What do assurance practitioners need to know about ESG?

The stakeholders' environment

The first thing assurance practitioners should do is get familiar with the stakeholders’ environment around ESG reporting and be able to navigate through the complex ecosystem of regulations, rules and requirements that derives from it.

• Around ESG there is a crowded and very diverse ecosystem of stakeholders where roles are not always clearly defined and sometimes overlap.
• Among these stakeholders are preparers themselves, but also actors that will drive the preparers’ ESG requirements and actions.
• Policy makers and market supervisors on one hand (public actors driving regulation) and institutional investors on the other hand (private actors driving capital flows) play critical roles in the ecosystem – as they influence the rules defining what preparers will ultimately have to report and get assurance on.
• Other stakeholders like NGOs and civil society also play their part, and will influence the former ones.
• Policy makers can be supranational (like the European Commission) or national. They are responsible for setting the ambition and agenda on ESG (EU Action plan for sustainable finance, EU Green deal, EU climate law) that will ultimately turn into mandatory regulation (CSRD, EU Taxonomy, SFDR).
• Market supervisors are increasingly considering ESG risks within the scope of their monitoring role, and as a result, publishing guidelines that require preparers to disclose information on their ESG risks and policies. In the EU, such guidelines are issued by ESMA.
• Without having regulatory power, large institutional investors (e.g. BlackRock) have significant influence over their investees’, and are putting an increasing pressure on them regarding disclosures on ESG risks.

Frameworks, standards and guidelines

Assurance practitioners should educate themselves on the most widely known and used – and soon, mandatory – frameworks, standards and guidelines that today help preparers structure ESG information and build ESG reporting.

• Until today, stakeholders mentioned above were imposing ESG reporting onto the preparers while providing very limited guidance regarding what should be exactly disclosed and how.
• As a result, various frameworks, standards, and guidelines emerged to fill that gap. Several dozens were (and are still) created by many different parties (both private actors and emanations of public entities), but only a few of them gained international recognition and became widely used.
• Those standards are non-binding and are used on a voluntary basis.
• They provide guidance on which disclosure should be reported for each ESG topic / situation.
• They may be transversal to all ESG stakes (e.g. GRI, CDP, B Corp Impact assessment) or focused on a single topic (e.g. UN guiding principles on business and human rights).
• They may be relevant for all preparers (e.g. GRI) or designed for the specific needs of various economic sectors (e.g. SASB).
• They may have different approaches regarding what is to be considered material in the ESG reporting – here, the financial materiality (e.g. TCFD or SASB) is frequently opposed to the environmental and social materiality (e.g. GRI).

• For more on this, see 'What ESG reporting frameworks exist today?'

ESG factors

Assurance practitioners should then dive into the ESG factors that are most relevant for each preparer, and by doing so should get more knowledgeable regarding the key ESG risks and opportunities within the economy.

• The most practical way to highlight the ESG stakes that will be relevant to a specific preparer is by conducting a materiality assessment, the goal of which is to prioritise a list of ESG risks and opportunities that are material to the preparer and on which it should focus.
• Assurance practitioners should get familiar with that kind of analysis, which is today at the core of the reliable ESG reporting processes.
• In order to be able to mobilise such methodologies correctly, assurance practitioners will also have to be knowledgeable regarding the most common and critical stakes in each of the 3 ESG categories (environmental, social and governance). For example, for environmental aspects, climate change stakes cannot be overlooked; for social risks, human rights and labour rights are key.
• Assurance practitioners will gain that knowledge notably by leveraging some of the topic-specific frameworks mentioned above (e.g. CDP for environmental risks, UN guiding principles on business and human rights for social risks), but also, when necessary, by using some external documentation and even by embarking some external experts specialised on the ESG subject matter at hand.

Collaboration

Assurance practitioners will have to work together with the preparer and engage discussions on its own analysis of ESG risks, and what efforts have been made to mitigate them.

• A part of the assurance practitioners’ knowledge on ESG risks and opportunities will come from the preparers themselves, as they will have to carry their own materiality analysis and ESG risks & opportunities assessment leveraging their business expertise on their own activity.
• Once the core knowledge described above has been mastered, it is necessary that the assurance practitioners engage discussions with the preparers on their own perception of the ESG stakes relevant for them – which will ultimately help the assurance practitioners challenge the preparers and reinforce their understanding on the ESG matter.