High-Quality ESG Reporting Requires High-Quality Assurance

The ESG reporting landscape continues to move at lightning speed, with the first international and EU sustainability reporting standards expected to be finalized soon.

For many companies this means mandatory ESG reporting will start to apply in the FY24 reporting cycle – an effective go-live in a matter of months’ time that will also require the systems and processes that collect the information to be up and running.

ESG Reporting: Need for scrutiny and rigor

To gain investor and stakeholder confidence and avoid the risk of greenwashing, ESG reporting needs to be at the same level of quality and rigor – and subject to the same level of scrutiny – as the financial information that users rely on. This means that companies need to invest and improve data quality by applying internal control and risk frameworks akin to what they do for financial reporting.

The International Auditing and Assurance Standards Board (IAASB) recognizes the demand for consistent high-quality international standards for assurance on sustainability reporting and they are working on the replacement to the current best-in-class assurance standards which are expected to provide more specificity for assurance on sustainability reporting (ISSA 5000).

KPMG believes that investors and stakeholders will likely see ISSA 5000 as the gold standard against which to hold companies to account and we strongly support the IAASB as it develops a baseline for global sustainability assurance standards. To meet these standards – which is expected to be essential to evolve how ESG assurance addresses the needs of global capital markets, stakeholders and broader society – those providing assurance should prepare to significantly invest in tools, technology and skills.

Without robust assurance, conducted to consistent standards around the world, the effectiveness of the whole ESG reporting endeavor could be fatally undermined.

ESG Reporting: Important role of the auditor

There are various views and interpretations of who is best placed to provide assurance with mixed practices in the market. The KPMG Survey of Sustainability Reporting 2022 found that 63 percent of the G250 companies obtained assurance. Similarly, the International Federation of Accountants’ (IFAC) recent study of around 1,350 companies in 15 jurisdictions found that 64 percent were obtaining some form of assurance over at least some of their ESG information and in 57 percent of cases, this was done by an audit firm. Of these, the majority (70 percent) used their statutory auditor.

When it comes to sustainability assurance, freedom of choice is a key principle, management and audit committees should be able to make a choice over who to entrust with it. Over time sustainability assurance providers will likely need the same deep understanding of the company’s business model required for financial assurance if they are to play their part in bringing sustainability-related information to the same quality as financial information. Without that, the assurance is essentially limited to metric verification.

Under this new reporting ecosystem, information is expected to be increasingly integrated - in fact, likely drawing information from the same systems and processes, subject to the same internal controls, and with oversight by the same bodies charged with governance. ESG and sustainability information will likely increasingly need to be managed on a formal, structured basis, in contrast to today where much of it is handled through informal and unstructured repositories such as spreadsheets and emails. Assurance over sustainability reporting and financial statements will need to be of the same exacting quality – something that the audit profession is well-placed to provide.

I want to be clear on KPMG’s position in the area of assurance over ESG reporting: We stand ready to serve the public interest in providing ESG assurance over what matters to stakeholders.

Importance to the capital markets

For companies, there is a strong argument to utilize the services of their statutory auditor. A third party conducting ESG assurance would need to gain the same understanding and run checks and controls over processes and systems that the financial auditor had already assessed, including entity level controls. There would likely be significant amounts of duplicative work and therefore increased cost. Utilizing the financial auditor would be a much more efficient, streamlined, and cost-effective option, and crucially help to ensure the overall connectedness that the reporting is seeking to achieve. This should deliver some of the best results for users of corporate information too.

Given the growing need for diverse skills to support assurance over ESG there will clearly be an important role for a wide range of ESG assurance providers other than audit firms, however for the public interest to be met all need to be held to the same quality and ethical standards, so that investors and other stakeholders get what they are looking for – risk reduction. Statutory auditors are ideally placed to provide stakeholders with a single holistic assessment over a company’s integrated reporting and be held to account for their opinions. The large audit firms that operate within a multidisciplinary model, providing audit, advisory and tax services, can draw upon deep skillsets from decarbonization to human rights as well as the international coverage and robust systems of quality management. There have been discussions in some jurisdictions that show there is an expectation from investors and regulators to have auditors play a key role.

ESG Reporting: Potential benefits to the wider public interest

KPMG believes that having the audit profession take the lead on ESG assurance would produce a wider public benefit too. By striving to ensure that an established profession, working to globally consistent standards and under a robust system of oversight and inspections, is responsible for the checking of information, it would help limit the risk of greenwashing.

This is an area KPMG is passionate about and striving to delivering on. The audit profession is investing significantly in new hires and training to meet the public interest role over sustainability assurance as a new era of ESG reporting dawns.

Guest Author: Mike Shannon is global head of ESG Assurance and KPMG. Read more KPMG blogs here. More: Read all guest blogs here.