CSRD Proposal Sparks Debate Over ESG Assurance Market

CSRD Proposal Sparks Debate Over ESG Assurance Market

The EU’s Corporate Sustainability Reporting Directive (CSRD) — one of the latest directives to come out of the EU to help meet the objectives of the European Green Deal — will require roughly 49,000 firms to disclose sustainability information in compliance with European reporting standards from as soon as 2024. Included within the proposal is a requirement for assurance of sustainability information (at first limited, moving to reasonable once standards have been developed). This will mean that all firms within the scope of the directive will need to hire qualified audit and assurance providers to check that the information disclosed is consistent with the reporting standards. The debate is now heating up over who should assure these sustainability reports. 

On one side of the debate are European lawmakers who have raised concerns about the risk of conflicts of interest if financial and sustainability reports are audited by the same entity. On the other side of the debate are businesses and financial organisations which support auditors taking responsibility for both sustainability and financial audits. Accountancy Europe, an organisation representing EU auditing firms, has argued that statutory auditors are well placed to perform sustainability assurance because they already have broad company knowledge gained through financial audits, are required to adhere to stringent ethical principles, and their oversight of this process supports the connectivity between a company’s financial and sustainability information — in keeping with investor demand.

These debates come at a time when audit and assurance are moving further up the ESG agenda. Audit petitions were a key tactic during this year’s AGM season. Blackrock voted for a racial equity audit of Alphabet in order to enable stakeholders to track the effectiveness of the firm’s DEI efforts. Likewise, shareholders in ExxonMobil called for the firm to publish an audited report on how decarbonisation of the economy would impact its financial statements. This focus on ESG audit and assurance reflects the growing consensus that sustainability information needs be brought on a par with financial information amid concerns over transparency, reliability, and accountability. Consumers, employees, investors, and capital market shareholders need to be able to access ESG information which they can trust. Achieving this will require a concerted effort from firms and technology providers. Some of the key changes include:

• Firms will need to identify gaps in their current ESG reporting process and seek out technology providers which can help bridge these gaps. 
• Sustainability and Finance departments will need to focus their efforts on integrating cross-functional ESG data into one ecosystem which can aggregate this information. 
• Technology providers will need to keep up with regulations and adapt their offering to accommodate changing requirements.

For more information on how to navigate the rapidly changing landscape and upgrade your reporting capabilities, look out for our upcoming report on Integrating ESG into Financial Disclosures.