Need to know: IAASB’s new global sustainability assurance standard

There are numerous assurance standards for specific environmental, social and governance (ESG) metrics. They cover such topics as greenhouse gas emissions and electricity usage, offering highly specific measurement and evidence factors around each. These specialised standards are typically delivered by the International Organisation for Standardisation (ISO).

More recently though, there has been a call for a general-purpose, global standard specifically for sustainability assurance, dealing less with specific topic areas and more with the verification processes around the information entities report externally about any sustainability-related matter.

That is now becoming a reality, in the form of an international standard developed by the International Auditing and Assurance Standards Board (IAASB).

On 2 August 2023, the proposed, landmark International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, will be released for public consultation. The IAASB has published a short explainer video, and requests feedback on the proposed standard before 1 December 2023.

It’s not something that smaller operators should ignore, says Kevin Dancey, CEO of the International Federation of Accountants (IFAC) which is home to several standard-setting boards and represents the 3 million members of 180 professional accountancy organisations globally, including the IFA.

“Some small practitioners, because they’re very busy with their day-to-day work around financial reporting and the tax system, etc., might consider that they’re just going to stick to the things they know,” Dancey says. “They might think this is all about the big, listed entities, the public companies, and the capital markets and big investors. They’re thinking, ‘It’s not about me’. But that’s not the case.

“A lot of the larger companies are going to need to understand the ESG impacts down through the supply chain, down through their suppliers. That is going to impact entities of all sizes, and therefore accounting practitioners of all sizes. Small companies will need accounting practitioners who can do this as well as their tax and other existing services. Don’t ignore this.”

What is the purpose of the standard?

Tom Seidenstein, Chair of IAASB and co-CEO of the International Foundation for Ethics and Audit, says in financial reporting there are standards at a global level that govern how management prepares accounts.

Following on from that, there are international standards for the auditing of those accounts.

“So, what we have seen now on the sustainability side is a proliferation of, and to some extent a move to consolidate, sustainability reporting standards that would govern disclosures on sustainability topics,” Seidenstein says. “In investor parlance, this is about ESG-related matters.”

“Naturally, you have the same principal-agent problem on sustainability reporting as you have on financial reporting. And so, there’s a demand for independent assurance.”

This is important for several reasons, Seidenstein says. One is that societies are currently determining new boundaries governing their economies and markets. That includes decisions around what they believe should be disclosed, or what they believe is required to drive capital allocation within those markets.

“Then there’s increased demand by investors and providers of capital, who want to invest in entities that conform with an element of what they view as sustainable from an economic development perspective,” he says. “And then there’s a whole range of stakeholders who want information about markets.”

Seidenstein explains that his organisation doesn’t dictate what is or is not reported, but suggests that anything that is material and disclosed should be accurate and assured.

“If people are making decisions based upon what’s disclosed, then what is disclosed should be reliable,” he says. “What investors and others would like is trust in the information being prepared faithfully, and also an external assurance in a way that’s consistent across borders.”

Is this standard completely new?

Is this a case of accountants having to learn an entirely new assurance standard? Fortunately not.

There has been assurance provided on non-financial information, including sustainability reporting, for a long time, Seidenstein says. The standard known as International Standard on Assurance Engagements 3000 (Revised), Assurance Engagements Other than Audits of Reviews of Historical Financial Information, was last revised in 2013.

“ISAE 3000 has been the most used assurance standard globally, particularly when engagements go beyond just greenhouse gas statements, for which we have a specific standard,” he says. “Nearly 70% of assurance engagements on ESG matters have used ISAE 3000 in some form.

“So, this isn’t new. What we’re doing right now, based upon the evolution of sustainability reporting frameworks, is developing something much more specific than ISAE 3000 that currently applies to all assurance for non-financial information. And we’re doing it with a specific lens of sustainability.

“It covers all sustainability topics. It addresses both limited and reasonable assurance. And it is appropriate to all practitioners, including accounting firms and non-accounting firms.”

Along the way, the IAASB has consulted with hundreds of professional bodies, membership bodies, associations, companies, assurance providers, investors, regulators, other standards setting bodies and civil society groups.

The list includes the International Organisation of Securities Commissions, the Financial Stability Board, the International Ethics Standards Board for Accountants, the International Sustainability Standards Board, and the Global Reporting Initiative.

With the 2 August release of the proposed ISSA 5000, the IAASB is looking to cast that net even wider, including feedback from IFA members.

“It will clearly evolve over time,” Seidenstein says. “Just think about how long it has taken for financial reporting and auditing standards to evolve in the way that they have.

“Then you take into account that we’re in relatively early days of sustainability reporting, relative to financial reporting. The maturity, the data, the governance and more will continue to evolve. The same applies on the assurance side, which is the equivalent of the audit standards. For this, we need real market feedback.

“We’ll always be adapting our standards to reflect new economic realities, new knowledge about the marketplace and areas where investors and others need more decision-useful information or more confidence in the reporting.”

Where’s the opportunity for accountants?

Consider the idea of moving from voluntary reporting to mandatory reporting, says Willie Botha, IAASB Program and Technical Director.

This is very much driven by policy and regulation within a specific jurisdiction. When it becomes mandatory for financial or sustainability reporting, regulators first focus on the big end of town. Only later do the same requirements filter down to smaller entities.

However, as Dancey said, when larger businesses need to comply with specific reporting regulations, they quickly develop a need to know what’s going on within all businesses in their supply chains, and within any other businesses they might bring on board to carry out specific tasks.

“This is one thing that small organisations should not forget,” Botha says. “Your business, or your client’s business, might be in the value chain of a very big entity. Because you’re part of that value chain, you might find you’re moving towards sustainability reporting sooner than what the regulation might prescribe, because that big player in the value chain might demand from you certain information about your sustainability practices.”

To continue to be a part of the value chain, some smaller businesses may need to adopt new reporting and assurance processes earlier than they are mandated. Rather than being seen as an extra burden, Botha and Dancey agree, this should be considered an opportunity to differentiate, to add value for the business itself and for its clients.

“The work of smaller accounting firms is often viewed as valuable in terms of tax management, as well as other more compliance-based activity,” Dancey says. “This is an opportunity for accountants to become even more relevant to their clients.

“Some businesses are going to seize this opportunity. It’s there for the taking. It’s also in the interest of all accountants to try to ensure this is a success, because government is going to be requiring it. So, there’s the fantastic commercial opportunity and also a public interest responsibility element.”