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Luis M. Gomes G. - Audit Partner at BDO in Costa Rica
In today's economy, sustainability has become a powerful force, with companies investing billions in sustainable initiatives. Business leaders increasingly recognize that sustainability is key to risk management and value creation.
There's a calculation that companies will invest 5 trillion dollars annually in sustainability by 2025. Business leaders increasingly consider sustainability fundamental to risk management and value creation.
In this context, ESG Assurance, or attestation of Environmental, Social, and Governance aspects, has become essential for both large and small businesses. By investing in third-party Assurance for ESG reporting, companies can mitigate risks, avoid greenwashing, and prepare for future regulations that will demand objective reporting.
ESG Assurance provides consistency, comparability, and rigor to non-financial reports, valuable for multiple stakeholders such as clients, regulators, investors, and employees. It also ensures that ESG reports are ready to meet regulatory requirements as new standards emerge.
In the current business landscape, ESG Assurance has become essential due to several driving forces. Customers are increasingly aware of sustainability and prefer companies committed to environmental and social responsibility. Investors also focus on reliable ESG data to support their investment decisions. Companies must provide verified information to maintain competitiveness and avoid accusations of greenwashing.
Regulation also plays a significant role in the growing importance of ESG Assurance. Both the U.S. Securities and Exchange Commission (SEC) and the European Parliament have proposed rules requiring carbon emissions and sustainability reporting, along with independent Assurance for certain disclosures.
What are the main forces driving attention to ESG Assurance?
Companies worldwide are investing time and money in their ESG efforts. The growing importance of ESG Assurance is driven by several factors:
Customers: 65% of U.S. buyers consider sustainability when making purchases, and globally, 89% have directed their spending towards more sustainable goods and services in the last five years. Companies must respond to these significant shifts in consumer preferences to remain competitive.
Investors: With the vast amount of capital allocated to ESG investment and an increasing list of ESG indices and Exchange-Traded Funds (ETFs), the data supporting companies' sustainability claims is under careful scrutiny. Companies undergoing rigorous third-party reviews through Assurance are expected to gain a credibility advantage.
Sellers: Companies increasingly incorporate upstream and downstream impacts into their ESG assessments and goals, including net-zero carbon objectives. As more organizations incorporate this data into their statements, their partners will be asked to provide certified data.
Competition: Given the importance of ESG for both companies and consumers, Assurance is becoming a competitive imperative. A company lagging behind competitors in ESG reporting can lose favor with customers, employees, and other partners, as these stakeholders make decisions based on these factors.
Regulations: Any company wishing to do business with a U.S. public company may soon need more advanced ESG reporting and Assurance. This is because in March 2022, the U.S. Securities and Exchange Commission (SEC) proposed new rules requiring public companies to report greenhouse gas emissions. This potentially includes emissions related to Scope 3 in the value chain, along with climate-related risks and transition objectives related to emission reduction and other sustainability goals. The proposal includes Assurance requirements for certain emission disclosures. In addition to the SEC rules, in November 2022, the European Parliament approved new sustainability information requirements applying to companies operating within the European Union that meet certain size criteria. The measure states that "to ensure that companies provide reliable information, they will be subject to audits and independent certifications. Financial and sustainability reports will be on an equal footing, and investors will have comparable and reliable data."
Preventing Greenwashing: Companies are increasingly being accused of greenwashing, i.e., falsely claiming sustainability credentials. Assurance can help companies bring transparency to their ESG metrics. ESG Assurance helps mitigate the risk of greenwashing accusations by ensuring that ESG data is accurately communicated and emphasizes data credibility. (See BDO's recent article: "Trends in fraud and financial investigations: Greenwashing")
Globally, ESG Assurance has gained ground, with around 58% of companies issuing some form of Assurance according to a 2021 study. Larger companies have obtained third-party Assurance for years, although it has mostly focused on greenhouse gas emissions.
Preparing for ESG Assurance requires a methodical approach and a detailed evaluation of current reporting. Companies need to conduct a materiality assessment, review peer reports in the industry, and consider the reporting frameworks used. Collaboration with an audit firm is essential to ensure adequate preparation.
What are the risks of not using ESG Assurance services?
In the short term, companies not obtaining Assurance on their ESG performance could face:
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Reputation damage
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Competitive risk
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Supplier pressure
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Customer attrition and hiring difficulties
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Compliance costs
A delay in initiating the ESG Assurance process presents additional risks. ESG Assurance requires the selection and hiring of an audit firm and demands thorough planning to proceed smoothly, making it challenging to execute under time pressure. Additionally, continuing to publish ESG data without Assurance increases the risk of errors being detected once a third party is hired to provide Assurance. Starting the ESG Assurance process earlier and with less stakeholder pressure can mitigate these risks.
In summary, ESG Assurance has become a competitive differentiator in today's economy. Companies obtaining third-party Assurance demonstrate credibility and transparency.