Four Advantages To Obtaining Independent ESG Assurance

Republished By Plato

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This article is sponsored by PwC.

A sustainability strategy that encompasses ESG reporting has several stages and involves many decisions as your company collects, manages and publishes this information. Reporting should be investor-grade — credible and well-supported so that investors and other stakeholders can rely on it when making decisions. While this process should be an integral part of your strategy, it’s a move many companies are thinking about for the first time.

As you contemplate this path forward, consider the benefits that assurance over ESG data provides. Management and boards may gain an independent perspective on their ESG reporting. Investors and other stakeholders — including within the value chain — may get a view of your company’s longer term value creation strategy and insight into the reliability of management’s assertions, data and disclosures.

An assurance engagement, performed by a CPA firm, can also enhance the reliability of company reported ESG data. In PwC’s 2022 Global Investor Survey, 87 percent of respondents told us they believe corporate reporting contains unsupported sustainability claims. But many of those respondents also said they would have greater confidence in the reporting if there was an independent reasonable (75 percent) or limited (54 percent) assurance report. Working with an independent assurance provider to assure ESG data can build trust with key stakeholders at a time when there is skepticism about the thoroughness and accuracy of sustainability disclosures.

flow chart depicting process from determining climate reporting strategy to publishing investor-grade reporting

New regulations put a spotlight on ESG assurance

By today’s standards, companies can, and are, voluntarily reporting ESG data — and that’s a good first step. Transparency is the key to building trust in the marketplace. Companies in the early stages of ESG reporting may be focusing on one or two key metrics while developing a plan to build a more comprehensive reporting process. That’s okay because reporting will improve over time as enhancements to the process are made.

But companies are coming under regulatory and stakeholder pressure to provide expanded sustainability disclosures and to have their reporting assured by an independent auditor. Many new or proposed global sustainability regulations — including forthcoming SEC climate disclosure rules — may eventually require independent assurance of certain ESG data, such as Scope 1 and Scope 2 greenhouse gas emissions. These regulations may require companies to move from limited to reasonable assurance over time, so now’s the time to start thinking about ESG assurance.

As your company thinks about ESG assurance, consider these four advantages to gain.

1. Build foundational confidence in your ESG reporting

Companies have seen a dramatic shift in the number of stakeholders interested in their ESG reporting. Customers, suppliers, investors and prospective employees may use this information to understand how your company thinks about topics such as corporate culture and long-term value creation. They can then make decisions on purchases, stock transactions or job offers.

You, in turn, can gain valuable insights from an independent assurance provider on whether your ESG reporting strategy can stand up to scrutiny. The assurance process can identify gaps in reporting, limitations of current controls and areas for improvement. Overall, the process can help give your company confidence in the procedures and oversight necessary to produce complete and accurate ESG data.

2. Fine-tune your reporting process and create a robust audit trail

ESG assurance can also trigger companies to further evaluate their reporting processes and make proactive improvements. We’ve learned from companies across industries that identifying sources of ESG data is often one of the primary challenges of reporting. In many cases, information comes from multiple sources spread across functional business units and areas of the value chain.

By the time it gets consolidated, the origin of the data may be unknown, which makes it difficult to identify and trace the data from initial source to final report. You may also be leveraging property owners, utilities or business travel agencies to obtain ESG data. With limited oversight of self-reporting entities, it’s difficult to have comfort over what you’ve been handed. You know your company will need to be prepared for questions during the assurance process on such things as the sources of your data, how it was extracted and measured, and your calculation methods.

As part of your reporting strategy, your assurance provider likely will want to see an audit trail that provides a detailed record of the origins of your ESG data. Your company will need end-to-end documentation that will serve as evidence and allow the assurance provider to form a conclusion about the information. For example, to assess emissions from waste generated in operations (Scope 3, category 5) the assurance provider will probably want to see manifests or weight logs from your waste management company.

3. Attain greater visibility across your value chain

An important component of your company’s ESG reporting strategy will likely be the sharing of information across your value chain. In order for your company to calculate its Scope 3 greenhouse gas emissions, it will need to accumulate data from multiple suppliers, vendors and other business partners. Increasingly, companies in your value chain may already be focusing on what your company is doing to reduce emissions. Having assurance over all of that information can give all parties involved comfort that they’re making decisions based on accurate information.

That knowledge sharing can lead to other benefits such as unearthing value chain enhancements, best practices for worker health and safety or potential gaps in the reporting process. There’s also a competitive advantage to consider. A company may decide to purchase your products or services if it has greater confidence in the story you’re telling.

4. Establish ownership and accountability for ESG reporting

An effective ESG reporting strategy requires companies to think holistically and develop partnerships across functional business lines.

Your company will need to establish cross functional teams that include leaders from sustainability, finance, logistics, procurement, investor relations and other areas. These teams should have a clear understanding of who is responsible for ESG data and how it’s being used in the marketplace. A large, global organization may have an ESG controller overseeing additional team members.

Assurance can help management and the board obtain another perspective on how the team and the related ESG reporting process is functioning.