New globally accepted standards aim to improve investor confidence and “reduce the risk of material misstatements”.
The International Auditing and Assurance Standards Board (IAASB) has published a public consultation for its 2024-27 proposed strategy and work plan, with it wishing to develop an overarching standard for assurance on sustainability reporting.
“As with financial reporting, the IAASB believes that market participants are best served when the information that companies report benefits from external assurance provided by professionals committed to the public interest, implementing the highest professional and ethical standards,” IAASB Chair Tom Seidenstein told ESG Investor.
“We should not expect investors to understand the differences between different sets of rules. It is for this reason that we are working closely with policymakers, regulators, other standard setters, investors, and practitioners across the world.”
The proposed strategy seeks to accelerate the actions originally outlined in the IAASB’s 2020-23 strategy with a focus on increasing capacity and resources to the assurance of sustainability and ESG reporting to support a phased approach to sustainability assurance standard setting.
The standards setter’s proposed strategy aims to produce a draft proposal that supports the consistent performance of quality sustainability assurance engagements; is suitable across all sustainability topics and reporting frameworks; implementable by all assurance practitioners; and creates more agile, innovative ways of working in line with the International Organisation of Securities Commissions (IOSCO) Monitoring Group’s reform vision.
The IOSCO Monitoring Group, is a group of international financial institutions and regulatory bodies committed to advancing the public interest in areas related to international audit standard setting and audit quality.
“Audit is an enabler”
A primary benefit of the new standards is that investors will find it easier to identify companies striving to become more sustainable, Nick Jeffrey, Director of Professional Standards at Baker Tilly International, an accountancy and business advisory network, told ESG Investor.
The second, and arguably more important benefit, is the impact on day-to-day behaviour on companies’ management teams, he said.
“Company managers know that decisions they make will impact how they are perceived by society and their owners,” he said.
“In turn that will influence day to day decisions and behaviour – companies will make more sustainable decisions; their people will be proud to work for more responsible businesses and see that their personal values are mirrored by their employer.
According to Jeffrey, the rationale for a globally accepted set of standards for assurance on sustainability reporting is the same as for financial reporting and audit, with the impact on cost of capital minimised where common standards are used.
“Audit is an enabler,” he said, noting that it gives investors’ confidence in the reliability of the information they use to make investment decisions.
“That is at least as relevant for ESG information as it is for financial information – maybe more so, given the increasing importance of ESG information to investors and wider society,” he added.
In a report by Carbon Tracker, the independent think tank that researches the effects of climate change on financial markets, it found that investors are “still flying blind” due to poor-quality climate-related information in company reports, particularly from firms with the highest CO2 emissions.
Sidenstein expects the IAASB’s proposal for an overarching standard to be ready after its September meeting, with the goal of finalising the standard in 2024.
“This should be the first of an emerging suite of standards,” Sidenstein added. “Investors should demand a high level of trust in sustainability reporting and a level of rigor and external review in order to reduce the risk of material misstatements.”
The IAASB invites all stakeholders to comment on the proposed strategy and work plan via the IAASB website by 11 April 2023.
Read more articles like this on Regulation Asia’s sister publication, ESG Investor.