Environmental, Social, and Governance (ESG) Assurance

ESG – Why now?

In recent years, Environmental, Social and Governance (ESG) factors have emerged as critical areas of focus for organisations due to an increasing awareness of the broader impact of corporate activities. As stakeholders—including investors, customers and employees—become more conscious of sustainability and ethical practices, they demand greater accountability and transparency. ESG practices help organisations mitigate risks, enhance long-term value, and build trust with their stakeholders. Additionally, strong ESG performance is increasingly linked to financial performance, with companies demonstrating robust ESG practices often enjoying improved operational efficiencies and access to capital.

As climate change, social justice and corporate governance issues dominate global conversations, organisations recognise that integrating ESG considerations is not only a moral imperative but also a strategic necessity to remain competitive and resilient in a rapidly evolving market landscape. This shift reflects a broader societal movement towards sustainability and ethical business practices, pushing organisations to align their operations with these evolving expectations.

ESG – What are the rules?

The European Union has been at the forefront of ESG regulation, with significant measures such as the EU Taxonomy Regulation, which classifies environmentally sustainable activities, and the Sustainable Finance Disclosure Regulation (SFDR), requiring financial market participants to disclose ESG information. Additionally, the Corporate Sustainability Reporting Directive (CSRD) mandates extensive ESG reporting from large companies and listed SMEs. Beyond the EU, other regions are also advancing ESG regulations. In the United States, the Securities and Exchange Commission (SEC) has proposed rules to enhance and standardise climate-related disclosures for investors. In Asia, countries like Japan and Singapore are integrating ESG into their financial frameworks and corporate governance codes.

Looking ahead from here, anticipated developments include stricter reporting requirements, harmonised international standards, and enhanced enforcement mechanisms. These evolving regulations aim to increase transparency, drive sustainable investment, and ensure that companies are accountable for their environmental and social impacts, reflecting a global shift towards more rigorous ESG governance.

Environmental, Social and Governance

The assurance process for ESG focuses on distinct yet interrelated areas, each with specific targets, requirements and policy directions.

Environmental: The environmental aspect of ESG assurance emphasises a company’s impact on natural resources and climate. Key focus areas include carbon emissions, energy consumption, waste management and water usage. Companies are expected to track and report their carbon footprint, set targets for reducing greenhouse gas emissions, and implement strategies for sustainable resource management. Policies such as the Paris Agreement influence these targets, pushing companies towards net-zero emissions and greater energy efficiency. Compliance with regulations like the EU’s Taxonomy Regulation and adherence to global standards such as the Task Force on Climate-related Financial Disclosures (TCFD) are also critical.

Social: The social dimension examines how companies manage relationships with employees, customers, suppliers and communities. Focus areas include labour practices, diversity and inclusion, human rights and community engagement. Companies must ensure fair labour practices, provide safe working conditions, and promote equal opportunities. Reporting on diversity metrics, gender pay gaps, and community impact initiatives is essential. Policies and frameworks like the UN Guiding Principles on Business and Human Rights and the Global Reporting Initiative (GRI) guide these efforts, aiming to enhance corporate social responsibility and societal impact.

Governance: Governance focuses on the internal systems and controls that ensure ethical conduct, accountability and transparency. Key areas include board composition and diversity, executive compensation, anti-corruption measures and shareholder rights. Companies are expected to establish robust governance structures, enforce ethical business practices, and maintain transparency in their operations. Policies such as the OECD Principles of Corporate Governance and various national corporate governance codes provide direction, aiming to strengthen accountability and protect stakeholder interests.

Collectively, these focus areas within ESG assurance aim to foster sustainable, ethical and transparent business practices, aligning corporate activities with broader societal and environmental goals.

What exactly is ESG Assurance?

ESG assurance involves an independent evaluation of a company’s environmental, social, and governance disclosures and practices. The process begins with the company preparing its ESG report, which outlines its performance in various ESG areas based on established frameworks such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB). An external auditor or assurance provider then reviews this report, assessing the accuracy, completeness and reliability of the disclosed information. This often involves site visits, interviews with management, verification of data sources, and testing of control systems. The assurance provider may use standards like the International Standard on Assurance Engagements (ISAE) 3000 to guide their work.

ESG assurance is typically conducted by specialised assurance providers, which can include major accounting firms, sustainability consultancies and certification bodies. These entities must possess expertise in ESG criteria, industry knowledge and familiarity with relevant reporting standards. Their independence and objectivity are crucial to providing credible assurance.

After completing the assurance process, the assurance provider issues a report detailing their findings. This report includes an opinion on the accuracy and reliability of the ESG information, highlighting any discrepancies or areas for improvement. The assurance report is usually included in the company’s ESG report or annual sustainability report, making it accessible to stakeholders such as investors, regulators, customers and the broader public. The transparency provided by these reports helps stakeholders make informed decisions and enhances the company’s credibility.

EU regulations significantly influence ESG assurance practices. The CSRD mandates that large companies and listed SMEs disclose comprehensive ESG information and obtain external assurance on these disclosures. This regulation aims to harmonise ESG reporting across the EU, ensuring consistency and comparability. As mentioned earlier, the EU Taxonomy Regulation and the SFDR further define sustainable economic activities and require financial market participants to report on sustainability risks, impacting the scope and rigour of ESG assurance.

Who is required to conduct the assurance process? 

While the CSRD and other regulations primarily target large companies and listed entities, smaller companies and private firms may not be required to undergo ESG assurance. However, they may still choose to do so voluntarily to demonstrate their commitment to sustainability and meet stakeholder expectations.

Non-EU organisations with operations in Europe or those listed on European stock exchanges are subject to EU ESG regulations. These companies must comply with the same reporting and assurance requirements as EU-based firms. Additionally, global companies often align their practices with EU standards to maintain access to European markets and investors, driving broader adoption of rigorous ESG assurance practices worldwide.

Is it working?

The ultimate aim of ESG assurance is to provide stakeholders with reliable, accurate and transparent information about a company’s environmental, social and governance practices. This assurance fosters trust and confidence, enabling stakeholders to make informed decisions and hold companies accountable for their commitments to sustainability and ethical conduct. By verifying ESG disclosures, assurance helps mitigate risks, enhances corporate reputation, and drives long-term value creation.

To a significant extent, ESG assurance is achieving its aims. Companies with verified ESG reports are better positioned to attract investment, improve stakeholder relationships, and meet regulatory requirements. However, challenges remain, such as varying global standards, inconsistent reporting quality, and the evolving nature of ESG criteria. Despite these hurdles, the growing demand for and implementation of ESG assurance clearly indicate its increasing effectiveness in promoting transparency and accountability in corporate sustainability practices.