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Audit firms risk losing out in race for ESG assurance

Author: ICAEW Insights

Published: 14 Nov 2023

There’s growing demand for external ESG assurance following a rise in ESG reporting by large organisations. The accountancy profession must demonstrate to stakeholders why it is best placed to deliver, IFAC warns.

The proportion of organisations seeking external assurance over their ESG reporting claims is continuing to rise, but audit firms are in danger of losing market share to other service providers, new data suggests.

A benchmarking study of global practice in sustainability disclosure and assurance conducted by the International Federation of Accountants (IFAC) found that in 2021, 95% of large companies around the world reported on ESG, up four percentage points since 2019 (91%). Of those, 64% of companies obtained assurance/verification over some of the information they provided, compared with 51% in 2019.

However, while audit firms continue to provide the majority of ESG assurance reports – 57% of ESG assurance engagements in 2021 – the market share of audit firms in the market has reduced by six percentage points from a high of 63% in 2019. 

Overall, 70% of companies that obtained sustainability assurance from a professional accountant also engaged their statutory auditor to review their ESG disclosures. However, in seven jurisdictions – the UK, the US, Hong Kong SAR, India, Japan, South Africa and South Korea – non-accountancy service providers performed a majority of assurance engagements, albeit narrower in scope – focused on greenhouse gas or other environmental metrics. 

The analysis shows that the market for ESG assurance remains fragmented; in the UK, the largest audit firm market share (2019-2021) stands at 17%.

In a foreword to the report, IFAC Chief Executive Officer Kevin Dancey and Susan S Coffey, Chief Executive Officer – Public Accounting AICPA and CIMA, said: “We believe professional accountants are best positioned to conduct engagements that connect sustainability assurance with financial statement audits – all based on rigorous and widely accepted professional, quality management, and ethical standards.”

While the UN’s Sustainability Development Goals are the most commonly cited reporting framework (79% in 2021), this is not the focus of sustainability assurance engagements. Instead, Information disclosed in accordance with the Greenhouse Gas (GHG) Protocol and jurisdictional standards in Europe are commonly the subject of assurance. 

Bearing in mind that 86% of the companies reviewed employed multiple standards and frameworks to prepare and present sustainability information, the findings present a compelling argument for the need for a harmonised global system for reporting decision-useful information.

The IFAC foreword continues: “We continue to believe [use of multiple standards] neither supports consistent, comparable, and reliable information, nor provides a foundation for globally consistent, high-quality sustainability assurance.”

Nigel Sleigh-Johnson, Director of Audit and Corporate Reporting at ICAEW, said: “There is a desperate need for alignment of climate and other sustainability reporting requirements. The UK, for example, has requirements for sustainability reporting by companies in the FCA’s listing rules, in various sets of regulations (such as the so-called Streamlined Energy and Carbon Reporting (SECR) regulations) and under the strategic report regime. To add to this, many UK companies are affected by the EU’s Corporate Social Responsibility Directive and separate European sustainability reporting standards. 

“With this backdrop, the proposed adoption of the ISSB’s IFRS S1 and S2 standards present a golden opportunity for the UK to support international consistency while simultaneously streamlining existing national requirements.”

Now in its third year, the IFAC report examined for the first time the extent to which companies provide forward-looking information on climate emissions reduction targets and plans for achieving them. While nearly two-thirds of companies disclosed targets, this lags behind the rate at which companies report their historic greenhouse gas emissions (97%). 

Over the period from 2019 to 2021, fewer companies relied on stand-alone sustainability reports. Meanwhile, use of integrated and annual reports for ESG disclosures, which provide more connectivity between ESG and financial information and support integrated decision-making within companies, have increased. That said, standalone sustainability reports remain a popular format for disclosure, especially in Canada, the US and jurisdictions in Asia.

While most reporting focuses on multi-stakeholder and societal matters, use of or reference to the Task Force on Climate-Related Financial Disclosure Framework and Sustainability Accounting Standards Board Standards has grown dramatically since 2019, albeit unevenly around the world. Companies in the Americas and Europe have steadily adopted these frameworks while companies in the Middle East and parts of Asia have lagged behind. 

Meanwhile, the rate of assurance has increased significantly from 2019 to 2021, but most engagements remain narrowly focused on greenhouse gas metrics. Just over half (53%) of engagements obtained assurance on information in all four of the ESG categories examined in the study, namely GHG, other environment, social and governance.

The International Auditing and Assurance Standards Board’s (IAASB) International Standard on Assurance Engagements 3000 (Revised) remained the most widely used assurance standard. But change is afoot.

Alex Russell, Head of Audit and Assurance Strategy at ICAEW, said: “With the IAASB’s development of a draft of its intended ‘practitioner-agnostic’ sustainability assurance standard, ISSA 5000, a solution may be at hand for a sustainability specific assurance standard which can be applied globally to achieve consistently high quality assurance.” 

“ICAEW believes a healthy ecosystem encompasses both accountant and non-accountant assurance providers. However, practical solutions need to be found to enable all providers to be held to the same high bar of regulation, quality management and ethical standards. And as the IFAC study states, it is up to the profession to demonstrate its strengths in this area, including any particular advantages derived from an auditor’s skills and mindset,” Russell added.

Delaney said assurance enhances trust and confidence in ESG information and the systems and controls used to collect and report data. It also supports informed capital allocation decision 

“As the ISSB, IAASB and IESBA collectively work to ensure their standards support high-quality sustainability disclosure and assurance, the accountancy profession must demonstrate to stakeholders why our profession is best placed to deliver assurance,” he said. “We hope this study continues to serve as a foundation for evidence-based conversations among policymakers, regulators, preparers and all users of sustainability information.”

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