Emerging findings from the Financial Reporting Council (FRC) sustainability assurance market study published last week highlight possible issues around consistency in the quality of sustainability assurance services.

The FRC report warns that many companies report difficulties in determining the suitability of sustainability assurance providers and assessing their likely quality, especially when appointing a new provider. Some respondents said that the lack of an established framework for the quality of assurance created inconsistencies in the market.

Similarly, a lack of clarity on the UK’s regulatory position could hinder investment, planning and capacity development in this immature market. Without an established regulatory framework, the UK sustainability assurance market may not produce consistent, high-quality sustainability information for decision-making, the study warns. 

Although most UK companies say they had sufficient choice of providers, some raised concerns that the market is starting to consolidate around the Big Four, which some respondents warn may limit market choice and effective competition in the future.

The FRC’s data analysis found that the proportion of FTSE 350 companies obtaining sustainability assurance increased by 19 percentage points from 2019 to 2022. In 2022, there were 64 providers of assurance to FTSE 350 companies although 44 carried out only one or two assurance engagements. Large companies reported a choice of three to four providers, but smaller companies claimed to have fewer options. 

Among FTSE 100 companies, there has been an increase in the proportion of auditors providing sustainability assurance to their clients, from 25% in 2019 to 33% in 2022, possibly driven by international changes affecting some UK companies, for example the EU’s Corporate Sustainability Reporting Directive (CSRD) requirements.

Stakeholders collectively agreed that there was a clear need for transparency and clarity on likely future regulatory requirements, or at least the direction of travel, to enable adequate planning, investment and future compliance. Many stakeholders said they would like any UK regulatory requirements to be fully interoperable with other international regulations.

The FRC report – based on responses to the FRC’s Invitation to Comment and extensive stakeholder engagement with companies, investors and both audit and non-audit related providers of sustainability assurance – demonstrates the growth of the sustainability assurance market. 

The FRC's Executive Director of Regulatory Standards, Mark Babington, says for many investors, sustainability related reporting is becoming an increasingly prevalent factor in their decisions to allocate capital and invest in UK companies. “Independent assurance of this reporting is vital in ensuring trust and transparency in companies non-financial reporting.

“These emerging findings demonstrate the increasing demand for sustainability assurance that we are continuing to see from UK companies. While the UK’s approach to sustainability assurance is yet to be defined, this market study plays an important role in establishing a clear picture of the market and the challenges it faces.”

The FRC says it wants to ensure the UK’s market for sustainability assurance is working effectively, with a wide range of providers producing high-quality assurance without creating undue burdens and costs for business. It has three broad themes: choice of sustainability assurance provider and competition; market capacity, opportunities and barriers to entry/expansion; and the regulatory framework including how changing international requirements could affect the UK market.

Alex Russell, ICAEW Head of Audit and Assurance, says: “We welcome the publication of the FRC’s emerging findings. We look forward to further engagement with the FRC team and ICAEW members to discuss the findings and, importantly, the next steps needed to ensure the growing UK sustainability assurance market functions effectively and provides assurance that is high quality and of value to its users.” 

The FRC is inviting stakeholders to provide further input on development of the UK’s regulatory framework. In particular, it would like to know if you agree with the emerging findings and views on any actions that should be taken, how future developments such as mandatory application of the ISSB’s sustainability disclosure standards might impact the UK sustainability assurance market, and thoughts on the future regulatory and policy approach to sustainability assurance in the UK.

If you have any questions or would like to provide feedback on the FRC’s follow-up consultation questions for consideration as part of the ICAEW’s response, please contact the Audit and Assurance Faculty at tdaf@icaew.com by 15 November 2024 quoting ‘FRC Sustainability Assurance Market Study’. 

A range of insights and resources on sustainability assurance are available at ICAEW’s dedicated sustainability assurance hub.