The European Commission believes it is “very important” that both auditors and independent service providers are able to carry out assurance for the Corporate Sustainability Reporting Directive (CSRD), Responsible Investor can reveal.
An EU official told RI that “one of the biggest challenges” with a draft global sustainability assurance standard unveiled this month by the International Auditing and Assurance Standards Board’s (IAASB) is that “by moving quickly to develop guidance, it has drawn heavily on existing auditing standards”.
“The question is whether this will be accessible enough for other independent service providers to do the job,” the official added.
The International Standard on Sustainability Assurance (ISSA) 5000, which was launched by IAASB at the start of August, is out for consultation until the 1 December, and due to be finalised by the end of 2024.
The EU official said that, like IAASB, the commission is engaging with independent service providers to “better understand their needs”, but stressed that it is “particularly important” that they make their voice heard during the consultation.
RI understands that EU policymakers are keen to ensure that the work of assuring corporate reporting required by the CSRD does not all go to the Big Four accounting firms which dominate financial auditing.
Despite the Commission’s stance, each member state will individually choose whether to use just auditors or both auditors and other independent service providers for CSRD assurance.
As it stands, Finland, France and Spain are all expected to opt for both. Austria, Denmark, Lithuania and Norway are also inclined to use both, while Cyprus, the Netherlands and Sweden are leaning towards choosing auditors only, RI understands.
The EU official said the commission will likely discuss what qualifications and skill sets people need to carry out CSRD assurance with the Committee of European Auditing Oversight Bodies (CEAOB).
Adopting ISSA 5000
Last week, RI revealed that the Commission is working closely with IAASB to ensure that its global standard is relevant for CSRD assurance.
IAASB chair Tom Seidenstein said this is because CSRD is having a “major impact”, with Europe “leading the way on mandatory requirements for sustainability disclosure and assurance”.
He added that he is “cautiously optimistic” that the standard will meet the needs of the market, and that European bodies will be able to adopt it “when there is an EU-wide requirement”.
The EU official said ISSA 5000 is “already quite robust” and “ticks a lot of boxes” for the Commission.
They added, however, that the adoption of the global principles-based standard is “a bit too far down the line to speculate” and “a political decision”.
“But we hope that the European standards will be similar to the global baseline standard, which some members may choose to adopt in the interim period, or if not use other existing standards,” they said.
Sustainability reporting under CSRD is due to begin in 2025, covering the 2024 financial year, with the first limited assurance engagements to start in 2024.
However, the Commission is not required to pick a limited assurance standard until 2026, several years into the reporting cycle, and has a deadline of 2028 for deciding on a reasonable assurance standard.
There will therefore be an interim period before an EU-wide standard is implemented where companies will still be required to receive limited assurance for their CSRD reporting, representing a potential challenge.
Some member states, including France, Germany and Denmark, are in the process of drafting individual CSRD assurance guidance, but other member states have told the Commission that they do not have the capacity to do this.
“The interim period will have to be managed by the member states,” the official said. “But CSRD foresees that the CEAOB could adopt non-binding guidelines to set out the procedures to be performed when expressing an assurance opinion on sustainability reporting, pending the adoption by the Commission of an assurance standard.”
CSRD does not explicitly mention the adoption of ISSA 5000 because, when drafting work began, the IAASB had not yet started work on a global sustainability assurance standard.
Otherwise, the Commission might have proposed adopting international assurance standards, such as ISSA 5000, for CSRD, RI understands.
The Commission is also unlikely to start drafting European assurance standards until ISSA 5000 has been finalised.
“We first want ISSA 5000 to be as good as possible,” the EU official said. “We currently don’t have something which is comparable. We have national standards and practices, but not one set of sustainability assurance standards, so there would not be much point in drafting EU standards until ISSA 5000 is finalised.”
They added that the Commission wants global alignment and hopes that ISSA 5000 “will be what it can consider a global baseline”.
“We are already thinking about what additional elements we might need in the EU, but we are not competing with the IAASB. On the contrary, we are working closely together.”
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