This article is sponsored by SGS
Author: Simon Colton, business development director, SGS
Environmental, social and governance materiality is now completely intertwined with its financial counterpart, and it is more important than ever to thoroughly assess the ESG factors that are material to a company’s performance. Indeed, it is well-established that negative ESG-related actions harm the performance and financial condition of a company.
How can an investor gain confidence that it has full visibility of a company’s ESG performance? We believe that Sustainability Report Assurance (SRA) is a vital part of the answer. SRA is an evaluation of ESG factors in a company’s policies and practices, providing an in-depth picture of company behaviour. It ensures that a company’s sustainability report meets certain standards.
Non-financial report assurance is vital because it provides peace of mind to investors that a company’s claims and disclosures are fair, accurate and verified. The conversation has evolved from the days when investors would overlook ESG when they believed company data was absent or unreliable. Now, investors increasingly recognise the benefits of data – even when imperfect – that comes with assurance provided by an independent party.
Data from International Federation of Accountants published in June 2021 revealed that 91 percent of organisations report some form of sustainability information. However, to be effective in terms of investor engagement, this information must come with assurance, and only 51 percent of these organisations provided this. And of this 51 percent, only 63 percent were conducted by an auditing company or affiliate. The vast majority (88 percent) of the reports that came with assurance only provided assurance related to defined facets of the sustainability report, such as emissions.
Assurance should be viewed as a bottom-up initiative that provides a solid and rigorous foundation for ESG – one that ultimately enhances reports and, thus, a company’s attractiveness to investors. It can also support a shift from simple reporting, born out of regulatory necessity and KPIs, towards integrating ESG into a company’s strategy in a more potent and forward-looking manner. Simply put, investors are increasingly looking for assurance as the way to clarify a company’s ESG output. Without it, companies are not so attractive to investors of any kind.
The overall benefits of SRA include:
- Increased trust in sustainability reports;
- Improved identification, analysis and risk management processes;
- If tied to lending or financing, a reduced cost of capital;
- Enhanced reputation among stakeholders;
- Improved brand value, avoiding accusations of greenwashing, especially as SRA is accompanied by external verification or second-party opinions;
- Avoiding the use of costly resources to create internal guidelines by reporting according to international standards;
- Meeting requirements determined by regulation, government or stock exchange rules, and thereby reducing legal risk.
The benefits depend on the system of assurance. Currently, the dominant assurance standards are AccountAbility’s AA1000 Assurance Standard and the International Standard on Assurance Engagements 3000 (ISAE 3000).
AA1000 in detail
Adopting AA1000 avoids the need to expend resources on creating tailored guidelines. The flexibility built into its framework enables it to be adopted by businesses of all sizes and industries – its scope can be customised to the company’s needs.
AA1000 was founded on:
- Inclusivity – people should have a say on the decisions that impact them
- Materiality – decision-makers should identify and be clear about the sustainability topics that matter
- Responsiveness – companies should act transparently on material sustainability topics and their related impacts
- Impact – companies should monitor, measure and be accountable for how their actions affect their broader ecosystems
AA1000 emphasises the need for organisations to engage effectively with stakeholders, identify material sustainability issues and demonstrate the existence of a responsible business strategy.
Strengthening internal controls
ESG and SRA inevitably lead to the question of resources, budgets and deployment. But what else should organisations consider?
Firstly, companies must explore ESG and SRA’s benefits before going through the process, not just afterwards. Companies need to recognise that the two should be cultivated internally, across the organisation.
Secondly, everyone can play their part, to a degree, in cultivating ESG and SRA internally. Upskilling the organisation leads to staff asking the right non-financial questions and gaining relevant knowledge. Training, especially external and independent, will also empower this. Asking the right questions of internal controls is vital to ensuring that controls material to the risks are in place.
Finally, many companies also sit ESG and SRA with procurement, focusing more on logistics and costs, rather than necessity and value. Drivers for this accountability should come from the top.
Even for organisations still at an early stage of their ESG journey, some assurance is better than no assurance. SRA is a platform that can help an organisation get to grips with information and disclosures. Having external, independent experts involved will simplify the process and enhance any disclosed data. These experts will look to fully understand a company, collaborate and help the process, including upskilling internal personnel. This assistance will help a company improve the scrutinising of reports, ensuring relevance, completeness and scope of ESG data.
With ever-evolving regulations, an assurance partner will provide the expert advice needed to underpin the latest sustainability reporting alignment, as ESG and SRA become more familiar and less complicated. In short, the journey towards credible, complete and comparable data becomes smoother.
A shifting ESG landscape
SGS launched the world’s first environmental management certification – the Green Dove Award – in the early 1990s. Since then, the corporate sustainability landscape has changed beyond recognition, but our sustainability services constantly evolve to meet all new challenges. In fact, COP27 showed that a lot can happen in ESG in just 12 months. The International Sustainability Standards Board, which was established a year ago at COP26, is now fully operational and committed to issuing its first two standards for adoption in 2023. This means it can provide global financial markets with high-quality disclosures, starting with climate.
To help shape the future, climate data project Net Zero Data Public Utility – backed by the Glasgow Financial Alliance for Net Zero – wants financial institutions and auditors worldwide to provide corporate climate data. Potential participants include banks, asset owners and managers, brokerage firms, and auditing and verification providers. These can all provide feedback on topics, such as disclosure incentives, interoperability of global disclosure standards, proof of assurance and associated standards, and product stability.
With this heightened focus on reporting and disclosure, robust and credible ESG practices are essential to enhance trust and company attractiveness to stakeholders. A company that can demonstrate independently assured excellence in ESG management is able to benefit from reduced capital costs. As the landscape continues to evolve at a rapid pace, there has never been a more important time to put ESG front and centre of corporate strategy.
For more information: SGS ESG services.