In the realm of sustainability, metrics and disclosures have garnered immense global attention, becoming pivotal aspects for investors and stakeholders alike. However, the practices of assurance in this space exhibit a significant variance, potentially misleading investors with the mere term “assurance.”
The voluntary nature of sustainability reporting has resulted in a myriad of practices that are often disjointed, sparking concerns of greenwashing. To address these, recent regulatory actions such as the EU Corporate Sustainability Reporting Directive (CSRD) and the U.S. Securities and Exchange Commission (SEC) climate-related disclosure rule have been implemented.
As the importance of environmental, social, and governance (ESG) considerations continues to rise, investors increasingly rely on sustainability information for decision-making. This surge in demand has led to an uptick in external assurance, even in the absence of regulatory mandates. For instance, in 2021, 320 S&P 500 companies voluntarily sought assurance services for their sustainability information.
Nonetheless, these assurance practices are not uniform and fall into two primary categories: limited and reasonable. Let’s delve into what these entail and what sets them apart.
Assurance of Sustainability Reports: What is Covered?
- Scope of Sustainability Reports: Sustainability reports encompass a gamut of topics ranging from environmental impacts to governance oversight, typically conveyed through figures and tables.
- What is Actually Assured: The assurance provided for sustainability reports does not automatically cover all disclosed information. To ascertain what is assured, one must refer to the accompanying assurance report, which explicitly identifies the subject of assurance.
Reasonable Assurance
Reasonable assurance mirrors the familiar concept from financial audits, providing the highest level of confidence in the accuracy of reported information. The assurance provider reduces the risk of material misstatements to an acceptably low level but never to zero.
Limited Assurance
In contrast, limited assurance engagements entail fewer procedures, thus accepting a higher level of risk for material misstatements. Many companies lean towards this option due to cost considerations.
Key Takeaways on Sustainability Assurance Engagements
Limited assurance engagements offer a lower level of confidence due to minimal procedures and evidence, typically chosen for cost-efficiency. On the other hand, reasonable assurance engagements involve extensive procedures, ensuring a higher degree of confidence in the accuracy of reported information.
In conclusion, investors are encouraged to engage with assurance reports to understand the scope of assurance, evaluation criteria, and the level of assurance provided. This proactive approach will enable investors to make informed decisions based on the quality of sustainability information they receive.
