Sustainability reporting: focus on assurance

This is the seventh blog in a series of seven focusing on sustainability reporting practices in the chemical industry. It is based on research I´ve conducted on sustainability reports submitted to GRI from the chemical sector in 2014 i.e. containing 2013 data.

With a 151 reports at my disposal, I analysed 102 reports after removing reports that was not submitted in English and excluding more than one report from the same company. In the latter case I restricted my analysis to one report per company where the corporate report had preference over the subsidiary.

My research focus was to evaluate reports on transparency, management disclosure and assurance practices. Transparency was broken down into three sub-criteria: how materiality is determined, how stakeholder engagement practices are conducted and how sustainable business goals are set. Management disclosure was evaluated by focusing on another three sub-criteria: the management approach of the executive committee or board of directors, whether reporting was balanced and transparent in terms of risks, opportunities, challenges and successes and the third sub-criteria evaluating sustainable business strategy. Assurance practices looked at whether reports are validated internally and to what degree it is verified externally.

There are no statutory or regulatory requirements for the assurance of sustainability reports. This is exactly the opposite of what is required from financial reports. One can speculate that this situation might change in the near future. In a study conducted by the Association of Chartered Certified Accountants (ACCA) and the European Sustainable Investment Forum (Eurosif) in April 2013, 84 per cent of investors, analysts and stakeholders agreed or strongly agreed that non-financial disclosure should be independently verified. In a global survey of institutional investors on non-financial performance conducted by EY in 2014, it stated that report assurance remains largely voluntary and the scope of assurance often remains limited to a few key metrics.

My research shed some light on current practices in the chemical sector. Forty-six per cent of reports were subjected to “limited external assurance” whilst 19 per cent of reports included not only the assurance statement or the verification report, but also disclosed key findings and recommendations made by the verifier for improving the next report. This is an interesting development! However, only one company requested that their report be verified at a “reasonable assurance” level, which is more comprehensive than limited assurance. This one company went further by making reference to ISAE3000 as a reference standard and included an extensive list of guidelines. These guidelines will aid the comparison with other reports, admittedly not in the chemical sector, but in other progressive sectors. Comparability remains problematic and one way to solve this is to start using the same guidelines.

I have to caution on how the audit scope is defined. My research indicated that the audit scope is sometimes too narrowly defined to the extent that one has to question the value of the verification process itself.

Publishing the assurance statement as part of the sustainability report seems to be common practice. I would urge all reporters to also include the key findings and recommendations made by the auditor in the report. It would definitely increase the credibility of your report – especially if these issues are addressed in the next report. In one case, the reporter actually addressed the key findings and made firm commitments for how they intend to improve each finding in the same report – right after the audit report.

But, not all chemical companies have embarked on external assurance in 2013. Exactly one quarter of the 102 reports I have evaluated limit their assurance to the sustainability team compared to 22 per cent by various internal departments, of which the finance and legal departments are clear favourites. I suspect this percentage is higher, but internal assurance is not explicitly stated in the report! As 53 per cent of companies’ don´t go beyond internal assurance, they have to describe their internal assurance process in more detail as it could still be quite a robust process and anyway the best they have at the moment.

My research results confirm the trend towards external assurance. In an analysis of assurance practices in South Africa of companies listed on the Johannesburg Stock Exchange (JSE) in 2009, all 60 companies on the Socially Responsible Investment (SRI) Index were analysed. Marx and Van Dyk (2011) found that 30 per cent of companies have their reports externally assured, whether by audit firms or independent assurance providers. This compares with 47 per cent five years later when I add both types of external assurance (i.e. limited and reasonable assurance) from my research in the chemical sector.

External assurance seems to increase year-on-year. In the annual World Business Council for Sustainable Development´s (WBCSD) 2015 report, Reporting matters, 78 per cent of their 169 members have their report externally assured. Of course one can reason that the sample population is skewed, and indeed I would agree with that, as membership tends to consist of progressive sustainable companies, but even within this group, the trend is increasing by five percentage points in 2014 and 14 percentage points when compared to 2013.

Those companies not yet verifying their sustainability report externally, the pressure is on as the tide is against you. Keep in mind that the goal is to provide stakeholders with credible reports. It is also another way to prove your commitment to sound sustainability practices, a well-executed sustainable business strategy and an executive team´s commitment to leave a better world for the next generation.

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One thought on “Sustainability reporting: focus on assurance

  1. Hi Johan,

    Thanks for your blog. And even better yet, thanks for the series of 7 blogs! This is a great forum for sharing your research findings and it sounds like you’ve come quite a long way – congratulations on that front.

    I selected to comment on the assurance blog as this is a topic my own company is currently thinking about, so it’s useful to read your insights.

    I agree with you about the parallels between sustainability and financial reports and how assurance helps to increase credibility. It does not surprise me that assurance often does not go beyond a few key metrics; and in the case of your own research, that over half don’t go beyond internal assurance (as is the case with my own company).

    I wondered as I read about the language for internal and external assurance and how the processes differ. Of course a major difference is around who does the audit; and whether this party is independent from the company. I am not sure, however, if an internal audit team would take the same steps in assuring a sustainability report as an external audit team from let’s say the big 4. Perhaps I am confusing the issue all together by pulling in audit vs. assurance into the mix (and this is even before verification, validation etc.) – but man, these terms can be confusing!

    I was intrigued by the part about ‘limiting assurance to the sustainability team’ with finance and legal as clear favorites if going beyond that. This to me sounds more like a proofreading / signoff process than assurance although I may have misinterpreted the finding. I would be particularly interested to learn more about the steps taken by sustainability teams to assure a report, because as you allude to, I imagine this is a highly unstandardized process from company to company.

    My only other thought is that you touch on the benefits to assurance and I also questioned the risks to not having an assured report – this could be an interesting element to include in your research if you haven’t done so already.

    Thanks again Johan, keep up the good work!

    Like

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