As global jurisdictions increasingly adopt sustainability reporting requirements, a dual approach method is emerging to provide comprehensive and credible sustainability assurance, combining the strengths of the methodology used by finance and accounting professionals and sustainability professionals
The International Financial Reporting Standards (IFRS) Foundation recently reported that more than 20 jurisdictions have decided to use standards determined by the International Sustainability Standards Board (ISSB) or are taking steps to introduce these standards in their frameworks. These jurisdictions represent nearly 55% of global GDP, more than 40% of global market capitalization, and are responsible for more than half of global greenhouse gas emissions.
As more jurisdictions transition to these requirements for sustainability reporting — also commonly known as environmental, social & governance (ESG) matters — it will likely make the demand for sustainability assurance services soar. Expectations of sustainability assurance by regulators will likely mirror those required and conducted for financial reporting.
As some critics point out, however, modeling assurance methods for sustainability reporting on those of financial information has limitations. The market consensus is that multi- or cross-functional sustainability assurance teams, which include sustainability professionals, are better suited for the job, according to Udaya Nanayakkara, acting head of standards at AccountAbility, an organization that has been developing principles-based standards for sustainability assurance, stakeholder engagement, and sustainability performance management since 1995.
“It’s not a debate whether the finance professionals do the assurance better than the sustainability professionals,” Nanayakkara explains. “It was just that with the regulation for data verification of sustainability disclosures, there seems to be an emphasis on recognizing only standards used by finance professionals to provide sustainability assurance. We believe the market should be broader in getting the views of different professionals providing assurance, including their preferred standards.”
One of the main points that sustainability experts point out is that ESG covers an extensive remit of information that is much wider than financial information. In addition, a cross-section of sustainability professionals usually specializes in a focused area of ESG, ranging from greenhouse gases to workplace safety, and should be involved in assurance based on the company’s material issues. Those specialists bring in knowledge and context that a purely accounting or audit professional cannot.
Indeed, this is already quite common even in audits by accounting professionals, who bring in sustainability and ESG experts for specialist areas, Nanayakkara adds.
Most popular standards suggest a dual approach
Currently, there are three main assurance standards. One is the International Standard on Assurance Engagement (ISAE 3000), created by the International Auditing and Assurance Standards Board (IAASB) and used by auditing and assurance professionals mainly outside the US. Another is AccountAbility’s AA1000 Assurance Standard, which is preferred by sustainability professionals and ESG practitioners in Asia and South America. A third commonly used one is the ISO 14064-3, which specifically outlines how to assure greenhouse gas information. Interestingly, finance and accounting professionals are more likely to use the ISAE 3000 because of its affiliation with the IAASB and alignment with the goals of the assurance methodology used for financial reporting.
To assure the validity and completeness of sustainability information, using both standards that complement each other is preferable. One standard is not necessarily better than the other; however, applying more than one may provide a more comprehensive perspective. Indeed, AA1000 does not compete with the ISAE 3000, for example. Rather it is “not exclusive of other standards,” Nanayakkara says. “Our position is that the complementary usage is a tremendous value-add and an enhancement to information verification which assurance providers, reporting companies, and the stakeholders will recognize.”
Sunny (Sunil) A. Misser, CEO of AccountAbility, notes that sustainability and financial performance have become inexorably linked. “We are now in a world where ESG metrics are not only used to report and disclose on a company’s health, but, more importantly, to predict it” Misser says, adding that use of such assurance standards “provide a broader, holistic, and more inclusive view towards measuring, managing, and disclosing sustainability performance.”
Key differences in standards demonstrate dual approach
Broadly speaking, all of the aforementioned standards are well recognized as the most popular standards used for sustainability assurance. AA1000 and ISAE 3000 require two levels of assurance — limited (similar to the moderate level in AA1000) and reasonable (similar to high level in AA1000). Other important elements of the AA1000 and the ISAE 3000 include:
Lens of audience — The AA1000 is a principles-based framework that focuses on stakeholder inclusivity, materiality, responsiveness, and impact. It emphasizes stakeholder engagement and the importance of understanding and addressing the most relevant sustainability issues for an organization and its stakeholders. While the ISAE 3000 has a general use application, it is likely to be preferred by financial professionals and investors as users of the assurance report because it mirrors the methodology used to assure financial information.
Data verification — When verifying data, the AA1000 framework looks at how well the data reflects the principles outlined in the standard and how effectively the organization has engaged with its stakeholders to improve its sustainability performance and the integrity of its sustainability management systems. On the other hand, the ISAE 3000 is a systems-based framework that focuses on the robustness and effectiveness of an organization’s sustainability management systems. This framework analyzes how well the data demonstrates the effectiveness of these systems and how well the organization can measure and disclose accurate sustainability information.
To move forward and when a dual approach may not be feasible based on costs, Nanayakkara recommends gathering a cross-functional team to assess why your company wants to obtain sustainability assurance. If the primary motivation is to only comply with regulations, using the ISAE 3000 may be sufficient.
However, if the key motivation for embracing a specific standard is to be a leader in the industry by demonstrating the company’s commitment to sustainability, using the methodology outlined in the AA1000 would be more effective.
“What we would propose is for companies to meet the regulatory requirements, but also consider whether they want to make a real change,” Nanayakkara adds. “If there is a desire to go beyond compliance, use the AA1000 to produce a long-lasting impact.”
On the horizon, the IAASB is working on a professional agnostic sustainability assurance standard ISSA 5000 due in September, which could replace the ISAE 3000.
