Investors in listed entities

Shareholders or funds need information to inform their investment. They also make decisions around what the direction of the entity should be and how this should influence their voting at AGMs. To understand this, investors need to decide:

• Does the entity offer the risk/return profile that they are looking for?
• Does the entity fit with their strategy or mix of investments?
• Does the entity meet their minimum ESG investment criteria?
• Are there hidden risks (e.g. greenwashing)?

Assurance itself provides investors with comfort over the robustness of the information being assessed. Investors must understand any caveats to an ESG assurance report, as this will impact the nature of the assurance, along with the reporting criteria that the assurance practitioner will be assessing the subject matter information (ESG metric) against.

Investors also use ESG assurance reports to understand which metrics are most important to the entity or which metrics the entity sees as most important to stakeholders. Large banks often obtain assurance over selected metrics including in the area of environmental and social finance, which is where their potential impact is greatest.

ESG assurance reports can also communicate where there is underlying risk, e.g. if a metric changes significantly in the first year that it is assured, but not before or after. This may indicate that issues were found during the assurance process which materially changes the metric, and so the historical metrics may be incorrect, and this may indicate a lack of strength in the control environment at the entity.

Which metrics are assured can also indicate whether a entity is out of step with the industry; for example if there are commonly-assured metrics over which the entity does not get assurance this can indicate a lack of awareness or focus. Conversely, if an entity gets assurance over metrics which are not commonly assured this can indicate a market leading position or an inclination to look further ahead. For example, Baillie Gifford obtained limited assurance over disclosure in their Positive Change Impact Report before many entities were considering ESG assurance.

However, getting assurance over an unusually high number of ESG metrics can also indicate a lack of focus in the entity.

Directors of family-run or large private entities

Directors of family-run or large private entities need to make decisions about the strategic direction of the entity. To make these decisions, they need to understand:

• What is the current strategic direction of the entity?
• What would be the optimum strategic direction of the entity for the future?
• What do they need to change to reach the optimum strategic direction, and how can they make this change?

When changes require engagement with external parties, obtaining assurance over key metrics can enable and enhance discussions, e.g. the cost of capital and access to financing is now increasingly influenced by ESG reporting/metrics.

We are also seeing more focus on ESG disclosures within large private entities. For example, highlighted by the recent FRC Thematic review on SECR disclosures (FRC SECR Thematic Report 2021). Assurance over those disclosures helps to enhance their credibility.

Private ESG assurance reports can provide the directors with comfort over key information, e.g. metrics which form the basis for remuneration or metrics which are pivotal to the entity’s strategy.

Direct stakeholders (e.g. management, customers, suppliers, lenders, insurers)

Direct stakeholders need to decide whether to engage with the entity or not, and how to engage with the entity. To make these decisions, they need to understand:

• Will the entity do what they say they are going to do?
• Does the entity look beyond itself to consider its place in society and the world, especially where required by the direct stakeholder?
• How ESG data from customers and supply chains align with a entity’s own ESG policies, procedures and disclosures.

Direct stakeholders use ESG assurance reports to understand how serious the entity is about ESG (versus its peers or the sector), and from analysis of ESG assurance reports over time and in combination with ESG reports, to indicate more broadly how or whether the entity follows through with plans committed to in the ESG Report.

The metrics the entity chooses to have assured will give direct stakeholders an understanding of the entity’s priorities, and decide whether these align with their values. It could also be possible to see the impact of stakeholder engagement programmes on the choice of ESG metrics to be disclosed and assured. Furthermore there is an increasing integration of customer and supplier ESG reporting with, for example service providers, and particularly given the focus on measuring, reporting and assuring scope 3 indirect emissions.

Direct stakeholders are increasingly requesting different types of ESG assurance. This includes in sustainable finance, for example sustainability linked loans or the use of proceeds assurance for Green Bonds, or the use of ESG assurance to support a change in strategy across a supply chain, for example the recent ESG linked supply chain financing issued by Tesco.

Indirect stakeholders (e.g. government, regulators, charities)

Indirect stakeholders primarily use ESG Assurance reports for information and data gathering, and then use that dataset to inform decision-making. They need to understand:

• How the entity affects its environment.
• In the case of the government, are policy changes needed?
• If policy changes are implemented, what might the effect of policy changes be?

These stakeholders are more likely to analyse ESG reports and ESG assurance reports over time and as part of a large dataset, to assess trends in reporting, reported numbers or industry-level impacts.

Governments looking to change policy to decrease greenhouse gas emissions can use assured emissions data to gain insight into the effects of past policy changes and model the impact of future changes.

Where assurance is required by legislation, indirect stakeholders can assess the impact of policy change over time to understand whether further changes to legislation are needed.

Internationally NGOs can use ESG assurance reports to assess the impact of key projects, e.g. the introduction of the UN Sustainable Development Goals to help inform future ESG initiatives.

Future use of ESG assurance reports

The recent increase in demand for ESG assurance reports should aid decision-making. This may be driven by increasing stakeholder demand as well as changes in mandatory disclosure, e.g. the Taskforce on Nature-related Financial Disclosures.

This could also be driven by forthcoming legislation which specifically demands assurance, such as the Corporate Sustainability Reporting Directive.