Expect move toward assurance of ESG disclosures, experts say
As investor demand for ESG information continues to increase, a group of ESG experts believe pressure will build on issuers to seek third-party assurance for ESG disclosures in the near future.
Third-party assurance has been a talking point for the last two years at the ESG Integration Forum – US, hosted by IR Magazine and Corporate Secretary. At both forums, audience members have expressed trepidation about seeking third-party assurance, with common concerns including the time it takes to seek assurance and the impression that seeking assurance may lead to less disclosure overall.
Speaking at this year’s ESG Integration Forum – US, which took place in early December, Mark Siegel, partner in financial accounting advisory services at EY and a member of SASB’s standards board, said that roughly 30 percent of companies get some form of assurance on at least some of their ESG information.
Those companies are ‘doing it because they believe it’s valuable to do so,’ Siegel said. ‘Most often what gets reviewed is greenhouse gas (GHG) emissions, which sometimes doesn’t even have to get done by an auditing firm. Frankly, it can be done by an engineering firm.
‘Whether it ever becomes mandatory to assure or whether investors push hard for it, leading companies are already on the path to get assurance. Frankly, I expect that trend to continue, whether it’s market-led or mandatory.’
Chad Spitler, chief executive officer of Third Economy, agreed. Speaking on a separate panel, he said assurance is a best practice and an effective stepping stone toward being included in ESG-oriented indexes, including the Dow Jones Sustainability Index, the FTSE4Good and the MSCI ESG Select.
But Spitler also acknowledged issuer concerns around assurance, especially for companies that are at an early stage with their ESG reporting. ‘Don’t let it be a hurdle to getting started,’ he said. ‘Generally, what we see happen is when companies get started, they begin with qualitative statements and policies. Then you want to back that up with metrics and then ultimately move toward goals that you’re tracking those metrics against over time.
‘When you’re at the latter end of that spectrum and really becoming a leader in this space, assurance makes a lot of sense. But if you’re just getting going, don’t let that be a hurdle to kicking off.’
For Patrick Bryden, head of ESG research, global banking and markets at Scotiabank, third-party assurance is ‘absolutely’ desirable. Bryden spent most of his career as a sell-side analyst covering the energy sector in Canada before moving into ESG research recently. The change he’s seen in climate and energy-related reporting during his career informed his comments.
‘We are determining what is material to the financial statements and, ultimately, valuation of companies,’ he said. ‘There are a lot of data-driven opportunities that are coming to light globally now, where we live in this age where we really can measure a whole bunch of things that we didn’t used to be able to measure.’
Bryden said the Covid-19 pandemic made him realize how important is it to have verifiable data on social issues, in addition to environmental and governance issues.
‘My view is that [ESG data] has to be verifiable and it has to be reliable,’ he continued. ‘Ultimately it needs to translate into things that are credible and calculable for investors. So I don’t see any diminishing of this trend… Data verification is on the rise and I think assurance will be an integral part of this.’
Speaking on the same panel as Siegel and Bryden, Emily Kreps explained that CDP requires third-party assurance of GHG emissions from companies that report to the CDP’s framework. Kreps is the global director of capital markets at CDP and spoke to the need for issuers to give investors confidence in the accuracy of their climate-related disclosures.
‘Our mission is around disclosure and transparency, but also to drive to a planet that works for its people and the economy,’ she said. ‘By having assurance on GHG emissions, you’re really giving people a sense of confidence in terms of how they think about their portfolio or align their investment objectives.’
Ray Cameron, head of investment stewardship at BlackRock, agreed with Kreps and said that when it comes to GHG emissions, assurance is ‘required’, adding that he expects the conversation around assurance to evolve, and that external validation will become a norm.
‘As we continue to mature, I think other elements will require those types of assurances as well,’ Bryden said. ‘Remember what we’re trying to do here is… tie these factors to the financial operations of the organization. So as that tie gets a little bit closer, those assurances will be needed as well.’
Click here to access the recordings from this year’s ESG Integration Forum – US.