Verification and External Assurance in Sustainability Reporting
To know whether the organization’s commitments and practices related to sustainability, including sustainability reporting, are improving its sustainability-related performance, it is necessary to have in place procedures for verification and measuring changes that can be communicated to the organization’s stakeholders. Hohnen and Potts described verification, which is often referred to as “assurance”, as a form of measurement that involves on-site inspections and review of management systems to determine levels of conformity to particular criteria set out in codes and standards to which the organization may have agreed to adhere.[1] Verification procedures should be tailored to the organization’s culture and the specific sustainability topics that are reported on and which have been incorporated into the organization’s sustainability strategies and commitments; however, it is common for companies to rely on internal audits, industry (i.e., peer) and stakeholder reviews, and professional third-party audits, in each case focusing on the processes used to collect and analyze the data used to prepare the sustainability report. Verification procedures should be established before a specific sustainability initiative is undertaken and should be included in the business case for the initiative. Organizations may also commit to one or more of the certification processes that have emerged in the sustainability area.[2]
External assurance by a qualified and independent third party is the preferred method of validating the credibility of data used to prepare the disclosures in a sustainability report and the involvement of outside assurance providers such as accounting firms, engineering firms, quality assurance firms, and other professional services providers is an opportunity to learn about best practices and improve the organization’s own data collection processes. While auditing of financial statements by independent outside auditors has long been the norm for listed companies in the US and elsewhere, independent external assurance of sustainability information and reports has largely been voluntary; however, regulators and exchanges have generally encourage assurance and including a discussion of steps taken with respect to assurance in the sustainability report itself and assurance is now becoming a regular requirement in new sustainability reporting regulations in the EU and elsewhere. In general, the financial aspects of any sustainability report will be based on the same externally audited financial statements included in the company’s traditional annual report. With respect to environmental, health and safety matters, companies may engage private assurance firms to conduct limited assurances on data relating to, for example, air and water emissions, carbon dioxide generation, recycling/reuse and lost time injury rates. [3]
When external assurance is not available or feasible, as is typically the case with startups and most SMEs due to costs associated with engaged third party professionals, assurance may be conducted through internal groups that are organizationally independent of the business units they are reviewing and are specialists in the area with skills necessary to validate and certify operations to various quality, environmental, Six Sigma and safety standards (e.g., ISO 9000, ISO 14001, and OHSAS 18001). Groups of this sort should be responsible for establishing robust internal processes for verifying and validating sustainability data including oversight of data collection, entry, and review and cross-checking entries and calculations to ensure accuracy. Detailed and transparent documentation of data sources and collection should be maintained to build trust with stakeholders. Software solutions are available to automate data checks and identify anomalies, outliers, or inconsistencies in the data. Employees should be trained in handling data to foster a culture of data accuracy and responsibility. Data should be compared against industry benchmarks to ensure alignment. Finally, a peer and stakeholder review process should be implemented for sustainability reports and the underlying data before the reports are released.
Sustainable entrepreneurs may decide to measure and demonstrate the commitment of their organizations to social and environmental responsibility through participation in ratings agencies and ratings systems that have been created to give external stakeholders a means by which they can assess the social and environmental impact of the organization’s activities. To participate in these systems, some of which offer opportunities for certification, organizations must be prepared to adjust their internal structures to comply with the requirements of the system and ensure that the information necessary for measurement can be collected, analyzed, and properly reported. While there are similarities among the most popular systems, there is still no universal standard and many of the systems operate without extensive efforts to verify or audit the information provided by organizations, although organizations should expect that they will be required to submit to site visits and renew their certifications on a regular basis. Sustainable entrepreneurs might also consider pursuing “B Corp Certification” (as discussed earlier in connection with the initial sustainability assessment) or, for organizations organized under Delaware law, completing the requirements necessary for the Delaware Secretary of State to issue the organization a certificate of adoption of transparency and sustainability standards.[4]
In addition, various products, safety, and environmental certifications are available depending on the industry and activities of the organization. For example, UL Solutions helps companies demonstrate safety, confirm compliance, enhance sustainability, manage transparency, deliver quality and performance, strengthen security, protect brand reputation, build workplace excellence, and advance societal wellbeing through a range of services including inspection, advisory services, education and training, testing, auditing and analytics, certification software solutions, and marketing claim verification.[5] UL offers tools for assessing, rating and certifying the sustainability initiatives of organizations, and also tests and certifies products, processes, and materials against current environmental standards. Other examples of certification and labeling initiatives include Social Accountability 8000 (Social Accountability International), ISO 14000 Series of Environmental Management Standards, Greenhouse Gas Product Certification Standard, AccountAbility AA1000 Assurance Standard, Forest Stewardship Council, and Marine Stewardship Council.
Certification and labelling initiatives can either cover a broad range of issues or may be focused on a particular sustainability topic such as child labor, fair trade, or forest conservation. Costs to organizations for attempting to comply with certification programs and standards will vary, and consideration should be given to fees that must be paid to the agency and the investments that must be made to fulfill the agency’s requirements. Organizations must also consider the potential impact of participating in a particular rating or certification program, or complying with a formal reporting regime, on the organization’s governance or regulatory obligations will depend on the program. However, the costs and disruptions to traditional operating procedures must be balanced against the benefits of being able to provide potential investors and stakeholders with reliable information to accurately assess the social impact such companies make, thus making it easier for organizations to raise capital from investors seeking to support socially responsible ventures and attract employees and customers want to do business with companies that are having a positive social and environmental impact.
This article is an excerpt from my new book on Preparing a Sustainability Report.
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Notes
[3] The main global assurance standard used by accounting firms to guide their assurance engagements on sustainability reports is the International Standard on Assurance Engagements (“ISAE”) 3000, Assurance Engagements other than Audits or Reviews of Historical Financial Information developed by the International Auditing and Assurance Standards Board of the International Federation of Accountants, which is the body responsible for issuing international accounting and auditing standards for the accounting profession. Other important global assurance standards include the AA1000 Assurance Standard issued by the UK-based AccountAbility is a leading methodology used by sustainability professionals worldwide for sustainability-related assurance engagements, to assess the nature and extent to which an organization adheres to the AA1000 Accountability Principles (2018) (i.e., inclusivity, materiality, responsiveness, and impact).; and ISO 14064-3, which provides guidance for the validation and verification of greenhouse gas emissions. Reference should also be made to relevant regional and country-level assurance standards, many of which draw heavily from ISAE 3000, AA1000AS, the GRI Guidelines and local professional standards. See also Carrots & Sticks: Global Trends in Sustainability Reporting Regulation and Policy (KPMG International, the Global Research Initiative (“GRI”), the United Nations Environment Programme (“UNEP”) and the Centre for Corporate Governance in Africa, 2016), 28-29 (including a list and brief descriptions of various country-level attestation standards in Australia, Brazil, China, France, Italy, Japan, Netherlands, Spain and Sweden as of 2016), The State of Play in Sustainability Assurance: 2019-2022 Trends and Analysis (IFAC).
[4] For further discussion, see A. Gutterman, Certifications and Rating Systems for Assessing Social and Environmental Impact (Oakland CA: Sustainable Entrepreneurship Project, 2023) (also discussing requirements for “benefit corporation” status under state statutes, which generally (1) require that a benefit corporation consider general public welfare before acting, (2) permit that more specific interests be considered as well, and (3) require that the corporation’s compliance be measured against a standard imposed by an independent third party). Current requirements for B Corp Certification are available here.
[5] The UL Solutions website is available here.