Better when vetted

The encouraging growth of sustainability reporting has accelerated in Asia. The Global Reporting Initiative (GRI), by far the most widely used framework for sustainability disclosures, held an event in Manila earlier this year which highlighted the region’s progress in sustainability reporting uptake. Indonesia and Malaysia now rank within the top 10 countries globally, with an impressive reporting rate of 90% or higher in 2015. Furthermore, Korea, Taiwan and the Philippines, where GRI has set up an office, continue to demonstrate increased private sector uptake. At The Purpose Business we are delighted to see that Asian countries figure so highly on the global stage.

Different jurisdictions take different approaches, for example companies in Indonesia are legally required to report on their social and environmental responsibilities in their annual reports, whilst the Hong Kong stock exchange takes the “comply or explain” approach. As the regulatory environment develops, we have often seen that voluntary frameworks and guidelines evolve into regulations. The call for more publicly listed entities to report on sustainability is growing as companies are increasingly having to respond to market pressure, regulation and customer demands, both to reduce their risk exposure and to gain competitive advantage. As such the landscape is changing quickly and constantly. Although non-financial reporting has already been voluntarily adopted by many multinational corporations, it will become mandatory for an estimated 6,000 companies in the EU from 2017. It will affect public-interest entities with over 500 employees, including not only insurance companies and banks, but also listed companies.

The global investment community plays a vital role in consuming the information put out . Investors are now actively seeking to put their billions into ‘sustainable’ funds. CalPERS’ new five-year ESG investment strategy and green bonds, which has seen explosive growth in the last 3 years, are testimony to this trend. This rise in ‘sustainable investing’ is undoubtedly fuelled by the availability of better quality data and information. For example, Morningstar recently launched a sustainability rating system, whereby more than 20,000 funds are scored according to how well the underlying portfolio companies manage their ESG factors relative to their industries. Investors are therefore able to select funds according to their Sustainability Rating, even if the funds may not be marketed as such. Morningstar sources the underlying data from Sustainalytics, which in turn scores companies based on their reporting and disclosures. Ultimately, companies that have robust ESG data and publicly report and disclose them are more likely to attract a wider pool of investors.

As practitioners we continue to highlight the value that reporting brings to an organisation. By upholding the highest levels of professionalism, objectivity and integrity, our role is to support companies towards real corporate responsibility and to add value to society. Indeed, any treatment of the reporting process as a tick-box exercise or as another step towards PR and green-washing would be an incredible waste of resources and undermines the whole process. This is why independent third-party assurance lends credibility.

The case for independent assurance

A growth in reporting is naturally followed by a growth in external verification, also referred to as assurance. Apart from objectively assessing the reporting process and data, and lending credibility to the process, the external verifier can also add value by suggesting improvements. We have to be able to trust that the principles of data integrity, accuracy and completeness are upheld. External verification would therefore provide independent and objective assurance over these principles to the readers and users of the report.

“The use of external, independent reviews of sustainability management processes and final disclosures is intended to increase the robustness, accuracy and trustworthiness of disclosed information. The terms used to describe this process vary and include assurance, external assurance, verification, and certification.” – Global Reporting Initiative

One of our clients highlights the common sense necessity of assurance saying, “it is almost as if you put out financial data but don’t have it assured. You would never do that, so why should environmental and social data be treated differently? ” Assurance therefore, is part and parcel of good governance practice.

A well-defined governance framework that is enforced by the company provides a structure that works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards, best practices and formal laws. Assurance takes this one step further, as it allows an independent third-party to verify these adherences and claims, building, and sometimes restoring, trust from the public.

How does one get started with assurance?

According to GRI there are three main groups that provide external assurance of GRI reports in 2012. These are accountancy firms, with 64% of market share, sustainability services firms, representing 23%, and engineering firms, with 13%. Characteristics of these providers vary. Accountancy firms are mainly business focused, have a background in financial and non-financial reporting, and will often be connected to global networks and have their own controls, systems and auditing and assurance procedures. Sustainability service firms on the other hand will often be smaller than their counterparts and are locally based. Their experience and expertise tend to be mostly focused on stakeholder and sustainability issues. Engineering firms conversely offer engineering expertise as well as technical certifications, and are able to evaluate complex processes and are experienced with risk-based analysis.

Whichever external assurance provider you choose, they should adhere to recognised standards when conducting assurance engagements, such as the AccountAbility AA1000AS or the IFAC ISAE3000/3402 Standards. The level of assurance is typically divided into reasonable or limited assurance. For ESG data and disclosures, the latter is usually employed, as “reasonable assurance” requires a much higher level of audit trail and substantiation.

Apart from obtaining independent assurance from a third-party, one rising practice is convening external review panels – a cross-section of industry experts who can review certain material aspects in a company’s report and allow for practical evaluation of performance. Although this does not usually include a rubber stamp of the completeness and accuracy of all the relevant data points and statements, it does provide management with a unique and unparalleled perspective, and expert third-party opinion of their sustainability report and journey. Companies that adhere to this practice value being rated by practitioners that understand specific industry issues. As another of our clients likes to refer to them, “they are our critical friends who keep our sustainability reporting in check”.

Whichever model of assurance you go for, remember its Purpose: to independently verify the integrity of your actual environmental, social or governance performance as well as the methodology of data collection. It abides by the principles of materiality, credibility and reliability to ensure that the report’s content is relevant and accurate.

If you are interested in finding out more about ESG reporting and assurance, we will be the moderator of a panel of experts on ESG reporting on Thursday 13 October. The event will be co-hosted by Baker Tilly and the Australian Chamber of Commerce.