G4 Assurance. Is it leading to greater transparency? Leading the way in Sustainable Assurance

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1 G4 Assurance Is it leading to greater transparency? Leading the way in Sustainable Assurance

2 During the development of G4 many parties expressed the need for more transparency around assurance on sustainability reports - in particular the users need to better understand which information has really been reviewed and is deemed reliable. What emerged at the launch of G4 in Amsterdam in May 2013 was an assurance column in the G4 Content Index - but has this really helped? The latest research from ERM CVS suggests not. So how can we improve understanding and credibility in this still developing field? 1

3 The Background Why assurance? Stakeholders have a vested interest in the sustainability performance of companies whether as investors, managers and (potential) employees, customers, contractors or neighbours. Global trends such as climate change and resource shortages as well as the challenges of managing complex supply chains are widening the debate on who we want to work for, what we buy and where we invest. Internally non-financial risks and opportunities are also increasingly viewed as contributing to medium and long-term business viability and success, with targets for reducing impacts on human and natural capital. Whatever the motivation, it is not surprising that sustainability (or non-financial) performance information is under increasing scrutiny both from management and external parties. Stakeholders want, and need, to know whether claims about how material social and environmental issues impacts are being managed, as well as whether the reported performance against strategic objectives, are actually sound and reliable and supported by evidence. This includes, for example, the mandatory GHG emission data now included in the Annual Reports of listed companies in the U.K. Internally many companies have also extended the calculation of remuneration and bonus packages to include safety and environmental performance. An assurance or verification statement from a credible independent third party is seen as one way to provide a level of comfort to the users of this information. Recent surveys of sustainability reporting and assurance including a report published by GRI (July 2014) indicate that assurance is increasing, with 45% of the GRI reports having some information assured (up from 38% in 2011). Recent surveys of sustainability reporting and assurance including a report published by GRI (July 2014) indicate that assurance is increasing, with 45% of the GRI reports having some information assured (up from 38% in 2011). 45% of the GRI reports in 2014 have some information assured 38% of the GRI reports in 2011 had some information assured 2

4 Lack of transparency in sustainability report assurance Since the first verification statements on HSE data appeared in reports in the early 90s, one of the criticisms of assurance on sustainability reports has been the lack of transparency. Due to its much longer history, and that it is mandatory for many companies, the parties involved in financial auditing (from top management and governance bodies to investors and accountants) understand the reporting and auditing standards, the extent and depth of the investigation required (and the related costs) and the meaning behind a clean positive audit opinion, providing a reasonable level of assurance. However, sustainability assurance is much less well established and is, in most cases, voluntary. There is not only a far more diverse audience for the reported information and the assurance statement but also two levels of assurance in the standards used (IAASB, AICPA and AA1000AS) and massive variation in the scope of the assurance engagement from specified data through to assurance on sections or on the whole sustainability report. The introduction of the + in the GRI G3 Application Levels didn t improve the situation while reporters claimed our report is assured, the + could, in fact, mean anything from an expert opinion, a panel review or verification of the data for a couple of indicators through to assurance on the whole report. Getting the + sometimes seemed to be more important than whether the material information had been reviewed and shown to be complete and accurate by an independent third party. After all, why pay for assurance on a whole report when you could get the + for having one, potentially non-material, indicator assured? However, while assurance seemed to be downscaling, there has been an increase in the use of non-financial data to assess risks and the future viability and performance of companies. If the scope of the assurance engagement does not cover the data or information which is most important to users, it could mean that stakeholders are placing reliance on information which could be inaccurate, incomplete, unreliable or, at worst, greenwash. 3

5 So what changed in G4? During the development of the G4 Sustainability Reporting Guidelines the various GRI governance bodies recognised that assurance had expanded and moved on since G3 was launched in GRI decided to abolish the Application Levels to remove any misunderstanding that an A report was automatically better than a B report, and the mistaken interpretation that an Application Level Check was the same as assurance. In addition, it was decided that a simple + was insufficiently transparent as it was used for such a broad range of engagements that readers didn t know exactly what had been assured without reading the full assurance statement - not an easy read for the average report user. GRI s solution was to introduce an Assurance Column in the G4 Content Index in principle an excellent idea to clearly show users exactly which G4 disclosure items have been subject to independent review and, in theory, include reliable data and information. So no more hiding behind a + for a narrow or poorly defined scope and, combined with the principle that G4 reports would focus on material topics, aspects and indicators, the assurance would also address the most important information for stakeholders. However, without a closer look and further consultation, this may not have been such a great idea. Users probably gain comfort from a tick against a disclosure, assuming that the information in the report for that disclosure is reliable. But the G4 Guidelines state that the column should be used to indicate whether the disclosure has been assured. In other words it doesn t tell the reader the result or conclusion reached by the assurance provider. The user still needs to read the Assurance Statement to see whether the assurance provider actually concluded that the specified information is reliable. When examining the Content Index in G4 reports together with the related assurance statements, both reporters and assurance providers appear to be inventing different, and sometimes ingenious, solutions to this dilemma and, in doing so, may be making G4 assurance even more complicated for users. In order to try and understand how the G4 assurance column has impacted transparency in the sustainability assurance landscape, and to inform companies as they move to G4 reporting, ERM CVS has carried out some research on the first batch of G4 reports. 4

6 The Research 26% of the listed reports are G4 reports, spread across 34 sectors In the ERM CVS research the initial sample of reports was 1218 reports, published in 2014 and listed in the GRI report database towards the end of September Of this sample, 315 (26%) were G4 reports and 903 (74%) were G3/G3.1 reports. This is interesting in itself as it may indicate that many reporters are taking their time to move to G4 reporting, perhaps working on a more materiality-based approach to determining report content or improving and extending internal systems to capture the additional data for new G4 disclosures. The 315 G4 reports were spread across 34 sectors, with 238 in 17 sectors. As shown in the figure below, the highest numbers of G4 reports were in the financial services sector (31), energy (24) and mining (19). No. of companies per sector using G No. of companies No of companies per sector using G4 5

7 58% of G4 reports are assured When considering assurance, an interesting picture emerges. Of the G3/3.1 reports 309 were assured (34%) even lower than the percentage (38%) of all GRI reports assured in 2011, according to GRI s statistics. On the other hand, 184 (58%) of the G4 reports were assured, a considerable increase on the overall level of 45% assurance reported by GRI. This could of course mean that the more advanced GRI reporters, those more likely to seek assurance, have moved earlier to G4. However, it could also indicate that the Content Index assurance column is motivating additional reporters to seek assurance. It will be interesting to see how the picture develops by the end of the year. Core v. Comprehensive Of the 184 G4 reports with assurance, 56 (31%) were declared as in accordance Comprehensive reports, 127 (69%) as Core reports and one had no declaration. ERM CVS then selected 42 of the assured G4 reports for a more detailed analysis of the GRI Content Index and the Assurance Statement. These 42 reports covered the 17 sectors shown above, included both Core (72%) and Comprehensive (28%), a range of assurance providers (accountants, certification bodies and boutique assurance providers) and a mix of assurance scopes. 31% In accordance - Comprehensive 69% In accordance - Core 6

8 The assurance column Of the 42 reports selected, 23 indicated that the whole report had been assured and in 19 cases the assurance related to specified disclosures. However, 9 of the Content Indexes did not even include the assurance column, and therefore could be considered not to be in accordance with G4. Of the Content Indexes with an assurance column a variety of methods were used to indicate which disclosures were actually covered by the assurance, including a tick or yes but most commonly a link or page reference for the assurance statement. Assurance Column Index referencing Yes No Entire Sustainability Report Assured Specified Sections Assured Entire Sustainability Report Assured Specified Sections Assured Tick Page Reference/Link Other ("Yes") Other graphic 7

9 Lack of alignment between the Content Index and the Assurance Statement Perhaps the most surprising, and worrying, result of the research was that in 10 cases (24%) the scope of the engagement shown in the Content Index assurance column did not align with the description of the assurance scope in the Assurance Statement. Statement aligned with Index Yes No Entire Sustainability Report Assured Specified Sections Assured Some examples of this lack of alignment include the following: The Content Index indicates that a number of DMAs are assured although this falls out of scope expressed in the Assurance Statement which specifically addresses the materiality process and specified pages with data; The assurance column indicates assurance on G4-18, 20 and 21, however the Assurance Statement states Group level compilation of selected environmental, safety, social, social investment and corporate transparency performance indicators ; The scope as described in the Assurance Statement does not cover economic or product responsibility indicators that the Content Index shows as assured; The scope in the Assurance Statement refers to assurance on sustainability information in the report but DMAs are marked as not assured in the Content Index; One Assurance Statement refers to "moderate" assurance then provides a positive conclusion on the report: "provides a fair representation". However, not all disclosures are marked as assured in the Content Index. Of the above five examples, three are from the big 4 accounting firms, one from an engineering firm and one is from a boutique assurance provider. It therefore appears that these discrepancies are happening across the board, making the interpretation of the assurance scope, the level and, more importantly, the results of the assurance process extremely difficult for users to understand. 8

10 What does assurance on a whole report mean in practice? A key challenge for assurance providers is that when assuring a whole report under G3/G3.1, the risk of a material error or omission was determined at the level of the whole report. This allowed assurance providers to select material data and claims with a higher risk of error (and therefore potentially misleading for users) for detailed assurance procedures. The Assurance Statement then covered the whole report, usually in the double negative form (in principle nothing has come to our attention to indicate that the report is not correct ). This risk-based approach is similar to that used for auditing annual financial accounts. This is probably the reason behind the lack of alignment between the assurance scope in the Content Index and the Assurance Statement identified in this research. The result is a very blurred picture for stakeholders, both internal and external. In many ways assurance on specified G4 disclosures or indicators which are described or listed in the Assurance Statement and indicated in the Content Index provides a much more transparent picture to the user regarding the reliability of the specified information. In cases where the whole sustainability report was assured in this way under G3/G3.1, the assurance column in the G4 Content Index has complicated matters as a tick or yes or even a reference or link to the Assurance Statement may be (perhaps rightly) interpreted by users to mean that the information for that specific disclosure has been assured. However, in reality, to tick every disclosure would mean bringing the risk of a material error down to the level of individual disclosures, and therefore require the assurance provider to undertake procedures for each and every disclosure. While this might be expected for some information, for example GHG emissions and the DMA for managing human rights, to do this for every G4 disclosure would massively increase the cost of the assurance process and potentially make it unrealistic in the current climate where assurance on non-financial information is, in most cases, not mandatory. 9

11 Is issue-based assurance the next step? Although G4 reporting and assurance is at an early stage, this initial research seems to indicate that, up to now, the assurance column in the G4 Content Index has not resulted in more transparency around sustainability report assurance and, at worst, may be misleading users who understand a tick or a reference in the assurance column to mean that a specific disclosure has been found to be reliable (supported by evidence) by the assurance provider. So although the intention of GRI to make assurance in G4 more transparent was well-meaning, the consequences of this important change for the way assurance providers do their work, as well as the impact on the cost of assurance, were not properly thought through before the launch of G4. One way forward is for reporters and their stakeholders to better understand assurance options for sustainability reporting and be much more concise about their assurance needs when committing to external assurance. Extending internal and external stakeholder consultation to include discussion about which issues or G4 disclosures are the most important and where independent assurance is expected could provide a basis for determining the assurance scope, especially if companies continue to report less material data and information in their G4 reports under the principle more is better. Talking to a selection of assurance providers about options for G4 assurance (and how the assurance will be represented in the G4 Content Index) before writing and issuing a Request for Proposal (RFP) may help to ensure consistency and clarity between the Content Index and the Assurance Statement. Perhaps, alongside assurance of key indicator data, the future of sustainability assurance lies in Issues based assurance - assurance on a specified section of a report covering a material issue (or GRI Aspect) which incorporates narrative (e.g. strategy), disclosures on how the issue is managed (the DMA) and the data for related key performance indicators. ERM CVS believes that this may offer the most added value from the assurance process, both internally and externally. It not only provides assurance to external users regarding the accuracy of historical performance data, but confirms whether there is sufficient evidence to support management assertions regarding how the risks and opportunities associated with that issue are being managed, giving a forward-looking longer term perspective. It also (through interviews with a wider range of internal stakeholders) provides an opportunity to raise awareness and emphasise internally the importance of sustainability (reporting) to the company s reputation and license to operate. 10

12 Contact Us If you would like to talk to us about your data or report assurance needs please contact: Jennifer Iansen-Rogers Head of Report Assurance Services Office: Mobile: Wayne Fletcher Report Assurance Business Manager Office: Mobile: Global Head Office ERM Certification and Verification Services Limited 2nd Floor, Exchequer Court 33 St Mary Axe London EC3A 8AA Leading the way in Sustainable Assurance 2014 ERM Certification & Verification Services Limited