Corporate ‘assurance’ on sustainability needed

Many aspects of sustainability and ESG are not exact sciences. Being a nascent subject, many of us are still taking tentative steps. The corporate sector, being one of the largest emitters of greenhouse gases, is now being slowly brought into a three-process system of accountability, reporting and assurance. The last step would be a third-party assurance process to lend the reporting credibility.

Assurance-reporting has made a slow beginning, going through an evolutionary phase since the process of reporting itself has not fully matured. The importance of accurate reporting lies in the fact that it is tied indirectly to risks not encountered previously. It will also potentially bring in billions of dollars in revenues to organisations who are in this service activity. Professional organisations are jockeying for a slice of the market and while accounting bodies are staking a claim based on their presence in the corporate sector, others are not far behind.

Standards and frameworks

In India, the mandatory requirement for reporting sustainability-related information is SEBI-prescribed ‘Business Responsibility and Sustainability Reporting’ which is applicable to the top 1000 companies by market capitalisation. There is also a sub-set of ‘core’ which fastens a higher degree of reporting to larger companies within the 1000. As notified by SEBI, by notification dated July 12, 2023, listed entities falling in the ‘core’ group have to undergo ‘reasonable assurance’ as per the glide path.

Per the glide path, for the financial year 2024-25, the top 250 companies by market capitalisation are subject to reasonable assurance while the value chain, that is, the supply chain comprising vendors and customers, will be brought into the assurance fold in the following year on a comply or explain basis. In the absence of a regulatory-prescribed framework for assurance, it is discernible from published assurance reports there is no uniformity in the standards and frameworks being employed.

The case for a robust system

The concept of ‘audit’ relies on the premise that audited financial statements would be more acceptable by stakeholders. The same logic would be applicable in the case of sustainability-assurance (technically there is a difference between ‘audit’ and ‘assurance’). Assurance can be of two types — reasonable and limited. In the scale of reliability from the perspective of a reader/user of reports, reasonable assurance is above limited assurance since the assurance-provider would have employed a higher degree of examination. However, many jurisdictions are now starting low, with limited assurance in the initial stages, and gradually stepping up.

As for the importance of sustainability and ESG statements, one should go back to the Paris Conference of 2015 (COP21) where 196 countries recognised the perils the world is facing on account of greenhouse gasses, climate changes caused by overheating of the atmosphere and had bound themselves to bring down the global temperatures to 1.5^o centigrade over the pre-industrial times (years 1850 to 1900), by the year 2050. Based on this commitment, member-countries issued their ‘Nationally Determined Contributions’ (NDCs), by which they were legally bound, quantifying contributions for achieving their NDCs. In order to achieve these targets, at the national level, it would require compilation of reliable statistics based on a ‘bottom to top approach’. This is where the importance of reporting and third party assurance would assume importance.

Additionally, sustainability-assured statements would ensure that risks that are not captured by financial statements would be properly disclosed, evaluated for the risks that an enterprise faces and its future-proofing for business continuity. According to various commentators, sustainability is the major challenge for business continuity and therefore it is essential that the sustainability and ESG statements are subjected to assurance-reporting.

In the past, several companies have overstated their performance of sustainability preparedness and have been found wanting. This phenomenon of overstating is called ‘greenwashing’. There are several reasons for this: pressure from investors, peer-pressure or simply, for enhancing their brand value. Although this practice is gradually diminishing, it makes a strong case for sustainability-assurance.

Recently, the Central government issued revised guidelines titled ‘Prevention and Regulation of Greenwashing or Misleading Environmental Claims 2024’, casting responsibilities on the business community. Earlier, SEBI had issued guidance for issuing green debt securities on this subject.

The present state

Currently, there are two standards issued by the Institute of Chartered Accountants of India (ICAI) — ‘ISAE 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information’; and ‘SAE 3410, Assurance Engagements on Greenhouse Gas Statements’.

ISAE 3000 is due to be replaced by ‘International Standard on Sustainability Assurance 5000, General Requirements for Sustainability Assurance Engagements’. Although this is an initiative by the International Audit and Assurance Standards Board (IAASB) of International Federation of Accountants (IFAC), it is likely to be ‘practitioner-agnostic’ and will ensure competition amongst assurance providers. There are also other standards and frameworks for assurance such as ISO 14001.

In the European Union (EU), the Corporate Sustainability Reporting Directive (CSRD) has prescribed limited assurance for sustainability-related information. The EU has already issued 12 standards titled ‘European Sustainability Reporting Standards (ESRS)’. The US Securities and Exchange Commission recently released its format for climate related disclosures and has proposed limited assurance.

What is stated above is the formalised structure. While smaller companies are protected from outside pressures and are required to do what is expected of them by the domestic regulatory authorities, those that operate in an MNC environment will be subjected to multi-jurisdictional pressures. It is even conceivable that smaller entities such as start-ups funded by venture capital and private equity will be brought into these requirements. It is important to realise that sustainability-reporting and assurance are not a one-time phenomenon. While there are several quality third party service providers available in the market, there is no substitute for an entity building its in-house knowledge-base.

The writer is a chartered accountant