Trust, But Verify – The Rise of Sustainability Assurance

You knew it was coming.  Financial auditors have been chomping at the bit for years on this, and their furious lobbying appears to have paid off (well, at least in the EU).

The European Union’s Corporate Sustainability Reporting Directive (CSRD) includes the requirement for third party verification of reported sustainability data.  An interesting piece in Forbes today offers some thoughts on the logistical challenges associated with this requirement, the most serious of which is a dearth of qualified assurance experts to complete the work.

These are serious challenges, without question.  However, I am equally concerned with another capacity issue – the capacity of companies to produce and mark-up (using the correct digital tags) sustainability data which is compliant with both the reporting standards and all associated regulations (ie the EU taxonomy).  And while initially the assurance providers will be mandated to undertake “limited assurance”, that will graduate to a “reasonable assurance” standard within a couple of years.  The difference is important.

A “limited assurance” mandate’s focus is to understand the process used to compile the reported sustainability information. It concentrates on inquiry, observation, and analytical procedures, looking at data at a more aggregated level.  Conversely, a “reasonable assurance” mandate requires additional effort, utilizing many of the methodologies commonly employed in a financial audit (ie. a more rigorous review of internal controls & procedures).

It is also worth considering who will be deemed as qualified to complete this assurance work.  In the EU, each member state will be empowered to determine its own set of qualifications.  That said, it is likely going to be a mix of traditional accounting/audit firms and built for purpose specialist assurance shops.

Notwithstanding the recent EU decision to push back the implementation of CSRD for some companies by two years, those who begin reporting soon must navigate yet another complexity.  The alternative would be to simply take them at their word on the quality of sustainability data they will report.  But trust seems in short supply these days.  So trust, but verify.

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