With the demand for credible environmental, social, and governance reporting heightening, FTSE 100 companies are now looking to external assurance to enhance transparency in the face of regulatory change. More broadly, this reflects increasing trends due to new regulations such as the Corporate Sustainability Reporting Directive, which is coming into effect in 2024.
Growing Demand for ESG Assurance
In 2023, 79% of FTSE 100 companies chose external assurance for some or all of their ESG metrics, compared to 75% in 2021. This was a reflection of an increasing comfort within those companies in relation to the process of what was being demanded in terms of assurance, KPMG said. The pressure is increasing every day on account of tightening regulations that require companies to calibrate all their respective internal teams with the process of reporting and assurance. Finally, the CSRD will require the reporting of the entire ESG, with the rise in emphasis on the need for strong external verification.
Integration of ESG Assurance with Financial Audits
A major trend now revealed by the KPMG data is integrating ESG assurance with financial statement audit engagements. In 2023, 47 percent of the companies that obtained ESG assurance employed the same practitioner to perform both the ESG and financial statement audits. This implies a growth of 14% over last year, thereby getting closer to the integrated approach. The alignment is expected to grow even beyond this with the adoption of the provisions under the CSRD as there is a possibility of convergence between the disclosures that will be mandated under the ESRS and the financial audit that follows the conventional approach.
Big 4 Firms’ Dominance
The Big 4 accounting firms continue to dominate the ESG assurance market, with 63% of FTSE 100 companies appointing them for their ESG assurance needs in 2023—up 8% from 2021. According to KPMG, the trend towards joint appointments for assurance and audit is set to continue, and even increase, due to the demands companies have regarding consistent processes and the new regulations.
Coordination Challenges in Assurance Reporting
Links are well placed, but coordination remains a challenge. Assurance reports in 2023 show that only 52% are signed on the same day as the audit report for the financial statements. This indicates there is in need for a greater level of integration and synchronisation between ESG and financial reporting processes. Given the approval under the CSRD that the sustainability statement must now be ‘included in the Annual Report,’ those companies that currently report sustainability in a separate report are going to have to align and make their adjustments with these new requirements.
Prevalence of Limited Assurance
According to KPMG’s analysis, 94% of ESG assurance reports in 2023 were limited assurance engagements, where only one company achieved reasonable assurance for all KPIs. In contrast with reasonable assurance, which is carried out under a wide-ranging methodology somewhat akin to a financial audit and offers a more substantial hold that the reported data are accurate, limited assurance implies less stringent procedures.
Conclusion
The overall trend of growing ESG assurance in FTSE 100 companies reflects a push towards transparency and regulatory compliance. ESG reporting is also likely to change the form of the CSRD with increased alignment with assurance, audit service, and Big 4 dominance. Companies will have to address coordination challenges and consider the shift in changed stakeholder and regulator demands from being assured to providing reasonable assurance. The more recent adaptation of the external verification is part of the larger movement commenced for more accountable and transparent corporate reporting.
(Source:- ESG NEWS)