This panel will discuss and demonstrate how integrated reporting can be done in a way that includes BOTH financial and non-financial data. The panel involves discussion of a format that can be used internally for strategy-setting and decision-making and externally to communicate out to investors and analysts. The report protocol and data is assurable. It is designed to meet SEC materiality disclosure standards to be used in 10K filings.
Using a single software platform, this session will show how a public company can begin producing an integrated report. It bridges the gap between ESG data (think CSO) and financial data (think CFO) in a simple and relevant manner. The demo will be used to briefly present how data is collected, structured, audited and communicated to all stakeholders. The discussion will highlight both investors’ and auditors’ points of view.
In my last blog, I wrote about VWs limited assurance report on its latest sustainability report. I think limited assurance makes sense for sustainability reports after a high level of assurance has occurred. In VW’s case, this high level of assurance never had occurred.
How do we get companies to have their sustainability reports assured at a higher level? I suggest that high level assurance be done every other year with limited assurance to be performed in the years in between. This idea has some parallels to financial statement audits.
Every year public companies publish full financial statements, which are audited once a year. In an audit, considerable testing is performed on the systems that provide the data and the data itself. This testing includes gathering corroborative evidence such as checking calculations, obtaining third party confirmations, inspecting assets, and comparing valuations to external markets.
In the accounting profession, a “review” engagement of financial information is limited assurance and is often done in the interim period between the publication of full financial statements. In the interim period, companies issue financial information but not complete statements. During a review engagement, testing or other corroborative procedures are not done; instead, the auditors make inquiries and flag and research inconsistencies. After these limited procedures, the auditors state that they are not aware of any “material” modifications that should be made to the interim financial information for it to be in accordance with the relevant accounting principles. “Material” means it is big enough that it would affect your decisions about the company.
To illustrate, this is an example schedule for audits and reviews.
Audit, big deal done every year
Review, first quarter
Review, second quarter
Review, third quarter
And back to the audit
When these review engagements are done between audits, there is in essence an audit benchmark. During the audit, the data systems and controls have been evaluated; extensive testing has been done. The audit provides reasonable assurance that the information is not misstated in a major way due to errors or fraud. Limited assurance can be done in between audits because the audited financial statements serve as a benchmark upon which to assess subsequent financial information.
This could work for sustainability reports where limited assurance (review engagement) occurs between high level assurance. The costs would be less than doing a high level of assurance every year. As demand for assurance on sustainability reports increases, this would be an important step in achieving higher level assurance.
We had some interesting discussions! One topic in particular stood out for me. Why would companies have their sustainability reports assured when in many countries the reporting is still voluntary? This a great question! Presumably, they would have their reports assured because they get something out of doing so. There is value added when reports are assured but what will it take to increase the assurance rate?
I read a recent article in Forbes by Cindy Lubbers of CERES about how to get more companies to provide environmental, social, and governance (ESG) disclosures. The suggested solution was for stock exchanges to require more ESG disclosures. I think this is a great idea. The same would be true for assurance.
If stock exchanges can require more disclosures, they can surely require assurance of the information. This would definitely improve the information being provided to investors. If investors are relying on this information to make decisions, they should be able to have confidence that the information is reasonably accurate. Security exchanges are in a unique position such that they can set the standards for the companies that list with them. It is in their best interest to promote transparent and efficient capital markets. Adding a layer of assurance is a way to build trust and create long-term value.
In my next blog, I will talk about the qualities I think are needed by assurance providers.
Assurance on sustainability reports – How is it perceived?
As companies start to invest in assurance for their sustainability reports, they have to wonder “is it worth it?” Academic studies can shed some light on this.
In a 2105 study, researchers at the University of New South Wales in Australia looked at whether assurance of environmental, social, and governance (ESG) indicators affected investors’ willingness to invest in a company.
Researchers presented a sustainability report with ESG indicators to graduate students in a master’s of financial analysis program. These were students who were “sophisticated” users of financial information. They were told that they had inherited some money (lucky for them) and were to indicate their willingness to invest the money in a company. The researchers varied which students were given sustainability reports with assurance vs. no assurance and whether the company’s strategy and ESG indicators were aligned. For example, assume a retail grocery’s strategy is aimed at supporting products that are based on environmental stewardship. A strategically aligned ESG indicator would be the percentage of animal products sold that are sourced from sustainable agricultural practices.
What did they do with their inheritance? Study participants, aka, investors, were more willing to invest if the company had its ESG indicators assured. Assurance made a statistically significant difference! It also mattered to these investors if the ESG indicators had a high relevance to the companies’ strategy. This is an important result, especially as companies decide on what sustainability metrics to report. Just reporting for the sake of reporting does not mean as much as reporting what matters. This sounds very much like the essence of the GRI G4 Sustainability Reporting Guidelines.
This is just one study, but an interesting one that supports the role of assurance in giving credibility to sustainability reports. There are other assurance studies that I will talk about in future blogs.
Assurance sounds so reassuring! Something that is assured should give you confidence that it is credible. Shouldn’t it?
Consider the case of audited (assured) financial statements conducted by independent CPAs. Let’s say that they give an unqualified or “clean” opinion to a company’s financial statements. After reading such a report you should have confidence that the numbers are “fairly” presented. But what does fairly presented mean? It does not necessarily mean that the company is doing well. It only means that the numbers and information contained in the report fairly represent what is going on with the company. Financial statement audits are done in accordance with generally accepted auditing standards, and the final audit report must use standardized wording. Indeed there aren’t a lot of choices in how the audit is done or in how the report is worded.
What about assurance for sustainability reports? Unlike financial statement audits for publicly held companies, assurance isn’t required and standards are still developing. Yet demand for report assurance is increasing as more people depend on sustainability reports to make decisions about these companies. They want to be assured that the information in the report is accurate.
What are the options for report assurance? There are several choices to be made. First, who is doing the assuring? There are many groups (e.g., accountants, consultants, engineers) that do this work and each of them has a different perspective on report assurance. Second, which standards do they use in evaluating the report? Some standards are intended to evaluate stakeholder engagement and materiality processes while others are intended to attest to the accuracy of the information presented. The scope of the assurance also varies. Some companies, for example, only have their greenhouse gas (GHG) emission disclosures verified while others have a review of the entire report conducted.
In my next post, I will talk more about these different assurance options.