10 August 2023

Assurance on sustainability disclosures: A Q&A with IAASB

Standards for sustainability assurance will boost investor and regulator confidence in sustainability disclosures, IAASB says. Michael Hurley reports

This month saw the launch of a consultation on eagerly anticipated draft standards for external assurance of sustainability-related disclosures.

Proponents of the standards include the Financial Stability Board, which oversaw the influential Task Force on Climate-related Financial Disclosures, and investors including Norges Bank Investment Management, the manager of the world's largest sovereign wealth fund.

NBIM said in advance of the consultation that the International Auditing and Assurance Standards Board (IAASB) standards would be key to enhancing the quality of information disclosed by companies and used by investors.

Existing IAASB audit standards are used in about 130 countries around the world.

The IAASB sustainability-specific standards have been designed to apply to information reported across any sustainability topic and prepared under one of several frameworks, including the recently released IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards (ESRS).

The International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, have been designed to be used by professional accountants and non-accountant assurance providers.

The consultation will close on 1 December.

Tom Seidenstein, chair of the IAASB, told Environmental Finance that: "In the best-case scenario we will approve [the standards] at our September board meeting next year – but we are committed to have it finalised before the end of 2024".

Ahead of final approval, Seidenstein and Willie Botha, technical director of the IAASB, told Environmental Finance how the standards were developed and why they will be important for investors.

Environmental Finance: Why are sustainability assurance standards necessary?

Tom Seidenstein: "IAASB has been writing audit standards since 1977. The whole body of our audit standards comprises about 1,800 pages if you would print it all out.

Tom Seidenstein"It is the basis of audit requirements in most of the world and that's relevant because in the world of auditing, you need this three-legged stool to work: high quality financial reporting; high quality audit; and robust regulation.

"When they work together, that provides confidence to investors that the reporting reflects the actual economics and supports capital allocation decisions. The same [model] applies on the sustainability side.

"You want sustainability reporting developed on robust, globally consistent standards developed by an independent entity of technical experts – for example, the International Sustainability Standards Board, the [European Commission's] European Sustainability Reporting Standards [that make up the EU Corporate Sustainability Reporting Directive], or GRI, supported by independent high-quality assurance.

"We are trying to ... keep pace with both the demand on the investor side but also on the public policy side.

"We have had an assurance standard out in the marketplace for some time, known as International Standard on Assurance Engagements (ISAE) 3000, our general-purpose assurance standard, the current version of which has been in place since 2013.

"The International Federation of Accountants estimates ... approximately 70% of all sustainability reports that receive external assurance use ISAE 3000.

"What we heard was sustainability reporting standards have evolved significantly and are converging, and that there was demand to move from an assurance standard that dealt with all assurance topics to one that was specifically through the lens of sustainability. That is what we've done with ISSA 5000, the first overarching sustainability specific standard that goes into the level of detail and specificity that regulators are seeking so they can enforce the assurance of sustainability reports."

EF: How have the sustainability assurance standards been developed?

TS: "We have taken ISAE 3000, which reflects existing best practise and we have taken elements of ISAE 3410, our greenhouse gas statement, which adds a level of increased specificity. We put out guidance in 2021 that was responsive to what we heard from practitioners using the standard ISAE 3000 – which was issued in 2013, so it had a lot of practice – that ESG reporting was becoming much more common.

"Practitioners were telling us, there were [ESG-related] challenges that they would like further guidance on. We took elements of that work published in 2021, and then in places – particularly since people want our assurance standards to be more audit-like – we put elements of our audit standard, particularly as it relates to things like risk assessment and response, into ISSA 5000.

"The other thing to say is that we were very conscious of regulatory and public policy demands [for sustainability assurance standards]. The International Organisation of Securities Commissions [a body of the world's securities regulators] issued two reports calling on us to develop the sustainability specific assurance standard that would be profession agnostic, so it is written not just for accountants but for other assurance practitioners.

"We were also very conscious of the deadlines in Europe with the Corporate Sustainability Reporting Directive (CSRD), with the hope that Europe will adopt a globally consistent approach [such as that outlined by the ISSB] as its baseline, and if necessary, build out from that, so at the outset we are avoiding fragmentation in the marketplace."

EF: Investors have voiced concern that, under the EU's CSRD, companies may be able to avoid reporting on sustainability-related aspects including greenhouse gas emissions if they claim these are not material to their business. How do these assurance standards ensure disingenuous claims are not successful?

Willie Botha: "There are two components to it – the one that you've referred to is the entities' process to decide what they're going to report.

Willie Botha"For financial statements, the decision is much easier because you have a trial balance with debits and credits, to be reflected in a statement of financial position. When you get to sustainability, you don't have that 'double entry' system – you have information about all sorts of different topics.

"The entity has to follow a process whereby they decide what is material to users.

"The assurance practitioner is responsible for ensuring the reporting entity has properly applied the [sustainability reporting] framework [such as ESRS]. The assurance practitioner ... will factor into it why certain information was excluded and why other information was included, is there a rational purpose for that, or was it to mislead? The assurance practitioner must have a proper understanding of the criteria that the entity used and how the entity used that.

"They are only interested in material misstatements.

"One of those misstatements that may occur is that the reporting entity did not properly apply the reporting standards in terms of making that decision about what is important to users or not.

"The other component is that in Europe with the CSRD you have the concept of double materiality, according to which an entity needs to look not only at the impact of sustainability matters on the entity in terms of the entity's value creation but also the entity's impact on sustainability matters.

"The assurance practitioner must apply both those lenses in terms of what could go wrong, what different types of misstatements may occur. It might be with either one of those lenses.

"Remember, the assurance practitioner also has to contend with both quantitative and qualitative information. On the quantitative side it is easier because you can determine a threshold.

"On the qualitative side it is a little more difficult because you can't quantify anything.You need to think about things like sensitivity of information, perceptions and expectations, exposure, impact and it's all those type of factors that we build into the standard so that the practitioner can apply that [double materiality] lens.

EF: How much of a change will the sustainability assurance standard require from providers, in terms of education and recruitment of skilled workers?

TS: "In many ways, for those who are already doing the assurance engagements, the level of upskilling will be moderate because we are building off established frameworks.

"What is going to be different in the future is that the quantum of entities requiring assurance on sustainability reporting will increase significantly, and the scrutiny that those reports are going to receive from investors and regulators is going to increase significantly.

"The quantum of entities requiring assurance on sustainability reporting will increase significantly, and the scrutiny that those reports are going to receive from investors and regulators is going to increase significantly" Tom Seidenstein, IAASB

"So, there is just going to be a lot more demand for assurance practitioners globally.

"We see that already in terms of hiring practices, not just with accountant firms but all forms of assurance practitioners. And for those people that are relatively new to the world of assurance, there will be a level of upskilling that needs to occur."

WB: "One of the reasons we built an assurance standard on existing material was because of the urgency of the need for an assurance standard that works with new reporting standards but also because this is only a first step.

"We think that, over time, assurance will continue to evolve, as reporting will continue to evolve. There is a maturity curve you can see in reporting standards, among assurance providers, among reporting entities and information systems, and among investors. Even investors need to continue to evolve in terms of what information they deem important, what data points they are looking for and what level of specificity they need in terms of those data points."