Gain an overview of sustainability reporting and assurance developments with our primer on new and emerging regulations, standards and support resources.
The global sustainability reporting and assurance landscape is going through a period of accelerated evolution, as mandatory sustainability reporting moves into the mainstream.
An increasing number of jurisdictions across the globe are adopting mandatory requirements for financial and non-financial sustainability disclosures and/or reporting and mandatory assurance – sometimes supplementing or superseding extant mandatory and voluntary disclosures and reporting.
This is requiring more businesses to report sustainability-related performance information to regulators and other stakeholders and increasing demand for sustainability assurance services. It is also focusing minds on thorny matters such as availability and quality of sustainability data, alignment and interoperability of different disclosure requirements, and transition plans.
Other Audit & Beyond articles will consider such matters in more detail. This article offers an overview of recently emerging regulatory developments and disclosure standards that auditors may need to consider from 2024 onwards, with context on some extant regulations and frameworks, and pointers to support resources from ICAEW and other trusted sources.
New IAASB sustainability reporting standard
For auditors undertaking assurance engagements relating to disclosures on environmental, social and governance (ESG) factors, certain aspects of climate and sustainability more broadly, the global sustainability assurance standard, proposed by the International Auditing and Assurance Standards Board (IAASB), will be particularly important.
The International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance, expected to be finalised in September 2024, is a principles-based, standalone, overarching standard.
It does not include detailed requirements targeted at specific subject matters, or jurisdiction-specific assurance reporting, or framework-specific definitions of sustainability information. It can be applied to information on any sustainability topic, prepared using multiple frameworks, including those requiring ‘double materiality’ assessments, by any entity, regardless of size or complexity, for limited and reasonable assurance engagements.
There are IAASB FAQs and guidance on matters such as the application of materiality by the preparer and the assurance practitioner.
As well as being framework agnostic, the proposed ISSA 5000 is profession agnostic. It anticipates and supports use not just by auditors and other professional accountants, but by non-accountant sustainability assurance practitioners that are able to satisfy requirements addressing compliance with relevant ethical requirements and systems of quality management.
As well as being framework agnostic, the proposed ISSA 5000 is profession agnostic
ISSA 5000 builds on existing IAASB standards. These include the International Standard on Assurance Engagements (ISAE) for greenhouse gas statements (ISAE 3410), which ISSA 5000 will supersede, except when a practitioner provides a separate conclusion on a greenhouse gas statement. ISAE 3000 will remain for non-sustainability assurance engagements other than audits or reviews of historical financial information.
ISSA 5000 is expected to be the first in a series of ISSA assurance standards from the IAASB, with IAASB publication of the finalised ISSA 5000 expected in January 2025. Early adoption will be encouraged.
For more information on ISSA 5000 explore IAASB support resources.
The Audit and Assurance Faculty’s Sustainability assurance hub will keep auditors up to date on the fast changing developments around sustainability assurance, with articles, helpsheets, webinars, FAQs and other resources offering news, insights and analysis. In addition, the Corporate Reporting Faculty and Financial Services Faculty also provide sustainability-related resources that auditors may find useful.
New and emerging standards for sustainability disclosures
Auditors and others who will be undertaking sustainability assurance engagements from 2024 onwards will need to be aware of existing and emerging regulations and standards for financial and non-financial disclosures and reporting on sustainability-related information.
Regulation varies across jurisdictions and within them for different types and size of entity. Likewise, there are variations in when, what and how much assurers of sustainability disclosures and reporting need to know about any frameworks, regulations and standards.
Nonetheless, from 2024 onwards, auditors, assurers and preparers will increasingly need to consider these recently emerging standards and associated regulations:
- the European Sustainability Reporting Standards (ESRS) associated with the European Union (EU) Corporate Sustainability Reporting Directive (CSRD); and
- the Global IFRS Sustainability Disclosure Standards (SDS) from the IFRS Foundation’s International Sustainability Standards Board (ISSB).
For some preparers and assurance providers, understanding what’s required by the CSRD will be a priority. It’s effective for accounting periods from 1 January 2024, some companies outside the EU are affected and limited assurance is mandatory.
See ‘The CSRD and ESRS’, below, for more on this.
There are variations in when, what and how much assurers of sustainability disclosures and reporting need to know about any frameworks, regulations and standards
The IFRS’s SDS are effective for annual reporting periods beginning on or after 1 January 2024. Decisions on adoption and assurance are jurisdiction-dependent, but there are signs that mandatory and voluntary adoption will become widespread. Some entities may want or need to apply these and also comply with the CSRD.
During development of these regional EU and global IFRS standards, aligning their climate-related requirements was considered and there is joint ESRS-ISSB Standards Interoperability Guidance. If, when and how closely either or both sets of sustainability disclosure requirements align with others, only time will tell.
See below for more on the IFRS SDS.
For some preparers, auditors and assurers, recently emerging climate-related disclosure rules from the US Securities and Exchange Commission (SEC) and its mandatory assurance may also be a consideration. As outlined below, however, these SEC rules are currently on hold.
Meanwhile, let’s return to the CSRD and ESRS, SEC disclosure guidance, and IFRS SDS.
The CSRD and ESRS
To recap, for accounting periods from 1 January 2024, a broad range of companies in the EU will need to comply with the CSRD and report using ESRS. Because the CSRD is extraterritorial, some companies outside the EU (including UK entities) will be affected.
The CSRD applies to a broad range of companies and the scoping is complex, especially within group situations and where there are subsidiaries with non-EU country parents. There are some exemptions available. Some entities will come into scope over a phased timeframe.
An ICAEW hub page covers the scope, timing and exemptions for applying CSRD.
Entities in scope of the CSRD will also be in scope for the EU taxonomy for sustainable activities and other legislation, such as the EU Directive on corporate sustainability due diligence. Even without these, the CSRD offers plenty for preparers and assurance providers to consider.
Currently, there are two cross-cutting ESRS and 12 topical standards – and more than 1,000 qualitative and quantitative data points across 10 key ESG topics for CSRD disclosures. Preparing and assuring CSRD disclosures also demands an understanding of the ‘double materiality’ concept, consisting of impact materiality (the ‘inside-out’ perspective) and financial materiality (the ‘outside-in’ perspective).
Preparing and assuring CSRD disclosures demands an understanding of the ‘double materiality’ concept
To support the implementation activities of preparers and others using or analysing ESRS reports, the European Financial Reporting Advisory Group (EFRAG) that developed the ESRS for the European Commission (EC), is developing non-authoritative implementation guidance (IG).
In June 2024, EFRAG issued guidance on Materiality assessment (EFRAG IG 1), EFRAG IG 2 on the Value chain and EFRAG IG 3, a list of ESRS Data points plus EFRAG IG 3 Explanatory notes. There is an EFRAG ESRS Q&A platform, which preparers and auditors may consult; also, a periodic Compilation of explanations, with an appendix log of previous questions and answers.
At a recent ICAEW round-table event, the EC called for a proportionate and common-sense approach to implementation of the CSRD and an ICAEW Insights article (August 2024) offers tips on How to adopt a pragmatic approach to CSRD.
Limited assurance is mandatory for CSRD reporting from the first year of application, and this starts in 2025 for those companies in the initial phase and producing their first reports on the financial year starting on or after 1 January 2024.
The CSRD mandates the EC to introduce limited assurance standards by 1 October 2026 and to adopt reasonable assurance standards by 1 October 2028. In the meantime, member states can apply their national assurance standards.
Read an ICAEW overview of European sustainability reporting and assurance and Explore critical questions in CSRD assurance for professional services firms.
Webinar recordings from the Audit & Assurance faculty offer an Introduction to CSRD and SEC climate reporting and assurance requirements and Global sustainability and reporting assurance requirements: your questions answered.
Both offer a global overview of the current and evolving ESG landscape (across Asia Pacific, Canada, the EU, UK and US) and what’s driving the fast-changing regulatory developments. They also dig deeper into CSRD and SEC considerations for auditors and assurance providers.
IFRS sustainability disclosure standards
The International Sustainability Standards Board (ISSB) issued its first two global IFRS SDS in June 2023. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures are effective for annual reporting periods beginning on or after 1 January 2024. In practice, effective dates are jurisdiction dependent.
IFRS S1 requires an entity to disclose material information on the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term. It prescribes how an entity prepares and reports the required disclosures, including content and presentation.
IFRS S1 is designed for application to organisations of all types, sizes, locations and sectors. It permits reference to other standards and frameworks in the absence of topic-specific IFRS SDS.
IFRS S2 is designed to be used with IFRS S1 and sets out the requirements for climate-related disclosures. IFRS SDS covering other sustainability themes are envisaged.
Various countries plan to adopt IFRS S1 and S2 and/or align mandatory disclosures with them and/or use IFRS S1 and S2 as a basis for national standards.
In May 2024 the UK Government Department for Business and Trade published Sustainability Disclosure Requirements: Implementation Update 2024. This confirms its intention of using IFRS S1 and S2 as the basis for UK Sustainability Reporting Standards (UK SRS) and making these available Q1 2025. No decisions have been taken on assurance requirements.
Read more from ICAEW on IFRS S1 and IFRS S2 in the UK, including transitional reliefs and interactions with existing UK sustainability-related reporting requirements.
A Corporate Reporting Faculty hub, IFRS Sustainability Disclosure Standards, covers UK adoption and interactions with existing UK reporting requirements, transitional reliefs and global alignment in sustainability reporting.
SEC climate disclosure guidance
In March 2024 the SEC clarified its climate-related disclosure rules after lengthy deliberation, but within a month it decided to voluntarily stay these ‘Final Rules’ in the face of multiple and ongoing legal challenges.
The Final Rules will require all domestic and foreign SEC-registered companies to publish climate-related disclosures in annual reports and registration statements (including for initial public offerings). There’s an SEC factsheet on background, content and presentation of disclosures.
As adopted, the Final Rules require large accelerated filers to begin disclosing new and extensive climate-related information, beginning with annual reports for the year ending December 31, 2025.
The SEC’s decision to stay its Final Rules (without specifying an end date) avoids potential uncertainty that might result if the rules were to become effective before judicial resolution of the legal challenges. In April 2024, the SEC announced its intention to vigorously defend the Final Rules’ validity in court.
The direction of travel
All new and emerging sustainability-related frameworks, regulations and standards enter an already crowded and fast-changing disclosures, reporting and assurance landscape. If things are to become less hectic (and confusing), regulators and standard-setters will need to sustain and broaden efforts around alignment, interoperability and consolidation.
The EU’s CRSD and ESRS and the ISSB’s IFRS S1 and S2 may be grabbing headlines, but extant regulations and longer-established frameworks for mandatory and/or voluntary sustainability disclosures and reporting are still considerations for many preparers, auditors and assurers – and likely to remain so.
During 2022 and 2023 when the International Federation of Accountants (IFAC) analysed approaches to sustainability disclosures and assurance across dozens of jurisdictions, it found a wide variety and mix of frameworks and standards in use, within individual jurisdictions and even within individual companies.
IFAC found the most widely used to be: UN Sustainable Development Goals, GRI Standards and Task Force on Climate-related Financial Disclosures (TCFD). They all live on, and the UK is not the only jurisdiction to have mandated disclosures aligned with the TCFD framework, and where regulators, standard-setters and other stakeholders are now contemplating transition plans.
A future with a global baseline of disclosure and reporting requirements, that can facilitate more meaningful, comparable, independently assured, decision-useful, financial and non-financial information on sustainability, may be shimmering on the horizon. But there’s still some way to go, and a great deal of change for preparers, auditors and assurers to assimilate.
