In today’s rapidly changing business landscape, environmental, social, and governance (ESG) considerations have become a significant focus for companies, regulators, and investors. As organisations strive to demonstrate their commitment to sustainability and responsible business practices, there is growing pressure to back up ESG claims with solid, verifiable and credible data.
This is where ESG Assurance comes into play. But what exactly is ESG Assurance, and why is it becoming increasingly important?
Richard Singleton
Finance & Sustainability Director
What is ESG Assurance?
ESG Assurance involves obtaining an independent opinion on a company’s ESG data and reports to ensure accuracy, reliability, and adherence to relevant frameworks or standards. It mirrors the concept of financial audits but focuses on non-financial metrics, such as carbon emissions, diversity metrics, or governance practices.
With the increasing importance of ESG in investor decision-making and regulatory oversight, many companies are turning to assurance providers to validate their ESG disclosures. This not only builds trust with stakeholders but also mitigates the risk of “greenwashing,” where companies might exaggerate or misrepresent their ESG initiatives.
Different levels of assurance
ESG Assurance can be conducted at various levels, depending on the level of assurance needed. These levels include Agreed Upon Procedures, Limited Assurance, and Reasonable Assurance, each with distinct characteristics.
Agreed Upon Procedures (AUPs):
In this case, a service provider will agree with the company on specific procedures to perform. These procedures do not result in an assurance opinion but provide a factual report on the results of the specific procedures performed. AUPs are typically less comprehensive but can be useful for verifying individual ESG metrics or practices. AUPs are not used for external reporting but can be helpful when companies are preparing to publish data externally.
Limited Assurance:
This involves a less in-depth review where the assurance provider expresses a conclusion on whether anything has come to their attention that would suggest the ESG data is materially misstated. Limited assurance engagements are more common in ESG reporting because they provide a limited level of credibility without the depth or cost of more rigorous reasonable assurance.
Reasonable Assurance:
Reasonable assurance provides a high but not absolute level of assurance over the reported information. It involves a more thorough investigation into the underlying data, systems, and processes used to prepare ESG reports. This level of assurance is akin to a financial audit, where the assurance provider offers an opinion on whether the ESG disclosures are free from material misstatement. Though this is more resource-intensive, it is becoming increasingly sought after, particularly in highly regulated industries.
Regulatory changes driving the need for ESG Assurance
The regulatory landscape is evolving, with governments and regulatory bodies worldwide pushing for greater transparency and accountability in ESG reporting. The European Union (EU) and the United Kingdom (UK) are at the forefront of this shift.
- EU regulations: In the EU, the Corporate Sustainability Reporting Directive (CSRD) is a key piece of legislation that mandates rigorous ESG reporting standards for large companies. As part of this, companies are required to have assurance over their sustainability information, moving beyond voluntary practices to legal obligations. The goal is to ensure that companies are reporting reliable and comparable ESG data, enhancing investor confidence and improving corporate accountability.
- UK regulations: The UK has also introduced regulatory changes, initially through the International Sustainability Standards Board (ISSB), which issued IFRS S1 and S2 in June 2023, based primarily on the Task Force on Climate-related Financial Disclosures (TCFD) framework and are expected to be endorsed in Q1 2025.
Both the EU and UK regulations aim to provide comfort to stakeholders and drive a more uniform approach to ESG reporting. This further highlights the importance of assurance services, especially as the penalties for non-compliance become stricter.
The benefits of ESG Assurance for companies
Engaging in ESG Assurance offers several key advantages for businesses:
Increased credibility and trust: Having independent verification of ESG data enhances the credibility of a company’s sustainability efforts. Investors, consumers, and other stakeholders are more likely to trust the company’s claims, making assurance a critical tool for reputation management.
Attracting sustainable investment: As the demand for responsible investing grows, more investors are seeking companies that demonstrate genuine ESG commitments. Banks and financial institutions, in particular, are increasingly offering sustainable funding, where capital is tied to ESG performance. These loans often come with lower interest rates or other incentives for companies that meet specific ESG targets. ESG Assurance ensures that these metrics are accurate, making it easier for companies to access such funding.
Risk management: Accurate ESG data provides valuable insights into the risks and opportunities a company faces. For example, understanding a company’s carbon footprint or exposure to climate-related risks can help develop more robust mitigation strategies. ESG Assurance reduces the risk of errors in this data, helping companies make better-informed decisions and avoid potential pitfalls.
Regulatory compliance: As regulatory frameworks become more stringent, having ESG Assurance ensures that companies remain compliant with legal requirements. This reduces the risk of fines, legal challenges, or reputational damage due to inaccurate or misleading ESG disclosures.
Operational efficiency: Through the assurance process, companies often uncover areas where they can improve their data collection and reporting processes. This leads to better internal controls and, in some cases, operational efficiencies that can enhance overall business performance.
Conclusion
As the focus on sustainability intensifies, the need for accurate, reliable ESG reporting has never been more critical. ESG Assurance provides companies with the tools to ensure their disclosures are accurate, helping them build trust with stakeholders, meet regulatory requirements, and access sustainable funding opportunities.
If you have any assurance needs, speak to us – rsingleton@menzies.co.uk
Contact Our Experts
