Current Landscape on
Sustainability Report
In
todays business environment, sustainability has emerged as a key determinant
of a companys value and reputation. Sustainability reporting has reached a
pivotal point, with a notable surge in its adoption across the global business
landscape. The “State of Play Sustainability Disclosure and Assurance Trends
and Analysis” report by the International Federation of Accountants (IFAC) and
AICPA & CIMA for 2022, unveils that an average 98% of companies have used
sustainability reporting. These reports are presented in various forms with 30%
stated in a standalone sustainability report, 40% in annual report, 27% in its
integrated report, and 2% choose not to report.
There is a need for
consolidation and harmonization between these voluntary frameworks, guidance,
standards that are still in development. Such as, the Global Reporting
Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and
Task-Force on Climate-Related Financial Disclosures (TCFD), and the Integrated
Reporting Framework (<IR>). According to IFAC analysis, there is a 52%
average use of SASB Standards, 71% for TCFD Framework, 77% for GRI Standards,
and 83% referenced the use of SDG Goals in its report. This consolidation is
important in order to lower the divergence in reporting standards and to turn
sustainability reporting into a more consistent and commonly understood
approach landscape.
Demand for
Sustainability Assurance
·
As the demand for sustainability
grows and has finally become mandatory, especially in Indonesia, the demand for
assurance over information stated in the company’s sustainability reporting
also increased. This happens because regulators, investors, and stakeholders
will seek to understand the company performance regarding its Environmental,
Social, and Governance. By assuring, the confidence of these information will
be enhanced to the same level as an audit provides over financial information.
Based on IFAC Analysis for Assurance in 2022:
·
69% of companies obtained assurance
on at least some of their sustainability disclosures
·
58% of assurance report were signed
by audit firms
·
72% of assurance standards are
using ISAE 3000 (revised)
·
42% of assurance are provided by
Statutory audit firms, 16% by non-statutory audit firms, and 42% are by other
service providers
·
217 assurance reports assured GHG
Protocol Calculation
·
92% assurance reports provided by
Audit Firms uses the ISAE 3000 (revised) standard and 38% are provided by other
service providers
In Indonesia,
there are only 20 assurance reports during the year 2022. Out of these 20
reports, 40% used AA1000 for its assurance, 50% used ISAE 3000, 5% used ISAE
3410 (Assurance on Greenhouse Gas Statement). This is considered low,
especially if compared to its fellow Asia-Pacific neighbors. Korea has 113
assurance reports, Japan with 97 assurance reports, India with 67 assurance
reports, China with 45 assurance reports, Australia with 37 assurance reports,
Singapore with 29 assurance reports, and Hong-Kong with 28
assurance reports.
“Unsubstantiated claims can be
deeply damaging for companies and investors, which is why auditing of
sustainability disclosure needs to become standard practice, just as it is for
financial data. GRI continues to call for mandatory assurance as a key driver
for businesses to build trust with their stakeholders, prove their
sustainability credentials and tackle head-on any suggestions of greenwashing.
We also support the IAASB’s work to create an overarching sustainability
assurance standard which, as the patchy global picture in this report
illustrates, is much needed.”
- Eelco van der Enden, CEO of GRI
Sustainability Assurance Standards:
AA1000 and ISAE 3000
Standards that can
be used to assure a sustainability report, includes the AccountAbility’s AA1000
Series of Standards (Accountability 2023) and the International Standard on
Assurance Engagements (ISAE) 3000 (Revised).
AA1000 is
developed by AccountAbility, a non-profit organization. This standard focuses
on the quality of the information disclosed by the reporting company. This
standard emphasized the core principles of inclusivity, materiality,
responsiveness, and impact. These principles are used to ensure that the
sustainability information disclosed are aligned with the entity’s actual
sustainability performance. Due to its prioritization on the use of the core
principles, it allows for flexibility and a holistic approach for a genuine
sustainability effort beyond compliance.
ISAE 3000 (Revised) is issued by the International Auditing
and Assurance Standards Board (IAASB). This standard provides a framework for
the assurance of non-financial information, including sustainability
disclosure. The design of ISAE 3000 (Revised) also allowed the use of
supplemental standards, such as ISAE 3410 “Assurance Engagements on Greenhouse
Gas Statements”. The specific purpose of this standard is to enhance confidence
of intended users with the goal of expressing an assurance conclusion on reported
information. The ISAE 3000 (Revised) is more procedural focus and aligns more
closely with traditional financial audits. Its broad applicability and the way
it is aligned with traditional financial audits makes it a perfect choice for a
company that approach its sustainability in a rigorous and structured way for
its assurance.
Based on the study by IFAC for the year of 2022, In France, all 55
of its assurance reports used ISAE 3000 standards. In Spain, 85% of its
assurance reports use ISAE 3000 and only 8% use AA1000. In the United Kingdom,
68% of the assurance reports use ISAE 3000 and 4% use AA1000. In Korea, only
13% use ISAE 3000 and 35% use AA1000. In Brazil, 79% uses ISAE 3000 and only 2%
use AA1000. This shows how there is a clear preference globally for using ISAE
3000. This preference is potentially due to its alignment with established
financial audit methodologies rather than the flexible approach in AA1000.
Standards in Sustainability
Assurance: Newest Standard, ISSA 5000
There is a new
standard proposed by the International Auditing and Assurance Standards Board
(IAASB) titled International Standard of Sustainability Assurance (ISSA) 5000,
General Requirements for Sustainability Assurance Engagements. This standard
will address how to conduct an assurance engagement in its entirety with the
goal to enhance the trust and confidence investors, regulators, and other
stakeholders have in sustainability information. The proposed ISSA 5000
standard will serve as a comprehensive standalone standard suitable for any
sustainability assurance engagements and applied to sustainability information
across any topic and under multiple frameworks (Ex: IFRS S1-S2, GRI).
The proposed ISSA
5000 was aimed to make sure the information disclosed is accurate and
trustworthy. The assurance practitioner designs and performs procedures to
obtain evidence about whether the sustainability information is free from
material misstatements. Assurance practitioners’ goals is to ensure that the
sustainability information is reliable, which helps everyone understand the
entity’s impacts on environmental, social, and governance matters. ISSA 5000
can be applied regardless of what sustainability information is disclosed,
including climate, biodiversity, human rights, labor practices, along with
aspects of those topics. These aspects including risk and opportunities,
governance, metrics, and key performance indicator. The objective of this proposed
standard is to be:
·
Responsive to the public interest
need for a timely standard that supports the consistent performance of quality
sustainability assurance engagements;
·
Suitable across all sustainability
topics, information disclosed about those topics, and reporting frameworks
·
Implementable by all assurance
practitioners
Meanwhile the
following points are the priority areas that are considered during the
development of the ISSA 5000 Standards:
·
The difference in work effort
between limited and reasonable assurance, including sufficiency of evidence.
·
The suitability of the reporting
criteria, including addressing concepts such as double materiality.
·
The scope of the assurance
engagement.
·
Evidence, including the reliability
of information and what comprises sufficient appropriate evidence.
·
The entity’s system of internal
control and its impact on the ability of the practitioner to obtain sufficient
appropriate evidence, including the reliability of the information to be used
as evidence.
·
Materiality in the context of the
assurance engagement, including materiality in the context of narrative and
qualitative information’
The ISSA 5000
standards are to be adopted and implemented at the jurisdictional level. This
means that each jurisdiction and regulatory body must make its own decision on
whether sustainability reporting and assurance are mandatory and, if so, for
what size or type of entity. The United Kingdom, Australia, and Singapore have
announced plans to require listed companies and large private companies to
report its climate-related disclosure. The UK has announced its intention to
require listed companies to report according to ISSB Standards beginning 1
January 2025.
ISAE 3000
(Revised) will continue to be used for assurance engagements, for other than
audits or reviews of historical financial information or assurance engagements
on sustainability information. ISAE 3410 will also still be relevant for
assurance regarding Greenhouse Gas Statements. The ISSA 5000 is waiting for its
final approval for September 2024
Levels
of Assurance in Sustainability Assurance Engagement
There
are primarily two primary levels of assurance, which is limited assurance and
reasonable assurance. The differentiation is due to the different depth of
examination provided by the assurance providers and the different confidence
level conveyed by their conclusions. An assurance practitioner aims to obtain
sufficient appropriate evidence to express a conclusion to enhance the degree
of confidence of the intended users other than the responsible party.
A
limited assurance engagement is when the practitioner reduces engagement risk
to a level that is acceptable in the circumstances of the engagement but where
that risk is greater than for a reasonable assurance engagement. The result is
used as a basis for expressing a conclusion in a form that conveys, based on
the procedures and evidence obtained, if there is any information/-s that is
materially misstated.
A
reasonable assurance engagement is when a practitioner reduces its engagement
risk to an acceptably low level in circumstances of the engagement as the basis
for the practitioners conclusion. This assurance involves more extensive
inquiry and analysis. The practitioner must examine evidence more thoroughly,
assessing the risk of material misstatement in the sustainability information,
whether due to fraud or error. This level of assurance gives stakeholders a
higher degree of confidence.
Sustainability
Assurance Engagement: Materiality
As
in a financial statements audit, in a sustainability assurance engagement, the
assurance conclusion is stated in terms of whether the subject matter has been
prepared “in all material aspects” in accordance with the applicable criteria.
This is why during the assurance engagement, a practitioner is required to make
a judgment as to whether the misstatement is material. Materiality is a concept
affected by perception of the information needs of the intended users of the
sustainability information. Unless the sustainability framework defines it
differently, the concept of materiality ordinary includes the following
principles:
1. Judgements about matter that are material to
intended users of the sustainability information are based on a consideration
of the common information needed by the intended users as a group
2. Misstatements, including omissions, are considered
material if they, individually or in the aggregate, could reasonably be
expected to influence decisions of intended users taken on the basis of the
sustainability information
In
sustainability reporting frameworks, there will be requirements for the entity
to disclose information about sustainability matters when such information is
material, based on the entity’s facts and requirements. This included judgments
to determine specific topics (climate, biodiversity, labor, human rights) and
aspects of those specific topics (risk and opportunities, governance, targets,
metrics, and key performance indicators).
An
assurance practitioner determines materiality in developing the approach for
obtaining evidence and when evaluating identified misstatements of the
sustainability information. As a result, qualitative factors are considered by
the entity and the practitioner and entity will not necessarily arrive at the
same materiality threshold. Materiality is applied in planning and performing a
sustainability assurance engagement, including when performing risk procedures,
determining the nature, timing and extent of further procedures, and evaluating
its misstatements.
Challenges
in Sustainability Assurance
There
are several challenges in a report by the Association of Chartered Certified
Accountants (ACCA) titled “Sustainability Assurance – Rising to the Challenge”.
In this study, there are five challenges identified through virtual roundtables
with global sustainability assurance practitioners. These challenges are:
1. Limited versus Reasonable Assurance.
There
are several misconceptions about the different effort and depth between these
two levels of assurance. The practitioners cautioned against using limited
assurance as a way to not use reasonable assurance. This is done to avoid
higher engagement risk due to unreliable information. Based on the study by
IFAC, during 2022, 82% of assurance reports used limited assurance, 9% used
reasonable assurance, 6% used moderate assurance, and 3% are other types of
assurance. This shows that companies are still not willing to let an in-depth
examination to be done towards its sustainability disclosure. Because of the
lack of specification regarding these levels of assurance, there are certain
expectation gaps concerning how users perceive the depth of examination and the
level of confidence conveyed by the conclusions.
2. Estimates in Sustainability Reporting
In
a sustainability report, there are several estimations that can be made. For
example, in IFRS S2, an entity shall use climate-related scenarios or an
alternative method to assess its climate resilience. In these analysis,
historical information is not necessarily the base of these analysis but based
on hypothetical scenarios. These estimates made it difficult to develop an
assurer’s point estimates or range.
3. Use of Experts
Sustainability
report is comprised of specific information that required reliance on subject
matter experts. The use of experts is more prevalent in sustainability
assurance engagements than in financial audit statements. This creates a
significant challenge for assurance engagement partners undertaking
sustainability engagements, as they have to manage a combined competence in
assurance engagement and expertise regarding the specific subject matter.
4. Greenwashing
Greenwashing
is defined by IOSCO as “practices that involve misleading intended users of the
information, or intentionally giving them a false impression about how well an
organization or an investment is aligned with its sustainability goals”. Due to
the lack of address from IAASB regarding this, there is growing concern over
greenwashing risk. This should be one of the key areas of focus of the IAASB’s
standard
5. Assurance Report and Communication
Assurance
report as the end product of an assurance engagement, needs more necessary
attention to ensure that the work performed is communicated effectively to the
users of the report. There is a need for guidance regarding the structure,
format, presentation of the assurance report, how to describe any material
inconsistencies found, and on modified and unmodified conclusions. Guidance is
also needed about whether there is any difference between different levels of
assurance regarding its assurance report.
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