The rise of assurance standards for ESG reports

Sustainability reporting standards are swiftly being followed by auditing and assurance rules to build trust

It didn’t take long for sustainability professor Frank Figge to find examples of what he calls “reporting fails” to teach his next batch of students.

When he started looking earlier this month, the senior lecturer at ESCP Business School in Paris quickly stumbled across multiple unlikely statements in annual ESG reports.

Indonesian highway operator Jasa Marga, for instance, said its emissions had fallen from 2.9 billion tons in 2021 (more than four-times the country’s annual emissions) to 750 million tons in 2022.  

Chinese nuclear company CGN Power claimed in the English translation of its ESG report that it reduced the equivalent of more than 16 billion tons of CO2 in 2022 – that’s roughly 40% more than China’s entire annual emissions.

Both companies’ reports were assured.

Ernst & Young Hua Ming, which performed limited assurance for CGN, told Real Economy Progress that the 16 billion figure was the result of a "typographical error" - a misplaced decimal point in the translated report.

The assurance document was published in English and attached to the English translation, but EY stressed that its assessment was "pursuant to CGN's Simplified Chinese report", where the number was closer to 164 million tons.

Jasa Marga’s report was also assured, this time by regional non-profit SR Asia. At the time of writing, SR Asia had not responded to a request for comment.

Figge says it’s not unusual for companies to get numbers wrong, or mix ‘millions’ with ‘billions’, or commas with decimal points.

“The problem is that no one picked it up.”

This isn’t a matter of identifying complex fraud, or even intentional greenwashing, Figge continues (as the Jasa Marga example shows, companies often overestimate their environmental impacts, not underestimate them). In many instances, ESG reports simply contain sloppy errors that somehow make it through to the market.  

“Imagine a financial auditor didn’t notice that a company had said it made one billion profit when it was really just one million. They’d be the laughing stock of their profession; they’d be featured in text books,” says Figge. “Sustainability reports shouldn’t be that different.”

At least one major data provider took the 16 billion figure from CGN's English ESG report and provided it to its users, although it appears to have been amended in recent days.

From voluntary to mandatory

Marie-Josée Privyk, an ESG advisor at Canadian reporting firm FinComm Services, says “until recently, nobody looked at sustainability reports because they were voluntary and, frankly, C-suite and the board couldn’t have cared less”.

“So you had tiny, ill-equipped teams within companies doing their best to put out these reports to meet the demand of some investors.”

But this is beginning to change, Privyk notes, as regulators move to mandate ESG disclosures.

Gabriela Figueiredo Dias chairs the International Ethics Standards Board for Accountants (IESBA), which develops global expectations for the conduct of accountants, and she agrees: “There is now a lot of awareness and pressure coming from management teams and CEOs about what these sustainability reports need to look like”.

New conduct-related standards

To help them navigate that pressure, IESBA has this week issued draft guidelines on conduct and ethics for individuals auditing sustainability disclosures.

Figueiredo Dias says the body considered using its existing financial standards, but decided the challenges were different for sustainability.

“For starters, non-auditors are involved,” she explains.

A study released last year by the International Federation of Accountants found that almost half of ESG assurance in 2021 was conducted by non-auditing firms.

“So we need more professionally-agnostic standards than we have for the audit of financial statements, to ensure they’re accessible to non-professional accountants too,” Figueiredo Dias says.

Technical standards

Privyk points out that, while “the principles are very similar” between financial and sustainability reporting, the nature of the data is also different.

“There are many more units of measurement in sustainability than there are in finance, and there’s more qualitative, forward-looking data,” she says. “Which means there’s more uncertainty.”

IESBA’s ethical standards will sit alongside technical standards for sustainability assurance being developed by the International Auditing and Assurance Standards Board (IAASB).

Last month, IAASB closed a consultation on ISSA 5000, which its Vice Chair, Josephine Jackson, said would provide “a global baseline for sustainability assurance, adaptable to information prepared by any size entity under any suitable sustainability reporting framework.”

The final technical standards, which are intended to be compatible with both a ‘double materiality’ and an ‘enterprise value’ approach, will be released later this year and be suitable for limited and reasonable assurance.

“ISSB and the European Commission are developing sustainability reporting standards, and IAASB is developing assurance standards for that process,” explains IESBA’s Figueiredo Dias. “We are developing ethical standards for both processes. So hopefully, in a year’s time, will we have a complete set.”

But, with the EU’s Corporate Sustainability Reporting Directive (CSRD) requiring limited assurance on companies’ sustainability reports from 2025 (moving to reasonable assurance two years later), the need for clear rules is growing more urgent.

There are rumours that the Committee of European Auditing Oversight Bodies (CEAOB) could provide interim guidance to help assurers grappling with the CSRD requirements.

Patrick Parent, CEAOB’s Chairman, told Real Economy Progress that “discussions are underway within the CEAOB to decide what type of support the Committee could offer professionals who will be checking the quality of the application of the ESRS from this year onwards”.

He added that, at this stage, it is simply “taking stock of the initiatives undertaken or envisaged by its members, which could feed into a joint proposal for guidelines”.

Expanding assurance

While all these standards promise to strengthen trust in corporate ESG reports, Carol Adams, Chair of the Global Reporting Initiative, says there is still something missing.  

“I’d like to them cover the process of identifying the company’s most significant impacts on the economy, people and the environment,” she says. “Because if a company isn’t getting that right, then the completeness – and therefore the credibility – of the information they’re providing comes into question.”