected to stipulate assurance), while others will be not caught by any new regulations and therefore will still have a choice. Regardless, the following considerations will be relevant if an independent practitioner is to be engaged to provide assurance:
- Type of assurance needed – either 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 the 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 time of company personnel and costs of other resources needed to generate the information etc.). These costs can expected to be more significant in the first year and can vary widely depending on type of assurance and 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 ESG can 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 – including 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 – ensuring adequate controls and related policies and procedures over the development of ESG information reported.
- The third party engaged to provide assurance services - Using a professional accountant who provides 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 Assurance Standard (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, or International Standard on Assurance Engagements (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 understood 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 aspect of the needs of investors and others and an area that cannot be ignored.
Republished with permission from NACD Boardtalk.