Sustainability Reporting, Auditing and Assurance: A path to the Green Economy

Introduction

Sustainability means meeting the needs of the present without compromising the ability of future generations to satisfy their needs. It strives for the long-term health of our planet and its inhabitants. Sustainability can be achieved by reducing current consumption, conserving energy, and water, consuming less meat and creating awareness of sustainability among others. Sustainability is not just about the environment; it is about creating a future where environmental, social, and economic well-being are interconnected and mutually reinforcing. By prioritizing sustainability, we can ensure a healthier planet, a more just society, and a stronger economy for all in the long run.

Three main pillars of sustainability are Environment, Social and Economic Sustainability which focuses on:

Table 1: Main pillars of sustainability

These pillars ensure a balanced and resilient approach to the development and progress of the economy. However, to ensure the success of these pillars, governance of an organization plays an important role. Governance refers to the policies, structures, and processes adopted by the organization to make strategic decisions in order to ensure transparency, ethical practices, and compliance with regulations.

Sustainability Reporting

Sustainability reporting is the practice followed by companies for communicating environmental, social, and governance (ESG) efforts and performance to stakeholders. In order to report sustainability impacts, the Global Sustainability Standards Board (GSSB) developed the widely used standards, commonly known as GRI Standards, in 2016. To maintain consistency in Sustainability Reporting, IFRS trustees formed an International Sustainability Standards Board (ISSB) in November 2021 to develop standards of sustainability disclosures aiming at broader stakeholder needs. Two accounting standards issued by ISSB in June 2023 which became applicable from January 1, 2024 are:

• IFRS S1: General Requirements of Disclosure of Sustainability related Financial information
• IFRS S2: Climate related Disclosures

Furthermore, to facilitate the endeavours of these International Boards and boost sustainability practises among enterprises, SEBI introduced a new reporting requirement in May 2021 for ESG disclosures under the BRSR (Business Responsibility and Sustainability Report). These disclosures aim to help investors make informed decisions and encourage companies to consider social, governance, and environmental impacts. Filing of the BRSR has been made mandatory for the top 1000 listed companies from the financial year 2022-2023. MCA also prescribed disclosure requirements in the Annexure 3A of the \"Report of the Committee on Business Responsibility and Sustainability Reporting\". The BRSR needs to be filed online as a part of the annual report through platforms like BSE/NSE in the XBRL format.

The information which an organization is required to disclose can be categorized under the following sections:

• Section A: General Disclosures covering company details, products/services, operations, employees etc.
• Section B: Management and Process Disclosures corroborates the adherence of the NGRBC principles and core elements through policies and processes of the companies.
• Section C: Principle-wise Performance Disclosures validate the performance of companies while complying with the principles and core elements through their key processes and decisions.

BRSR is aligned with the nine principles of the National Guidelines on Responsible Business Conduct (NGRBCs). The nine principles of NGRBCs are provided in Table 2:

Table 2: Nine principles of NGBRC

The European Union has also introduced Corporate Sustainability Reporting Directive (CSRD) in January 2023 including many listed SMEs and few non-EU companies generating over 150 million euros in the European market. Several sustainability reporting models and frameworks are used by organizations worldwide to communicate their environmental, social, and governance (ESG) performance. Few notable ones are presented in Figure 2.

Figure 2: Sustainability reporting models and frameworks

• Global Reporting Initiative (GRI)
• Sustainability Accounting Standards Board (SASB)
• Integrated Reporting Framework (IR)
• Carbon Disclosure Project (CDR)
• Task Force on Climate-related Financial Disclosures (TCFD)
• UN Global Compact (UNGC) Communication on Progress (COP)
• ISO 26000
• Triple Bottom Line (TBL)
• Sustainable Development Goals (SDGs)
• Circular Economy Framework
• Cradle to Cradle (C2C)

As per the Guidance Note of SAE 3000 (Revised), the decision-making process of several stakeholders gets affected by the sustainable information provided by the Sustainability Report.

To strengthen sustainability reporting in India, the Institute of Chartered Accountants of India (ICAI), constituted the Sustainability Reporting Standards Board (SRSB) to formulate the \"Sustainability Reporting Maturity Model (SRMM)\" in 2020. The major aim of the Board is to identify and create new opportunities for Chartered Accountants in the growing field of sustainability reporting, develop detailed guidance for conducting audits of Integrated Reports with both financial and sustainability information, publish informative materials on key topics within the sustainability domain to equip professionals with the latest knowledge, engage with international and national bodies, as well as regulators, to advocate policies and regulations for the promotion of sustainable development goals. The \"Sustainability Reporting Maturity Model Version 1.0\" (SRMM) was developed based on the BRSR scoring system. This innovative model allows companies complying with BRSR to assess their own sustainability reporting practices.

The integration of sustainability reporting into the annual report enables companies to present a more comprehensive picture of their performance and their commitment to responsible business practices. It facilitates transparency and credibility leading to improved risk management and decision making. Sustainability reporting, thus, ultimately, results in the development of the country both financially and economically by improving the country risk profile, increasing job creation and efficiency, reducing environmental costs, improving public health, increasing foreign aid and grant opportunities, and boosting the tourism industry.

Table 3: BRSR scoring mechanism for each level of maturity

(Source: Sustainability Reporting Maturity Model (SRMM)* version 1.0 issued by ICAI)

Sustainability Audit

As per the Auditor Guidance Notes from the EMEA Accounting, Accounting and Education Committee (AAEC), a worldwide association of separate and independent accounting and advisory firms, sustainability reports should be followed by sustainability audits.

Key points to be checked at the Sustainability Audit

A sustainability audit dives deep into a company\'s environmental, social, and governance (ESG) practices. The main key areas are:

• I. Environmental: The audit is focused on evaluating the company\'s efficiency in resource utilization and its efforts towards resource conservation. Energy & water usage, air and water emissions, raw material sourcing, and waste disposal practices are all scrutinized. Compliance with environmental regulations and the company\'s commitment to reducing its environmental footprint are also assessed. A company\'s impact on natural habitats and its efforts to conserve biodiversity are also assessed through the company\'s supply chain practices and their impact on ecosystems.
• II. Social: The audit assesses the company\'s respect for human rights throughout its operations and supply chain by examining the fairness in labour conditions, worker safety, diversity, inclusion within the workforce, and living wages. The audit evaluates the company\'s relationship with the communities and its social impact on it. This involves looking at responsible marketing practices and product life cycle considerations.
• III. Governance: The audit assesses the company\'s leadership structure, board composition, and ethical practices. This includes looking for transparency in decision-making and accountability for the company\'s sustainability reporting. The audit ensures the company adherence to relevant reporting frameworks and provides stakeholders with a clear picture of its ESG performance.

Thus, a sustainability audit provides a comprehensive assessment of a company\'s ESG performance and identifies areas for improvement. This empowers companies to operate more responsibly, build trust with stakeholders, and contribute to a sustainable future.

Table 4: Steps to conduct Sustainability Audit

The following steps should be followed to conduct a Sustainability Audit:

• Planning and Scoping: This stage involves defining the audit\'s objectives, scope, and timeframe. Key stakeholders are identified, and relevant data is gathered. Information systems are studied. Linking the consideration of materiality and engagement risks to the nature, timing and extent of procedures.
• Applying procedures: Data relevant to ESG metrics is collected from various sources within the company through inquiry, inspection, site visits, interviews etc.
• Analysis: This data is then analysed to assess the company\'s performance across different sustainability aspects.
• Findings and Recommendations: The audit team evaluates the collected data and prepares a report outlining the company\'s strengths, weaknesses, opportunities, and risks related to sustainability. Recommendations for improvement are also provided.
• Management Response: The company\'s management reviews the audit report and develops a plan to address the identified issues and implement the recommended actions.

Sustainability Assurance Report

Sustainability reports comprise of both qualitative and quantitative disclosures. Assurance of these reports enhances the credibility of these reports. Sustainable Assurance Report is a more comprehensive report as compared to general audit reports. The AA1000 Assurance Standard (AA 1000AS v3), an internationally recognized standard, can be used alongside other recognized frameworks to enhance the quality and robustness of the assurance process.

As per AA 1000AS v3, there can be two types of assurance namely Type I and Type II Assurance. While Type I focuses solely on the adherence of the four core principles of AA1000 i.e., Inclusivity, Materiality, Responsiveness, and Transparency, Type II goes beyond adherence to principles and delves into the credibility of the reported sustainability information. The decision to choose between Type I and Type II depends on the specific context and desired level of assurance like level of stakeholders, materiality of sustainability impacts, and maturity of the organization in sustainability reporting. In case of a higher level, Type II will be preferred.

An assurance statement, as per AA 1000AS v3, discloses information under two categories: They are:

1. Assurance Information
   1. Intended users of the Assurance Statement
   2. Responsibilities of the reporting organisation and assurance provider
   3. Reference to the AA 1000AS v3 and other assurance standard(s), if used
   4. Description of the scope, subject matter, the type, and level of assurance provided
   5. Reference to criteria used
   6. Description and sources of disclosures covered
   7. Description of methodology
   8. Limitations and approach used to mitigate limitations
   9. Notes on the independence and competencies of the assurance provider
   10. Name of the assurance provider
   11. Date and place of performance
2. Performance Related Information
   1. Findings and conclusions regarding adherence to the AA1000 Accountability Principles of Inclusivity, Materiality, Responsiveness, and Impact (in all instances).
   2. For Type 2 assurance, findings and conclusions concerning the reliability and quality of specified performance information.

A more concise standardized format was also laid down by SSAE 3000. The International Auditing and Assurance Standards Board is in the process of developing an International Standard on Sustainability Assurance (ISSA) 5000 proposing general requirements for Sustainability Assurance Engagements applicable for any sustainability assurance engagements which will be superseding the existing ISAE 3000 (Revised), Assurance Engagements other than audits or reviews of Historical Financial Information and ISAE 3410, Assurance Engagements on Greenhouse Gas Statements issued by IAASB of IFAC.

Based on the existing international standards, ICAI has issued the Standard on Sustainability Assurance Engagements (SSAE) 3000 dealing with the assurance engagements on Sustainability Information effective for the periods ending on or after March 31, 2024 which can be applied in addition to other laws/regulations applicable to any entity. ICAI has also constituted the Sustainability Assurance Maturity Model (SAMM) to achieve the goal of Sustainability Reporting and Assurance in compliance with SSAE 3000 by assessing the maturity of an organization\'s sustainability assurance processes. The criteria for assessing maturity includes the independence and competence of assurance providers, the scope and rigour of assurance procedures, the level of integration of assurance findings into decision-making processes, the transparency and credibility of assurance statements, and the effectiveness of assurance in enhancing stakeholder trust and confidence in the organization\'s sustainability performance. The models aim to help organizations benchmark their sustainability assurance practices, identify areas for improvement, and develop strategies to enhance the quality, credibility, and impact of their sustainability disclosures.

Pre-requisites for the audit and assurance engagement

An assurance practitioner is expected to have the following pre-requisites for the procurement of assurance engagement:

1. Be a member of a firm that applies Standard on Quality Control 1 issued by ICAI, or other professional requirements, or requirements in law or regulation, that are at least as demanding as SQC 1;
2. Possess competence in assurance skills and techniques developed through extensive training and practical application; and
3. Possess sufficient competence in the underlying subject matter and its measurement or evaluation to accept responsibility for the assurance conclusion.

Benefits of Sustainability Audit and Assurance

• Enhanced decision-making: The audit provides valuable data and insights that can guide strategic decision-making towards more sustainable practices.
• Risk mitigation: Identifying and addressing ESG risks proactively can help companies avoid potential liabilities and reputational damage.
• Improved stakeholder engagement: A strong sustainability audit demonstrates a company\'s commitment to ESG issues, fostering better relationships with investors, employees, customers, and communities.
• Cost savings: Sustainability audits can identify areas for resource efficiency and waste reduction, leading to potential cost savings.
• Competitive advantage: Companies with strong sustainability practices can gain a competitive edge by attracting environmentally and socially conscious investors, customers, and talent.

Hurdles on the Road to Sustainability Audit and Assurance

Sustainability audits and assurance, while offering valuable insights into a company\'s ESG performance, can present their own set of challenges. Many organizations and their accounting professionals lack adequate knowledge and training on sustainability frameworks, standards and reporting methodologies. This gap can lead to incomplete or inaccurate data/disclosures, non-compliance with global standards and missed opportunities to leverage sustainability initiatives for competitive advantage. Ultimately, this will hinder the audit process and create hurdles on the path of the auditors to assess the performance accurately.

Overcoming Hurdles

Despite these challenges, effective strategies through adequate training programmes, workshops, and certifications for enhancing the knowledge of sustainability reporting among the concerned team can ensure a successful sustainability audit. As promulgated by the International Federation of Accountants (IFAC) through effective designing of regulatory frameworks, aligning sustainability disclosure with financial reporting based on the globally accepted standards, integrating sustainability assurance with financial statement audit engagements, and transitioning to reasonable assurance engagements can ensure trust and confidence in sustainability disclosure. While challenges exist, sustainability audits are a valuable tool for companies to assess their ESG performance, identify risks and opportunities, and demonstrate accountability to stakeholders. By addressing these challenges, companies can leverage sustainability audits to build trust and navigate the evolving landscape of ESG practices.

Role of a CA in Sustainability Reporting, Audit and Assurance

Chartered Accountants (CAs) play a crucial role in ensuring the credibility and accuracy of sustainability reporting. Their expertise in accounting principles, data analysis, financial reporting, risk management, and strategic planning makes them valuable assets in navigating the complexities of ESG (environmental, social, and governance) disclosures. Their brief role as an accountant and auditor is:

As an Accountant

1. Data Management and Analysis
   
   • Data Gathering and Organization: CAs play a vital role in collecting, analyzing, and organizing data relevant to ESG metrics. This includes energy consumption, waste generation, water usage, diversity metrics, and employee wellbeing data.
   • Internal Controls: CAs can help to establish and maintain strong internal control systems to ensure the accuracy and reliability of sustainability data through setting up of clear data collection procedures, verification processes, and maintaining a strong audit trail.
   • Standardization and Frameworks: CAs can guide companies in complying with the different standards and frameworks (like GRI, SASB) ensuring comparability and reliability of the reports.
   • Cost Management: By analyzing sustainability data, CAs can identify areas for improvement in resource efficiency and waste reduction which can lead to potential cost savings.
2. Setting ESG Targets
   
   • Goal Development: CAs can assist companies in setting realistic, achievable and measurable ESG goals, aligned with global standards. These ESG targets can be linked to the financial performance to ensure better productivity.
   • Metrics and KPIs: By developing appropriate metrics and key performance indicators (KPIs), CAs can assist in tracking progress towards ESG goals.
   • Accountability and governance: To ensure compliance with ESG related regulations and standards, ESG committees can be formed. Regular reviews and updates on ESG performance should also be initiated.

1. MIS Reporting
   MIS Reports increase efficiency by automating repetitive tasks and reduce errors, thereby generating more accurate and reliable reports. Timely decision making and up-to-date information can be extracted as per the requirement of the stakeholders. With the integration of MIS into their reporting processes, CAs can provide data driven, comprehensive insights to present a holistic view of the company\'s performance with improved transparency.

As an Auditor

1. Assurance and Verification: Sustainability auditors provide independent assurance on the fairness and accuracy of a company\'s sustainability report by assessing the company\'s internal controls, identifying any material misstatements, and providing an opinion on the overall reliability of the reported information. This enhances the credibility and transparency of the sustainability report, giving stakeholders greater confidence in the information presented.
2. Risk Management: The audit process can help identify potential risks associated with a company\'s ESG practices, allowing for better risk management strategies.
3. Collaboration with Sustainability Auditors: CAs can collaborate with external sustainability auditors to ensure a comprehensive assessment of the company\'s ESG practices thereby bridging the gap between financial and sustainability reporting.
4. Improvement Recommendations: Auditors may provide recommendations for improvement in the company\'s sustainability reporting processes and data collection methods, leading to more robust and informative reports in the future.
5. Investor Relations: CAs can help companies communicate their sustainability efforts effectively to investors who are increasingly integrating ESG factors into their investment decisions.

With the increase in the demand for sustainability expertise and tech enabled solutions, Chartered Accountants will play a vital role in ensuring the credibility and effectiveness of sustainability reporting.

Conclusion

Sustainability reporting is not just about environmental responsibility; it is a strategic economic move. By promoting sustainable practices within companies, a country can position itself to attract investment, create jobs, enhance its brand reputation, and build a more resilient and prosperous economy for the future. A sustained commitment to ESG principles is crucial for reaping the economic and financial rewards. Governments can play a crucial role in promoting and incentivizing sustainability reporting by establishing clear policy frameworks and regulations. Additionally, the role of Chartered Accountants cannot be denied, as they ensures the quality and integrity of sustainability reporting and audits. They work together with the company and the Government to provide stakeholders with a clear and reliable picture of a company\'s environmental, social, and governance performance.