ESG assurance is crucial for companies reporting on environmental, social, and governance practices. Here's what you need to know:
- Definition: Third-party verification of a company's ESG claims
- Types: Limited (quick check) vs. Reasonable (deep dive) assurance
- Why it matters: Investors are skeptical, regulators are tightening rules, consumers care
Key points:
- Most assurance providers use the ISAE 3000 revised standard
- 58% of listed companies got ESG assurance in 2020, up from 51% in 2019
- EU's CSRD will require ESG assurance for many companies
- US SEC plans mandatory climate risk reporting from 2024
Best practices:
- Implement strong data systems
- Follow known standards (GRI, SASB, TCFD)
- Engage stakeholders early
- Conduct internal audits
- Use tech tools for data management
Challenges:
- Navigating multiple frameworks
- Determining material issues
- Ensuring data accuracy
- Finding expert help
- Managing costs
Quick Comparison:
| Feature | Limited Assurance | Reasonable Assurance |
|---|---|---|
| Depth | Surface level | In-depth |
| Cost | Lower | Higher |
| Time | Quicker | Longer |
| Confidence | Moderate | High |
Bottom line: ESG assurance is becoming essential. Start now, invest in tech, and stay ahead of the curve.
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ESG Assurance Basics
ESG assurance is like a fact-check for sustainability reports. It verifies a company's claims about its environmental, social, and governance practices.
Most assurance providers (94%) use the ISAE 3000 revised standard. The scope covers:
- Environmental impact (carbon emissions, water use)
- Social practices (worker rights, community engagement)
- Governance policies (board diversity, anti-corruption measures)
Who cares about ESG assurance? Here's a quick breakdown:
| Group | Interest |
|---|---|
| Investors | Accurate data for decisions |
| Regulators | Reporting rule compliance |
| Customers | Proof of sustainability |
| Employees | Ethical workplace confirmation |
Companies are under pressure. A 2023 PwC survey found 94% of investors suspect "greenwashing."
ESG reporting rules are getting tougher:
- EU's CSRD will require ESG assurance for many companies
- US SEC plans mandatory climate risk reporting from 2024
- Switzerland's new rules will affect over 3,000 companies (likely after 2028)
More companies are getting ESG assurance. In 2020, 58% of listed companies did, up from 51% in 2019.
"Independent assurance can help build trust with stakeholders and investors. Having 3rd party verification of a company's reports can be seen as a positive sign of the credibility and transparency of their reporting." - Dean Emerick, Curator on Sustainability Issues at ESG The Report
Companies should prepare for both limited and reasonable assurance audits. Limited assurance is less detailed and cheaper, while reasonable assurance involves more testing and site visits.
Types of ESG Assurance
Companies can pick between two main ESG assurance types: limited and reasonable. Each one gives a different level of confidence in ESG reporting accuracy.
Basic Assurance
Limited assurance is the entry-level option. It's less thorough and cheaper than reasonable assurance. Here's what you get:
- Fewer tests and less evidence gathering
- More reliance on what management says
- Less checking of source documents
Most companies go for limited assurance right now. In 2022, 69% of firms got some level of assurance, up from 64% in 2021.
Detailed Assurance
Reasonable assurance digs deeper. It gives you more confidence that your ESG info is on point. It includes:
- More tests and evidence gathering
- Better understanding of internal processes
- Closer look at important stuff
It costs more, but it's becoming a big deal. The EU's new rules (CSRD) will make large companies switch from limited to reasonable assurance within four years.
Assurance Types: Side by Side
| Feature | Limited Assurance | Reasonable Assurance |
|---|---|---|
| Testing | Less | More |
| Evidence | Fewer docs | More source checks |
| Cost | Lower | Higher |
| Confidence | Moderate | High |
| Statement | Negative (no issues found) | Positive (looks good) |
Companies often mix it up. They might use reasonable assurance for big stuff like climate performance and limited assurance for less critical bits.
"Independent assurance can boost trust with stakeholders and investors. Having someone else check your reports shows you're serious about being open and honest." - Dean Emerick, Curator on Sustainability Issues at ESG The Report
When picking an assurance level, think about:
- Your budget
- What investors want
- How you stack up against competitors
- What the rules say you need to do
A practice run with auditors can help you figure out which level works best for you.
How to Do ESG Assurance Well
To nail ESG assurance, focus on these five areas:
Good Data Systems
ESG reporting lives and dies by reliable data. Here's what you need:
- Clear data governance
- Solid management policies
- Strong quality standards
Think automated checks to catch errors early. It's all about accuracy and staying compliant.
Following Known Standards
Make your ESG reporting easy to understand:
- Pick quantifiable, relevant metrics
- Use frameworks like GRI, SASB, or TCFD
- Stay on top of new rules (like the EU's CSRD)
Talking to People Early
Get everyone on board from the start:
- Investors
- Customers
- Regulators
- Your own teams (IT, finance, ops)
Early talks = better alignment with expectations and standards.
Checking Your Own Work
Do internal checks before outside assurance:
- Set up data approval workflows
- Run regular internal audits
- Track progress on key ESG metrics
Spot and fix issues before the external auditors show up.
Using Tech Tools
The right software makes ESG data management a breeze. Look for:
| Feature | Why It's Important |
|---|---|
| Data processing power | ESG data can get complex |
| Collaboration tools | Teams need to work together |
| Expert support | Help with emissions management and reporting |
Two ESG software options:
1. Novata: Customizable platform for private markets.
2. Proof (formerly Proof of Impact): End-to-end solutions for ESG data.
Start small with tech and build up as your ESG program grows.
Common ESG Assurance Problems
ESG assurance isn't easy. Companies face several challenges when verifying their ESG reports. Here are the main issues:
Matching Different Rules
Companies struggle with multiple ESG frameworks like GRI, SASB, and TCFD. It's a juggling act.
"The 'alphabet soup' of reporting frameworks complicates the reporting process for organizations", - KPMG study
Unlike financial reporting's single framework, companies deal with 15-20 for non-financial info.
Deciding What's Important
Picking the right ESG issues is tough. Companies must choose wisely to avoid greenwashing claims.
"Companies often express regret in not fully addressing materiality prior to launching into the data collection process", - Weinreb Group Sustainability Recruiting
Keeping Data Accurate
ESG data is tricky. It's not as straightforward as financial data.
| Data Issue | Impact |
|---|---|
| Unit conversion errors | Massive misreporting |
| Lack of standardization | Difficult comparisons |
| Data silos | Incomplete reporting |
Example: ABB over-reported sulfur emissions by 1,000 times for three years. They used kilotons instead of tons.
Finding Expert Help
ESG assurance experts are scarce. Companies are competing for limited talent.
"Only 29% of companies feel ready for ESG assurance", - Larry Bradley, KPMG
This shortage is pushing 54% of companies to hire externally.
Managing Costs
ESG assurance is expensive in terms of money, time, and resources.
| Cost Factor | Challenge |
|---|---|
| Data collection | Time-consuming |
| Expert consultation | High prices |
| Software | Necessary but costly |
"My team spends endless hours collecting ESG data from across our organization, meanwhile, I am drowning in data requests." - Chief Sustainability Officer, global hotel chain
Despite these hurdles, ESG assurance is crucial. With 77% of institutional investors seeing ESG integration as smart business, tackling these problems is a must.
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Steps in ESG Assurance
ESG assurance isn't just a checkbox. It's a deep dive into your company's ESG data and reports. Here's how it works:
Getting Ready
Before you jump in:
- Pick your ESG framework(s)
- Set up clear documentation
- Implement strong internal controls
- Train your team on ESG data
"Only 29% of companies feel ready for ESG assurance", - Larry Bradley, KPMG
That's a wake-up call, isn't it?
Checking Data and Documents
This is where the rubber meets the road:
- Review how you collect ESG data
- Double-check your reported info
- Make sure your ESG disclosures are complete
Here's a quick look at some common data issues:
| Data Issue | Impact |
|---|---|
| Inconsistent units | Misreporting |
| Lack of standardization | Difficult comparisons |
| Data silos | Incomplete reporting |
Testing and Confirming
Auditors don't just take your word for it. They:
- Sample and re-calculate
- Visit sites and observe
- Interview key people
- Cross-check with external sources
Writing the Report
The assurance report spills the beans on:
- What was covered
- How they did it
- What they found
- How sure they are (limited or reasonable assurance)
Giving Advice
After all that, auditors often:
- Point out gaps in your ESG reporting
- Suggest better ways to collect data
- Recommend how to boost your ESG game
"Companies often express regret in not fully addressing materiality prior to launching into the data collection process", - Weinreb Group Sustainability Recruiting
Don't be one of those companies. Get your ducks in a row before you start.
Why ESG Assurance Helps
ESG assurance isn't just paperwork. It's a game-changer for companies that take it seriously. Here's how:
Building Trust
ESG assurance shows you mean business. It's not just talk - it's proof.
"ESG assurance builds trust when people are skeptical about sustainability claims." - PwC
Why it matters:
- 94% of investors think sustainability reports have fluff
- 85% say proper assurance would boost their confidence
Spotting Risks Early
Think of ESG assurance as a health check for your sustainability efforts. It catches problems before they blow up.
| Risk | How Assurance Helps |
|---|---|
| Bad Data | Finds errors fast |
| New Rules | Keeps you compliant |
| PR Nightmares | Stops greenwashing claims |
Standing Out
ESG assurance sets you apart. It shows you're not messing around with sustainability.
The facts:
- 65% of US shoppers think about sustainability
- 89% of global buyers have switched to greener products recently
Keeping Investors Happy
Investors LOVE solid data. ESG assurance delivers.
In 2020, over 60% of big US companies got some ESG info checked. This trend is growing.
Staying Legal
ESG rules are changing fast. Assurance helps you keep up.
For example:
- SEC wants public companies to report emissions
- EU now requires sustainability audits for some firms
What's Next for ESG Assurance
ESG assurance is evolving rapidly. Here's what's coming:
Standardization
ESG reporting is messy. Companies report different things in different ways. But that's changing:
- The EU's CSRD is setting new rules for 50,000+ companies, including some outside Europe.
- The US SEC is working on climate disclosure rules for 2025.
These changes will make ESG reporting more consistent. ESG assurance will need to keep up.
Tech Tools
ESG data is complex. New tech is helping:
| Tech | ESG Assurance Use |
|---|---|
| AI | Quick ESG data analysis |
| Blockchain | Better data tracking |
| IoT | Real-time environmental data |
KPMG and Microsoft are already using AI to check climate reports against regulations. Expect more of this.
Stricter Rules
ESG rules are tightening:
- Europe's CSRD rolls out from 2024 to 2028.
- The UK now requires yearly TCFD reports from listed companies.
- Many Asian countries are creating their own ESG reporting rules.
Companies will need more help with ESG assurance. It's becoming a necessity, not a luxury.
In short: ESG assurance is getting more standardized, more tech-driven, and more crucial. Companies that adapt early will have an edge.
Wrap-up
ESG assurance is hot right now. Here's the scoop:
Investors are skeptical. PwC's 2023 survey shows 94% think sustainability claims lack support. They want solid ESG data.
Regulators are cracking down. The SEC and Europe's CSRD are pushing for more ESG info.
Companies have options: limited or reasonable assurance. 85% of investors prefer reasonable assurance for more confidence.
Good data management is key. You need accurate, reliable ESG reporting.
It's a team effort. Sustainability, finance, logistics, and IR all play a part.
To stay on top of ESG assurance:
1. Don't drag your feet. Start now, before regulations force your hand.
2. Invest in tech. Good tools make ESG data management a breeze.
3. Talk to stakeholders. Know what they want from your ESG reports.
4. Keep improving. ESG reporting is always changing.
5. Get help if you need it. ESG experts can guide you through the maze.
ESG assurance isn't just about following rules. It's smart business. You'll manage risks better, attract investors, and stand out from the crowd.
"Companies that provide assurance for their ESG reporting also reap the benefits. They attract investors and financing more easily. Assurance can also lead to the generation of competitive advantages and new business opportunities." - Tanguy Legein, Audit Partner at KPMG in Belgium
FAQs
What is reasonable assurance in ESG?
Reasonable assurance in ESG is a deep dive into a company's ESG reporting. It's like putting your ESG processes under a microscope.
What does it look at?
- How you gather ESG data
- Your accuracy controls
- How you manage ESG info overall
It's perfect for companies still finding their feet with ESG reporting.
As of February 2023, reasonable assurance has become a big deal. Why? It gives a fuller picture of your ESG practices than limited assurance.
Here's how they stack up:
| Aspect | Limited Assurance | Reasonable Assurance |
|---|---|---|
| Depth | Skims the surface | Goes deep |
| Scope | Zeroes in on specific areas | Covers the whole ESG reporting process |
| Confidence | So-so | High |
| Cost | Easier on the wallet | Pricier |
| Time | Quicker | Takes longer |
Here's the thing: Reasonable assurance costs more and takes longer. But it gives you (and others) more confidence in your ESG reporting. That's gold when it comes to winning over investors and stakeholders.
"A reasonable assurance engagement provides insights into the company's processes, controls and general oversight associated with collation of ESG information. This may be particularly valuable for a company that presently lacks confidence in its ESG reporting." - February 27, 2023
Bottom line? If you want to show you're serious about ESG, reasonable assurance is the way to go.
