Position statement and reflection note - Assurance of sustainability reporting

Societal evolutions interconnected with regulatory initiatives are driving the quest for sustainable value creation and are raising the bar regarding ESG (Environment, Social and Governance) objectives and their reporting. The need for reliable and real information (in contrast to green and social washing) on how companies integrate sustainability in their business has never been greater. Not surprisingly a call for assurance of non-financial information lurks behind the corner as it is included in the upcoming CRSD. Although the rationale of this requirement might be legitimate, the question rises whether sustainability reporting practice is sufficiently mature (assurance of what?) and who is best suited to provide the assurance.

It goes without saying that transparency has always been a corner stone of good governance. However, recent ESG developments put the notion in a new light and even more so, touches on the core responsibilities of the board of directors. As a governance institute, GUBERNA keeps track of new developments in this matter and aims to (a) feed the public debate and (b) inform its members by well-thought out opinions.

The aim of this paper is to examine the current state of affairs regarding non-financial reporting, with particular attention for the Belgian market in order to motivate the point of view of GUBERNA on the subject of assurance of sustainability information. In particular, based on an in-depth analysis of the literature we have identified the challenges on both sides (companies being the issuers of non-financial information and providers, mainly the audit profession, of assurance engagements). These insights have been discussed with a few handpicked practitioners and experts. The key findings can be listed as follows:

1. Firstly, legal requirements have undeniably stimulated the transparency of sustainability topics. Some Belgian listed companies who are subject to law 03/09/2017, which transposes the EU Non-Financial Reporting Directive, are becoming familiar with disclosing information on their sustainability performance. Improvements are observed but similar to international practices there are still numerous inconsistencies and flaws in sustainability reporting. The ‘credibility gap’ of non-financial reporting is well documented, but the key challenge for companies today is the multitude of frameworks that exist. Common standards and methodology would facilitate organisation and preparation of reporting by companies and allow for consistent interpretation by readers of reports.
2. Secondly, in discussions on “assurance” one often relies on well-known concepts and experience with assurance of financial reporting. In this context assurance is defined as the level of comfort given that the information provided is a sound basis for decision making and that should there be variations in the information provided, they would not lead to a different decision. An important notion hereby is materiality. It is however argued that the comparison between financial and non-financial reporting does not hold true due to various reasons (such as different users with diverging objectives and expectations, variety and complexity of sustainability topic related to particularities of industry/company, difficulties of impact measurement etc.).
3. Thirdly, a key challenges of assurance of sustainability information is that the expertise required to provide qualitative assurance is very broad and in some industries quite technical. The use of traditional assurance providers (such as Big 4 firms) that have the advantage of experience with assurance methodology and practices as well as the concept of independence, needs to be balanced with the need for specific expertise. There might be a distinct advantage in asking auditors to also provide assurance on ESG information because of their familiarity with the organisation and its processes. Nevertheless, one should be aware of the potential pitfalls and ethical concerns that have been raised regarding the role of the audit profession in this respect.

Based on the findings it is clear that there are still many challenges to tackle to reach the maturity and credibility in sustainability reporting. Practice is still premature and it is evident : we are not yet there.

If introduced to early, assurance of non-financial reporting might overshoot the mark and lead to compliance over substance. Nonetheless, it has the potential to add value on a number of conditions:

• A clear framework against which to analyse (both by companies, investors and assurance providers).
• A methodology (similar to auditing standards) adapted for sustainability information that guarantees the quality of the assurance. In this respect the development of standards (such as the EFRAG and ISSB) can be applauded in the strive for more uniform reporting on sustainability topics as well as for providing a more robust basis for more relevant reflections and discussions regarding ESG objectives..
• An independent assurance provider whose functioning is transparent and who has the necessary knowledge/expertise.

In addition, from a legal point of view, the question arises whether the extensions of the powers of an external auditor regarding ESG matters consequently impacts the investigation and control rights of an individual shareholder. Although not included in the scope of this paper, this topic is in need of further reflection too.

Finally, GUBERNA believes that the real change should come from transformation of a company’s business model by fully integrating sustainability into the strategy. Reporting requirements should be considered as a tool to reflect on genuine actions rather than as a mere compliance exercise.

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