Market for assurance on ESG disclosures is burgeoning, but hurdles to perfection remain

The escalating demand for companies to disclose their environmental, social and governance (ESG) actions – and the corresponding increase in greenwashing – has fuelled a need for independent, third-party assurance.

Users of such information, however, need to be aware that the practice is still in its early stages and operating within a macro-environment that is not without its shortcomings. The Business Times (BT) spoke to different stakeholders to glean their views.

Still nascent

KPMG’s study of sustainability reporting trends from 5,200 companies across 52 countries, published in December 2020, found that assurance of sustainability information has now become standard practice for large and mid-cap companies worldwide.

In Singapore, in particular, the professional services firm told BT that it has also observed an increasing interest from companies keen to obtain assurance on their ESG disclosures.

“For instance, leading companies in respective industries often voluntarily request for independent assurance. This is a positive signal that more companies see the importance of assurance reporting as part of corporate governance best practices,” said Cherine Fok, director, KPMG ESG, KPMG in Singapore.

But the practice is still discretionary here, at this stage.

The Singapore Exchange – along with its roll-out of climate reporting requirements for listed companies – is requiring issuers to minimally subject the climate reporting process to an internal review by their internal audit functions.

But, as an SGX Group spokesperson told BT, “in respect of external assurance, this is still a developing area and there is a lack of globally recognised standards or frameworks in relation to assurance on sustainability and climate information”.

“Hence, we have not mandated external assurance, though we have provided further guidance in our Sustainability Reporting Guide for issuers that do conduct external assurance. We encourage issuers that are more mature to consider assurance,” SGX added.

Benefits vs costs

Choosing to obtain third-party assurance on such non-financial disclosures, at this stage, is likely going to be dependent on its perceived benefit versus its cost.

Veteran investor Ang Hao Yao, who regularly scrutinises companies’ announcements and reports when making his investment decisions, said he would value the presence of such assurance, in the right context.

“To engender confidence in investors that a company’s ESG disclosures are consistent, accurate and reliable, a company would probably need at least a limited assurance on their ESG disclosures. A limited assurance should allay fears that companies could be engaging in greenwashing. I would think the benefits outweigh the costs of the assurance,” he said, adding: “For companies whose operations have a large impact on the environment like high energy usage or potentially pollutive operations, a company may choose to have a reasonable assurance engagement rather than a limited one to give stakeholders even more confidence on their ESG disclosures.” 

Professor of Accounting Mak Yuen Teen, from the NUS Business School, however, is of the view that limited assurance on such non-financial disclosures is provided for the benefit of the board of directors rather than the investors and external stakeholders, and that it is not yet suitable for the latter’s consumption.

“Currently, independent limited assurance statements specifically state that they are not intended for use by anyone else other than the company or management and no responsibility is owed to anyone else. This is unlike an auditors’ report which is provided for the benefit of shareholders/members of the company,” Mak said.

Still, interest in such assurance is growing, amidst indications that corporates are willing to shell out even more to obtain greater assurance.

KPMG’s Fok said she has noted that leading companies are actually often keen to obtain reasonable assurance on ESG disclosures, instead of limited assurance, as a higher level of assurance; it’s just that reasonable assurance may not yet be possible for all ESG indicators due to practical considerations and market readiness.

“Among the broad spectrum of ESG assurance reports, we do see reasonable assurance being performed for specific ESG indicators, such as greenhouse gases, as the norm against which the disclosures are made are from the Greenhouse Gas (GHG) Protocol. In recent months, KPMG’s global team has also been working with regulators to perform reasonable assurance on certain policy frameworks and reports.”

She believes this indicates a growing appetite for a higher level of assurance, which will be possible when the ESG framework landscape and companies’ ESG control frameworks and risk management systems are sufficiently mature.

Global (in)comparability

That maturity, however, will be some time in coming. While various standards have been developed for the reporting of sustainability and climate-related information, there isn’t yet a single, all-encompassing framework that provides a global baseline for such disclosures; this makes the comparability of such information – including audited information – across geographies and jurisdictions a complex, if not impossible, undertaking.

For example, the standards developed by the Global Reporting Initiative (GRI), while probably the most widely used, are hardly used by all; the GHG Protocol is an accounting standard used by many to report on their greenhouse gas (GHG) emission scopes but is limited to just these indicators; and the framework developed by the Task Force on Climate-Related Financial Disclosures (TCFD) relates to just climate information.

Fok added: “Many ESG indicators have yet to establish universal standards of measurement and disclosures – for example, the norm against which the assurance report is tested is not generally accepted. The absence of consistency hinders a third-party user of the assurance report from obtaining a comprehensive view of the ESG-related issues within the scope of the assurance, and the conclusion reached by the auditor as a result.”

Cherry-picking

The current lack of a globally accepted, commonly used set of standards gives rise to another issue: companies having the discretion to choose the sort of disclosures they get assurance on.

Prof Mak said: “Companies can pick and choose what reporting frameworks to use and what information they subject to independent assurance. Although companies do disclose what information is covered by the limited assurance, it is not clear whether any critical information was omitted from the independent assurance.”

A similar view was expressed in a recent CFA Institute article, “ESG Disclosure: How Can External Assurance Help Build Trust?”. Authors Usman Hayat and Kübra Koldemir pointed out that ESG issues are diverse, with disclosure and assurance of them being mostly voluntary and with lots of built-in flexibility.

“A company with assorted sustainability issues and multiple locations may pick and choose among the issues and geographies it reports on. Indeed, some firms may choose not to report on certain criteria or locations.

“External audit is different from sustainability assurance – (the external audit) reporting criteria is definitive and mandatory,” they noted, adding that robust global standards are required to make ESG and sustainability reports comparable within and across jurisdictions.

Earnest attempts to develop globally recognised standards are, however, underway. The recently formed International Sustainability Standards Board’s (ISSB) has issued draft standards on sustainability- and climate-related disclosures, which it hopes will eventually form a comprehensive global baseline of such standards in the next year or so

And, the International Auditing and Assurance Standards Board has also announced that it is targeting to propose new sustainability assurance standards for public comment during the second half of 2023.

SGX, for its part, has told BT that it is watching such developments closely.

But, Prof Mak said: “I think a consistent reporting framework can increase the utility of independent assurance but, as long as companies can pick and choose what information to subject to independent assurance, the risk of greenwashing will remain. Even when sustainability assurance standards are introduced, the assurance will be less reliable than for audit of financial statements — which itself is suffering from credibility concerns – because of the non-financial nature of the disclosures.

“Further, if there is little regulatory oversight over those providing sustainability assurance, then commercial interests may lead to compromised sustainability assurance – and may even aggravate greenwashing – as there is now a ‘stamp of approval’ by a supposedly independent third party.”