The ESG reporting landscape continues to move at lightning speed, with the first international and EU sustainability reporting standards expected to be finalized soon.
For many companies around the globe this means mandatory ESG reporting will start to apply in the FY24 reporting cycle – an effective go-live in a matter of months’ time that will also require the systems and processes that collect the information to be up and running. With the aim to reflect its commitment in promoting sustainability and prepare issuers to get ready for the climate-related reporting requirements based on the ISSB Climate Standard., the Stock Exchange of Hong Kong Limited (HKEX) issued a consultation paper seeking market feedback on proposals to enhance climate-related disclosures under the ESG framework. The HKEX proposes to mandate all issuers to make climate-related disclosures in their ESG reports on the effective date of 1 January 2024 and introduce new climate-related disclosures aligned with the ISSB Climate Standard, meaning that companies listed in Hong Kong should start preparing for the impending expansion of required climate disclosures.
Need for scrutiny and rigor
To gain investor and stakeholder confidence and avoid the risk of greenwashing, ESG reporting needs to be at the same level of quality and rigor – and subject to the same level of scrutiny – as the financial information that users rely on. This means that companies need to invest and improve data quality by applying internal control and risk frameworks akin to what they do for financial reporting.
Although assurance on sustainability reporting is not a mandatory requirement for Hong Kong-listed companies, the HKEX does encourage issuers to obtain independent assurance, and enhancing disclosures where independent assurance of ESG reports is obtained.
According to the KPMG Survey of Sustainability Reporting 2022 – China Insights, the ESG assurance rate of China’s N100 companies has doubled over the past two years, from 15 companies in 2020 to 30 in 2022. While this is to be welcomed, China’s assurance rate is not yet on par with global levels. Similarly, HKEX’s 2022 Analysis of ESG Practice Disclosure noted 6.7 percent of its sample issuers obtained independent assurance, with description of the level, scope and processes adopted for assurance, reflecting a relatively low rate for independent assurance among Hong Kong-listed companies. More companies are encouraged to seek ESG assurance to further improve the transparency and openness of their reports.
The International Auditing and Assurance Standards Board (IAASB) recognizes the demand for consistent high-quality international standards for assurance on sustainability reporting and they are working on the replacement to the current best-in-class assurance standards which are expected to provide more specificity for assurance on sustainability reporting (ISSA 5000).
KPMG believes that investors and stakeholders will likely see ISSA 5000 as the gold standard against which to hold companies to account and we strongly support the IAASB as it develops a baseline for global sustainability assurance standards. To meet these standards – which is expected to be essential to evolve how ESG assurance addresses the needs of global capital markets, stakeholders and broader society – those providing assurance should prepare to significantly invest in tools, technology and skills.
Without robust assurance, conducted to consistent standards around the world, the effectiveness of the whole ESG reporting endeavor could be fatally undermined. Independent assurance on ESG disclosures can help build market participants’ confidence in the important decisions made by management and investors related to the company, as well as help companies improve their internal data collection, review and control processes. The positive trend of ESG report assurance of China's N100 companies also reflects that the demand for high-quality ESG information is accelerating. Companies are encouraged to take early action to adapt to the constant evolving disclosure landscape.
KPMG helps corporates and public sector clients plan and execute ESG programmes to create long-term value.
KPMG helps clients plan and execute ESG programmes to create long-term value.
Important role of the auditor
There are various views and interpretations of who is best placed to provide assurance with mixed practices in the market. The KPMG Survey of Sustainability Reporting 2022 found that 63 percent of the G250 companies obtained assurance. Similarly, the International Federation of Accountants’ (IFAC) recent study of around 1,350 companies in 15 jurisdictions found that 64 percent were obtaining some form of assurance over at least some of their ESG information and in 57 percent of cases, this was done by an audit firm. Of these, the majority (70 percent) used their statutory auditor.
When it comes to sustainability assurance, freedom of choice is a key principle, management and audit committees should be able to make a choice over who to entrust with it. Over time sustainability assurance providers will likely need the same deep understanding of the company’s business model required for financial assurance if they are to play their part in bringing sustainability-related information to the same quality as financial information. Without that, the assurance is essentially limited to metric verification.
Under this new reporting ecosystem, information is expected to be increasingly integrated - in fact, likely drawing information from the same systems and processes, subject to the same internal controls, and with oversight by the same bodies charged with governance. ESG and sustainability information will likely increasingly need to be managed on a formal, structured basis, in contrast to today where much of it is handled through informal and unstructured repositories such as spreadsheets and emails. Assurance over sustainability reporting and financial statements will need to be of the same exacting quality – something that the audit profession is well-placed to provide.
Financial auditors are the professionals of choice for assuring non-financial information with recognised expertise in measurement, controls, assurance and reporting. Financial auditors’ ability to assure both ESG information and financial information is also becoming more important as stakeholders increasingly expect ESG information to be presented alongside financial information, and for ESG information to be as reliable as financial information.
Importance to the capital markets
For companies, there is a strong argument to utilize the services of their statutory auditor. A third party conducting ESG assurance would need to gain the same understanding and run checks and controls over processes and systems that the financial auditor had already assessed, including entity level controls. There would likely be significant amounts of duplicative work and therefore increased cost. Utilizing the financial auditor would be a much more efficient, streamlined, and cost-effective option, and crucially help to ensure the overall connectedness that the reporting is seeking to achieve. This should deliver some of the best results for users of corporate information too.
Given the growing need for diverse skills to support assurance over ESG there will clearly be an important role for a wide range of ESG assurance providers other than audit firms, however for the public interest to be met all need to be held to the same quality and ethical standards, so that investors and other stakeholders get what they are looking for – risk reduction. Statutory auditors are ideally placed to provide stakeholders with a single holistic assessment over a company’s integrated reporting and be held to account for their opinions. The large audit firms that operate within a multidisciplinary model, providing audit, advisory and tax services, can draw upon deep skillsets from decarbonization to human rights as well as the international coverage and robust systems of quality management. There have been discussions in some jurisdictions that show there is an expectation from investors and regulators to have auditors play a key role.
With ESG and non-financial reporting continue to rise in importance and now at the top of the agenda, audit has an important role to play – helping to drive insight that has an impact. HKEX also pointed out in the 2022 Analysis of ESG Practice Disclosure that independent assurance can help enhance the credibility of ESG information and the quality of ESG reporting, and provide investors with more reliable data for analysis. While the demand for confidence in ESG disclosures is growing, the demand for ESG risks also require the continuous attention of the board of directors and the audit committee. Auditors can satisfy the relevant requirements by providing independent measurement, validation and quality assurance over ESG information.
Potential benefits to the wider public interest
KPMG believes that having the audit profession take the lead on ESG assurance would produce a wider public benefit too. By striving to ensure that an established profession, working to globally consistent standards and under a robust system of oversight and inspections, is responsible for the checking of information, it would help limit the risk of greenwashing.
This is an area KPMG is passionate about and striving to delivering on. The audit profession is investing significantly in new hires and training to meet the public interest role over sustainability assurance as a new era of ESG reporting dawns.