Bruce Cartwright, CEO of the Institute of Chartered Accountants of Scotland, outlines the importance of non-financial reporting assurance and why the industry body supports the end goal of double materiality.
The Institute of Chartered Accountants of Scotland (ICAS) – the oldest accounting body in the world – was formed in 1854. Since inception, it has grown into an organisation with over 23,000 members. Up until relatively recently, it primarily focused on financial reporting.
However, the organisation has begun an evolution in recent years due to the rise in sustainability-related reporting, with socially responsible investors and activists increasingly seeking to understand companies’ impact on the environment and society, Bruce Cartwright, CEO of ICAS, tells ESG Investor.
The Global Reporting Initiative (GRI), a significant pillar of sustainability reporting and a standard-bearer for double materiality, has been in existence for 26 years since its establishment in 1997. Additionally, two other prominent players have more recently emerged – the International Sustainability Standards Board (ISSB), established at COP26, and the EFRAG Sustainability Reporting Board, which is responsible for drafting the standards that inform the EU’s Corporate Sustainability Reporting Directive (CSRD), in partnership with the GRI.
“These three bodies spearhead our thinking on sustainability reporting standards and practices, with all three recognising the need for collaboration,” says Cartwright.
In March 2022, the GRI and the International Financial Reporting Standards (IFRS) Foundation announced a collaborative agreement whereby their respective standard settings boards, the ISSB and the Global Sustainability Standards Board (GSSB), would seek to coordinate their work programmes and standard-setting activities. Further, the ISSB, GRI and EFRAG have been in close contact in an attempt to work out a shared approach on how companies should report on sustainability data.
“These collaborative initiatives are driven by the understanding that there is only one planet and a shared goal among all stakeholders, albeit with different approaches, to save the human race from the climate and nature crises,” says Cartwright, adding that alignment of sustainability standards is vital, but acknowledging that it is unlikely there will be a “big bang one day” where all standard-setters suddenly agree on a single approach.
“We have two sides of the coin: financial materiality and the impact materiality.”
The ISSB is developing a single materiality-based reporting approach, which requires entities to disclose the financial effects of sustainability issues on enterprise value. This is also the reporting approach of the International Accounting Standards Board (IASB), which also sits under the IFRS Foundation umbrella.
The ISSB plans to issue its first two finalised frameworks (IFRS S1 and S2) by the end of June. It intends to make the standards effective from 1 January 2024, subject to approval by the International Organization of Securities Commissions (IOSCO), with the first corporate sustainability reports aligned to these frameworks issued in 2025.
The GRI, however, also requires firms to report on impact materiality, which focuses on the consequences of an organisation’s activities have for the environment and local communities. The GRI’s revised Universal Standards came into effect from 1 January, meaning that all GRI reporters are required to use these them for information published on or after this date.
According to Cartwright, ICAS supports the end goal of double materiality, requiring companies to report on how their business is impacted by sustainability issues from both an ‘outside-in’ and ‘inside-out’ perspective.
Double materiality recognises and combines the work of the ISSB and the GRI, he says. However, he acknowledges that achieving coordination won’t happen overnight due to different paces of progress and geographical variations.
“Alignment simply takes time,” he says. “The end goal is to see alignment between the ISSB, GRI and ESRS sustainability standards. With a multi-stakeholder focus, we can establish international standards that satisfy investors and the public’s desire for assurance.
“Once we have alignment, we will get a multi-stakeholder focus with everyone buying into the same approach to materiality and everybody talking the same language.”
The Europeans, however, are moving at a “faster pace”, he says, with EFRAG’s first draft of its European Sustainability Reporting Standards (ESRS) published and handed over to the European Commission (EC) in April 2022. The EC is currently consulting EU bodies and Member States on the draft standards, before adopting the final standards as delegated acts in June this year, followed by a scrutiny period by the European Parliament and Council.
According to some sources, the EC is contemplating removing mandatory sustainability reporting requirements, with disclosures subject to materiality assessments, representing major departure from EFRAG’s proposal.
As the proliferation of non-financial reporting increases and the regulatory landscape evolves, auditors will increasingly be required to provide assurance on sustainability and ESG-related disclosures to offer peace of mind to investors and other stakeholders on the trustworthiness of the information they receive.
To date, assurance of sustainability and ESG-related disclosures has often been undertaken on a voluntary basis. However, this is changing as regulators step in and mandate non-financial disclosures to provide consistency, comparability and reliability to investors.
CSRD’s phased implementation starts in January 2024 while the US Securities and Exchange Commission’s (SEC) long-awaited climate disclosure rules are expected later this year.
In an effort to keep pace, the International Auditing and Assurance Standards Board (IAASB) published its public consultation for its 2024-27 proposed strategy and work plan in January, with it wishing to develop an overarching standard for assurance on sustainability reporting.
In April, the IAASB confirmed its intention to advance the consultation on its proposed International Standard on Sustainability Assurance (ISSA 5000). Subject to the expected IAASB approval of the Exposure Draft in June, stakeholders can now expect the public consultation on the proposed standard to open in the latter part of July or early August 2023 and extend into December 2023.
“We strongly support the introduction of sustainability standards for assurance. We have observed that having standardised guidelines, such as the those set by the IAASB, that have been tried and tested over the years, is of value to the profession and other stakeholders,” says Cartwright.
“In this context, non-financial reporting represents a slightly different form of assurance, but we firmly believe that independent assurance of non-financial reporting is essential because relying on self-assurance would not be reliable or effective. It is necessary to have external validation to ensure the credibility and integrity of the sustainability information being presented.”
Reporting as an opportunity
During ICAS’ Sustainability Summit last month, UK-based drinks company Britvic noted that if companies view non-financial reporting as a burden, they’re viewing it from the wrong perspective.
“The reality is that it’s about the impact we’re all having on society and, therefore, taking this information and using it is crucial,” he says.
“If reporting is merely seen as a requirement without utilising the data, then it becomes a burden since it doesn’t affect behaviours and thinking. However, if we perceive it as an opportunity to drive business behaviour and make a wider impact on society and the environment, it becomes meaningful.”
Undoubtedly, he admits, there is a cost associated with implementing sustainability reporting for corporates, but many businesses are already engaged in this practice.
In fact, 100 of the world’s largest companies (N100) have continued to steadily increase their sustainability reporting rates, according to a report by KPMG. Ten years ago, 64% of N100 companies issued sustainability reports, with that number climbing to 79% in 2022. Further, nearly all of the world’s top 250 companies (G250) report on sustainability, with the rate of reporting among the G250 remaining at 96% in 2022.
The catalyst for this trend is, in part, investor-driven, according to Cartwright. Asset owners, particularly pension funds, are increasingly engaging with investee firms to drive sustainable outcomes and long-term returns on investment.
“While financials provide some insight into a company’s performance, assessing its sustainability is also a crucial component in evaluating its value over the long term.”