Assurance is a very critical component of corporate financial reporting and enhances the credibility of the reported information. This article explores how assurance, both limited and reasonable, is extended to corporate sustainability reporting in the US and the EU.
Corporate Sustainability reporting is no longer a “good-to-have” virtue signaling tool but a “must-have” regulatory requirement, thanks to the ongoing and upcoming disclosure regulations, most notably in the US and the European Union (EU). While many large companies have been voluntarily reporting their sustainability or ESG performance for several years now, many more companies have to start mandatorily reporting their sustainability performance. This includes about 7000 listed US firms and about 50,000 firms in the EU, once the sustainability disclosure regulations proposed by the US Securities Exchange Commission (SEC) and the EU’s Corporate Sustainability Disclosure Regulations (CSRD) come into effect.
While the proposed US SEC rules relates only to climate related disclosures (or a part of the “E” in ESG), the EU CSRD is more vast in scope(more here) and covers several aspects covering Environmental, Social and Governance (all of ESG) topics. More details on the differences between the proposed US SEC and EU CSRD can be found here.
One of the key components of both the proposed regulations is “assurance”, especially the transition from “limited assurance” to “reasonable assurance”. For the uninitiated, limited assurance is based on less rigorous tests and evidence than reasonable assurance, and naturally less reliable(more details here). For reporting firms, the reporting costs will increase as they move from limited assurance to reasonable assurance. Both the US SEC and EU CSRD propose to use limited assurance as a stepping stone to reasonable assurance over a period of time.
When firms were voluntarily reporting their sustainability performance, they had a lot of discretion over what to report and what not to. In other words, they could cherry pick the information that showed them in good light, and report only that information. According to a 2021 Center For Audit Quality (CAQ) report, while 95% of the S&P 500 companies had published detailed ESG information, only 6% of the S&P 500 companies had received independent audit assurance over some of their ESG information.
Since no “assurance” was required for voluntary reporting, there was no way for investors or other stakeholders to confidently act upon a firm’s sustainability performance information that was not independently validated. The lack of “assurance” puts a question mark on the credibility of such reports. Even the EU Non-Financial Reporting Directive (NFRD), which is currently applicable for several European firms, specifically requires statutory auditors and audit firms to only check if a non-financial report has been provided by the reporting firm, and not on the reported information. This is changing. In this article, we examine the assurance requirements of US SEC climate disclosure and EU CSRD proposals.
1. US SEC Disclosure proposal
As highlighted earlier, the SEC proposal is limited to climate related disclosures. The two aspects relating to assurance are the coverage and the timeline. On the former, assurance is required for a firm’s Scope 1 and Scope 2 GHG emission disclosures. Interestingly, assurance of Scope 3 is left out. On a related note, investors like Blackrock are pushing for relaxation of the proposed Scope 3 disclosure norms(more on Scope 1,2 and 3 emissions can be accessed here).
As far as timelines are concerned, a phased approach is proposed to move from the first disclosure to limited assurance to reasonable assurance. The timelines also vary for the small and large filers. The assurance timetable is given below.
| Filer Type | Scopes 1 and 2 GHG
Disclosure Compliance Date |
Limited Assurance | Reasonable Assurance |
| Accelerated Filer | Fiscal year 2024 (filed in 2025) | Fiscal year 2025 (filed in 2026) | Fiscal year 2027 (filed in 2028) |
| Large Accelerated Filer | Fiscal year 2023 (filed in 2024) | Fiscal year 2024 (filed in 2025) | Fiscal year 2026 (filed in 2027) |
For more details, refer to the US SEC Proposal document here
2. EU Corporate Sustainability Reporting Directive (CSRD)
The scope of reporting under the proposed CSRD is much broader than the US SEC rules. In addition to reporting on environmental issues related to climate change mitigation like scope emissions, CSRD also requires reporting on topics like Climate Change adaptation, water resources management, resources use and circular economy. Reporting on social and human rights issues cover gender equality, diversity, employee health and safety, to name a few. Governance issues cover, among other things, internal control and risk management systems related to sustainability reporting, anti-corruption, protection of whistle-blowers and lobbying.
On June 21, 2022, the European Council announced a provisional political agreement between the European Council and European Parliament on the CSRD, which means that the CSRD is likely to have cleared political hurdles on its way to becoming legislated in all the EU member countries. One of the key updates related to the changes to the implementation timeline(more here).
The announcement reiterates the importance of ensuring the quality of reporting and the mandate to certify the sustainability reports by an accredited independent auditor or certifier.
Assurance Coverage
The coverage of the assurance is unclear at the moment, and will depend on the sustainability reporting standards(ESRS) currently being developed by EFRAG. The first set of reporting standards should be adopted by 30 June 2023 and the second set by 30 June 2024. Assurance on forward-looking information has been mentioned in the proposal.
Timelines for limited and reasonable assurance.
The revised CSRD proposal mentions that while the objective is to have the sustainability reporting assurance at par with financial reporting assurance, the lack of a universally agreed standard for the assurance of sustainability reporting necessitates a gradual progression from a limited assurance to a reasonable assurance. The proposal indicates that the European Commission should adopt assurance standards for limited assurance before 1st October 2026 and reasonable assurance standards no later than 1st October 2028. The reasonable assurance of sustainability reports will become mandatory once the standards are adopted.
For more details, refer to the EU CSRD proposal here.
Conclusion
Assurance is a very critical component of the sustainability reporting regulations and ensures quality reporting. While the US SEC assurance requirements focus only on Scope 1 and 2 emissions, the EU CSRD assurance requirements are quite exhaustive and the process can be complex.
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