The IAASB is taking the next steps for new standards for ESG assurance.
With global assets in sustainability and ESG-related investment vehicles due to surpass $53 trillion by 2025, the need for reliable, neutral, and comprehensive frameworks for reporting sustainability information is evident. And policymakers and regulatory bodies have taken note. The European Union (EU) continues to negotiate terms for its Corporate Sustainability Reporting Directive. This past March, the U.S. Securities and Exchange Commission proposed new rules regarding disclosure of climate-related risks. The newly formed International Sustainability Standards Board (ISSB), which has support of the G20 and others, issued their exposure drafts for sustainability reporting for public comment. The International Organization of Securities Commissions and Financial Stability Board weighed in on climate-related disclosures as well.
As a result, we face a critical moment: the growing desire globally to develop reliable, high-quality sustainability reporting as a key element of corporate reporting is leading to new requirements and heightened expectations. This will be a journey, and some level of patience is needed. The data capture, information systems, and processes within many organizations needed to report reliably on sustainability are, understandably, in the process of maturing.
Like in the world of financial reporting, external assurance has a key role in contributing to reporting reliability. Supporting investors and regulators’ trust in the sustainability information reported is the goal. Robust assurance standards that offer a consistent approach across borders for opining on organizations’ sustainability reports should facilitate that goal.
We at the International Audit Assurance and Standards Board (IAASB) hear the need for a global assurance standards solution. The IAASB already has well-established principles-based and subject-specific standards and guidance that are being effectively applied. But we know there is further work to be done in bringing the existing standards and guidance together and supplementing them to address assurance of sustainability reporting specifically.
We’ve recently taken a big step forward; our March 2022 meeting provided our first opportunity to discuss the IAASB’s actions in responding to the urgent need for an international assurance framework for sustainability reporting. In the discussion, the IAASB heard directly from investors that the reliability of sustainability reporting is crucial for decision making. The need for urgent and effective action, which balances global consistency and flexibility to accommodate regional variations, was clear.
The IAASB is committed to leading this effort to create new “sustainability bespoke” assurance standards. We are now in the process of identifying the specific approach to building these standards that will have the greatest impact on establishing high-quality assurance to support reliable sustainability reporting. We have determined that the new sustainability assurance standards will need to be framework-agnostic and principles-based—they will need to work with all sustainability/ESG reporting frameworks. We also expect that the sustainability assurance standards will need to be developed in a phased approach. Initial actions shall focus on an overarching standard that addresses all areas of the engagement in principle, with specificity provided on key areas. Specificity across non-key areas of the assurance engagement will develop over a longer time horizon, factoring in the maturity and evolution of sustainability reporting and assurance.
We will be discussing the approach to standard-setting on sustainability assurance at our IAASB meeting next week. The IAASB is hoping to have the proposed new sustainability assurance standards ready for public comment during the second half of 2023. Moving at this speed is possible in part because the current International Standards on Assurance Engagements (ISAEs), together with the non-authoritative sustainability assurance guidance, provide a robust starting point. We also plan to leverage the principles embedded in our International Standards on Auditing (ISAs), which are already used in 130 countries, are well known throughout the marketplace, and are trusted by investors and regulators.
Building a mature reporting and assurance ecosystem for sustainability will not happen overnight. The evolution of the ISAs, for example, has been an iterative affair since the 1970s. The process will—and should—take time. Nevertheless, to make progress, we cannot let perfect be the enemy of the good. Over time, as preparers, auditors, regulators, and investors gain experience, we can expect reporting frameworks and assurance standards to become increasingly refined, just as financial standards have evolved.
To continue to make progress, all stakeholders will need to remain in close collaboration. This will enable us to move quickly and boldly where and when we can. We expect a rapid transformation to occur in this space over the next decade. From there, global sustainability standards, like global financial audit standards, will be a stable platform, and our focus will on almost certainly be on continuous improvement.