The last two years have seen an increasing level of activity and discussion around sustainability reporting by companies, and especially on the development of comprehensive and authoritative standards on sustainability reporting. Recently, there have been three important consultations on sustainability reporting. The International Financial Reporting Standards Foundation consulted on the first two draft standards developed by the International Sustainability Standards Board; in the European Union there was a consultation on the proposed Corporate Sustainability Reporting Directive; and in the United States, the Securities and Exchange Commission published proposals for rules to require registrants to provide climate-related information in their annual reports and registration statements.
Although these consultations were focused on corporate sustainability reporting, two of them also raised the issue of assurance on sustainability reporting, and this subject has been a notable feature of much of the engagement activities and discussions around all three consultations.
The Institute has consistently advocated that robust independent assurance adds value to all aspects of corporate reporting, including sustainability reporting. Independent assurance provides confidence to users of reported information, including boards, investors and rating agencies and indices. In December 2020, the Institute issued Auditing and Assurance Technical Bulletin (AATB) 5, which provides practical non-authoritative guidance for assurance practitioners that is specifically referenced to the enhanced sustainability reporting guidelines published by the Hong Kong Stock Exchange that became effective in 2021. This guidance was drafted based on the existing Hong Kong Standard on Assurance Engagements 3000 and utilized what was then work in progress by the International Auditing and Assurance Standards Board (IAASB). AATB 5 was subsequently updated in August 2021 to align with the now published IAASB guidance on extended external reporting and further updated in May 2022 as a result of the new and revised quality management standards that will come into effect on 15 December 2022.
In December 2021, as part of its ongoing advocacy and research activities, the Institute published a report providing a snapshot of where Hong Kong listed companies stand with regard to environmental, social and governance assurance with reference to 31 December 2020 year end reports. A summary of the findings and recommendations were published in the April 2022 issue of A Plus.
Also in 2021, the International Federation of Accountants (IFAC), the American Institute of CPAs and the Chartered Institute of Management Accountants carried out a global benchmarking study titled The State of Play in Sustainability Assurance, in partnership with Audit Analytics. The aim of the study was to better understand the extent to which companies are reporting and obtaining assurance over their sustainability disclosures, which assurance standards are being used, and which organizations are providing the assurance service. Significant differences in practices across different jurisdictions show a situation that is still evolving and influenced very much by local regulatory requirements.
The Institute has stated its support for the IFAC’s Vision for High-Quality Assurance of Sustainability Information published in December 2021. We agree with the assertion that assurance enhances the credibility of reporting and that authorities and regulators should maximize trust and confidence in sustainability disclosures by requiring high-quality assurance.
Addressing sustainability in the context of their roles as standard setters for the international accounting profession is a high priority for the IAASB and the International Ethics Standards Board for Accountants (IESBA) and both boards have set up working groups to focus on the topic and its implication for professional standards and conduct. The IAASB has already committed in its work plan for 2022-23 to a project for developing auditing and assurance standards that address sustainability reporting and has a dedicated webpage which brings together all content the IAASB has available regarding assurance on sustainability reporting and other forms of extended external reporting. The Institute has good connections and regular engagement with both IAASB and IESBA and will closely follow their work at the international level, with the intention of bringing relevant developments and knowledge to Hong Kong for the benefit of all market participants.
Beyond the accounting profession, the International Organization of Securities Commissions has been a prominent advocate for the importance of assurance to support the credibility and value of sustainability reporting, echoing the call from many significant institutional investors. This position has also been taken in Hong Kong by the Securities and Futures Commission.
For board members, assurance on sustainability information is important. Sustainability reports should include board commentary on which sustainability information and policies are considered to be material and how the board is satisfied as to the reliability of the more material items, and identify which items have been assured, the level of assurance and the assurance provider.
The prioritization of development and implementation of sustainability reporting standards for Hong Kong is understandable but the importance of assurance should not be overlooked. Initial considerations and development of proposals for assurance can go ahead even if regulatory and market requirements and standards for assurance come after the introduction of reporting requirements. We believe that the model of assurance for financial reporting has important features, including the need for assurance providers to adhere to independence, ethical and competence standards, that add value and should be included in assurance requirements on sustainability reporting. The Institute would support requirements for assurance of sustainability reports and will continue to provide necessary support and development opportunities for its members to be recognized as trusted assurance providers.
The Institute believes that independent assurance is a critical element of providing reliable decision useful information for use by boards, investors, ratings agencies and other parties.
This article was contributed by Chris Joy FCPA, Executive Director, Standards and Regulation of the Institute.