Market looks to clearer disclosure standards and tech boost for external assurance of ESG reports
Pending global accounting and audit frameworks could bring critical clarity as regulators, lenders step up scrutiny
FINANCIAL market professionals are hoping that clearer disclosure standards and improved technology in 2023 will provide much-needed support to rapidly growing demand for external assurance of environmental, social and governance (ESG) disclosures.
Assurance takes off
Demand is burgeoning for independent verification of non-financial reports, even in jurisdictions and within sectors that are not required to obtain them, industry players say.
“The demand for assurance, especially with regard to ESG (environmental, social and governance matters), is developing very quickly from both public and private companies,” says Pamela Fan, partner and ESG assurance leader at KPMG in Singapore. “This comes as companies recognise the value of assurance, especially the need to provide stakeholders with information that has been independently reviewed.”
A sign that ESG assurance could be on the verge of becoming mainstream is that it is no longer confined to the listed space. Fang Eu-Lin, sustainability and climate change leader at PwC Singapore, says: “Beyond listed companies, we’re seeing more non-public companies, especially larger firms, obtaining or being interested in obtaining external assurance around their ESG and sustainability-related disclosures. This is not surprising as there has been more scrutiny over ESG data and disclosures in recent times.”
The demand for such assurance has also been driven by the introduction of laws and standards on sustainability and climate-related reporting across the globe, along with a growing awareness of how such issues affect the planet and countries’ amped-up efforts to build a sustainable future.
Brian Ho, Deloitte Asia Pacific sustainability and climate assurance leader, says: “From the capital market perspective, due to the fact that the volume of GSS+ (green, social, sustainability and other labelled) bonds and loans insurance increased significantly in the last couple of years, there is now huge demand for assurance over sustainable financial product insurance and relevant sustainability metrics which are linked to those products.”
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And with greenwashing being a real concern, he adds, having third-party assurance can give capital markets additional confidence when it comes to the sustainability efforts of businesses.
Praveen Tekchandani, partner, Climate Change and Sustainability Services, Ernst & Young LLP, says he sees three emerging areas where non-financial assurance would be required by industries: entity-level sustainability report assurance that provides wider coverage and assured data to external stakeholders; regulatory-driven assurance such as carbon tax in Singapore; and assurance required by financial institutions for ESG products such as sustainability-linked loans, green bonds and green loans.
Persistent data challenges
The market faces manifold challenges, however, not the least of which relate to the quality of data used in disclosures and the lack of a common, globally accepted set of standards.
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“Some of the key challenges include a lack of data availability and data integrity,” EY’s Tekchandani says.
He cites the 2022 Status Report by the Task Force on Climate-Related Financial Disclosures’ (TCFD), which highlighted the significant growth in disclosures made by entities, as well as their continuing struggle to source the data they need to fully assess the threats of a changing climate. In South-east Asia, in particular, it found that companies are still working on improving the quality of their disclosures.
According to the EY Global Climate Risk Barometer, which was launched in September 2022, the average quality score of the reporting of climate-related financial data — based on the 11 recommendations set by the TCFD — of South-east Asian companies was 30 per cent. That was significantly lower than in the western markets, where scores were 62 per cent in the United Kingdom and 52 per cent in western and northern Europe.
“Notably, regulations across various jurisdictions in South-east Asia are taking shape, and this will continue to increase the number of TCFD disclosures from the region. To this end, it is important for companies to focus on internal capabilities to shore up their data management to address the issue of data integrity and availability, as well as effective integration of how climate change is addressed across the organisation,” Tekchandani says.
PwC’s Fang notes that the data collection and maintenance process for many organisations is still generally manual, with a large number still working on integrating ESG modules into their systems and software; this increases the risk of incomplete or inaccurate data.
“However, we are seeing digital and climate tech solutions emerging that can help companies alleviate these pain points, and we can look forward to more solutions adoption and more robust ESG data in the near future,” Fang says.
She adds that companies often rely on third parties to provide them with the necessary data, for example, when it comes to Scope 3 greenhouse gas emissions data. It is therefore imperative for data owners themselves to be familiar with the latest sustainability reporting standards and frameworks.
“Without good quality data, high quality assurance and transparent reporting will remain a challenge,” Fang says.
KPMG’s Fan says many ESG indicators have yet to establish universal standards of measurement and disclosures: “The current absence of consistency may hinder 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.”
There are also different standards for sustainability assurance, Deloitte’s Ho points out – with no definite requirement on who can use them, and no clear regulations on who is eligible when it comes to working on assurance for companies.
He is also concerned about the quality of the assurers themselves, saying that, while certified public accountant (CPA) firms have recognised standards to adhere to, other types of firms need not comply with these while working on assurance engagements.
“The scope of assurance (also) remains a key challenge – how does a company justify which metrics should be included or excluded for external assurance?”
Accounting standards bring hope
The industry is expecting some positive developments that would help bolster the reliability and usability of sustainability and climate-related reporting, as well as the assurance of such disclosures.
A major advancement in these areas is expected to come from the International Sustainability Standards Board (ISSB) — which aims to deliver a comprehensive global baseline of sustainability-related disclosure standards in 2023 — and the International Auditing and Assurance Standards Board (IAASB), which is developing new assurance standards tailored for sustainability reporting.
“We can expect to see more granularity and consolidation in guidelines and standards,” Tekchandani says. “With the ISSB due to release its standards in 2023, we are seeing the entire ecosystem – comprising governments, investors and financial institutions, as well as customers – gradually evolving towards a greater appreciation and usage of climate risk and opportunity-related information.”
Ho says companies will have to start looking at the financial implications of ESG matters and ensure greater alignment between financial and non-financial disclosure. “It also means that there will be (more) importance placed on the roles of finance and accounting departments on such disclosures.”
Assurance providers also believe organisations will gradually aim for higher levels of assurance.
In Singapore, in particular, most companies that have sought external assurance on their ESG-related disclosures have opted for limited rather than reasonable assurance. Because a limited assurance engagement requires a lower level of confidence, the practitioner collects less evidence than for a reasonable assurance engagement. That can mean performing different or fewer tests, or using smaller sample sizes for the tests performed.
Fan says that reasonable assurance may not yet be possible for all ESG indicators due to practical considerations — such as difficulties in auditing qualitative information — and market readiness.
“Regardless, companies have started charting out their journeys towards reasonable assurance and a meaningful level of disclosure. A phased approach to assurance by companies, starting with limited assurance, may be needed in the short term and would be a sensible response to demands for disclosure from stakeholders like boards, investors, financial institutions and regulators,” Fan says.
Fang also expects further development in this space as ESG data quality grows more robust and as companies mature further in their sustainability transformation journey.
“If sustainability information is deemed to be as important as financial information, it should have the same rigour applied to it,” she says, adding that investors are currently driving the bulk of the demand for sustainability assurance.
Ho says cost and complexity have been the reasons most companies here choose limited assurance, and he does not expect the demand for reasonable assurance to increase significantly in the near term.
“But, if we look at other markets such as (the US Securities and Exchange Commission’s) proposed climate disclosure rules and (the European Union’s Corporate Sustainability Reporting Directive), reasonable assurance will be the ultimate expectation by regulators by 2030, and there will be implications for companies in Singapore.”
Amid all this, there is also the need to upskill the assurance providers, so that they can meet these new demands and higher expectations, especially as stakeholders and report users grow more ESG and sustainability reporting savvy, Fang adds.
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