Sustainability assurance, if not done right, could worsen greenwashing

THE thirst for third-party assurance of sustainability disclosures has grown significantly of late, but the growth of the practice itself has not been without its issues.

A recent study has flagged the possibility that such concerns, if left unchecked, could escalate the threat of greenwashing that sustainability assurance is meant to diminish.

Such pitfalls are not unique to just certain markets – and investors here would do well to acquaint themselves with them to avoid falling into a knowledge trap.

Growing popularity

The demand for sustainability assurance has intensified across the globe, as calls for corporations to be held accountable for their impact on the environment and society have burgeoned.

Similar to audits of financial information, they aim to offer a form of independent assurance of non-financial information, relating to a company’s environmental, social and governance (ESG) practices.

But there are differences.

For one, sustainability assurance currently is not as in-depth and robust as audits of financial information. Most organisations have also gone for limited assurance of their ESG disclosures, rather than reasonable assurance, which is used for audits of financial statements.

In a limited assurance engagement, the practitioner collects less evidence than for a reasonable assurance engagement. For example, he would perform different or fewer tests, or use smaller sample sizes. As a result, the practitioner is not in a position to express the same degree of confidence as in a reasonable assurance engagement.

There are other differences: sustainability assurance is currently not mandatory, unlike audits of financial statements; and a comprehensive, globally accepted set of rules governing ESG disclosures is still in the works.

This has an impact on the quality of disclosures, including those that have been independently assured.

Worrisome issues

Some of these issues were flagged in a recent study by a group of researchers based in the United Kingdom and Switzerland, which was published in the current issue of the Stanford Social Innovation Review.

The “Sustainability Assurance as Greenwashing” study looked into the sustainability reporting of some of the world’s largest companies and the effectiveness of current practices in sustainability auditing – and reportedly found “alarming deficiencies in measurement, reporting, audits, and assurances”.

The study began in early 2021 and collected data from the sustainability reports of Financial Times Stock Exchange (FTSE) 100 Index companies published in 2020 and 2021.

“Their practices fall short,” the researchers said. “While high-profile companies scramble to establish themselves as leaders in this space and engage in grandstanding and ambitious rhetoric, their reporting is often ambiguous or cryptic, and the corresponding assurance weak.”

The report warned that the way ESG disclosures are currently being audited and assured often creates doubt and confusion instead. “Reporting that claims to verify sustainability practices but undermines, rather than affirms, those practices is ultimately just a form of greenwashing,” it added.

The report identified three such forms of greenwashing: misleading statements, obfuscation and diversion.

Misleading statements: it noted that many companies failed to disclose what was reviewed in the assurance engagement, how it was performed, the standards applied, and how they responded to assurance findings. Companies were inconsistent in how they defined assurance, with some having claimed to have obtained assurance but not in the form in which it is commonly understood.

Obfuscation: the study found that corporate management tends to cherry-pick the information it wants to disclose, as well as the metrics it wants to use. It said some companies even went so far as to display a determined commitment to make data interpretation as difficult as possible.

Diversion: researchers uncovered disclosure practices that left out relevant information, which they suspected were, in some cases, intended to distract from an unwanted story line. They also experienced a significant amount of unresponsiveness and ghosting to the various inquiries they made.

The report named the companies that displayed such behaviour; these came from a wide range of industries, but were all large, FTSE 100 Index-listed corporations.

Staying sharp

While the study may have focused on companies primarily headquartered in the UK and Europe, the concerns it raised apply just as much to markets such as Singapore.

Assurance of ESG-related information is also growing here. And as such independently assured reports become more commonplace, users of such information need to understand what they are looking at.

They should determine the type of assurance that has been provided – for example, whether it was limited or reasonable assurance, the scope of the engagement, the methods and tests used, the metrics/standards that the disclosures were judged against, and so on.

The underlying information is also important, and users should be aware of the metrics used by the company for its disclosures, and if these have been consistent from period to period. They should also determine if the company has disclosed all the necessary information required by the standards it has chosen to abide by, or if it has cherry-picked what to disclose or assured.

They should also look out for additional information provided by the company, such as its response to assurance findings or queries, not least because this is typically a good indicator of its approach and intentions.

It is important to note that assurance of ESG-related information is a practice that is still growing and maturing.

The release of a comprehensive global baseline of sustainability-related disclosure standards by the International Sustainability Standards Board (ISSB) this year, as well as new assurance standards tailored for sustainability reporting, is expected to help.

One hopes that, with the right attitudes and efforts – and with cognisance of the potential pitfalls – this is a practice that will continue to improve over time, providing that sought-after credibility to ESG-related disclosures.