Vacuum Threatens UK Sustainability Assurance Market
Calls to regulate the sector increase amid competition and quality concerns highlighted by the Financial Reporting Council.
A continued absence of regulation could stymie the development of the UK sustainability assurance market, exacerbating a lack of consensus on how services should be provided and by whom.
Key areas in need of resolution include which body should be tasked with overseeing the market and whether the responsibility should be shared with non-audit firms to prevent a Big Four monopoly.
Initial feedback was published last week to a UK Financial Reporting Council (FRC) market study on the country’s burgeoning sustainability assurance market. It considered how well the market is functioning, including whether it is delivering high-quality assurance without creating undue burdens and costs, and how the market could evolve in the future.
In 2022, there were 64 sustainability assurance providers, evenly split between audit and non-audit firms. Entities in the latter group included engineering firms, sustainability consultancies and industry-specific inspection and certification bodies.
Emily Ford, Policy Adviser at the Chartered Governance Institute UK & Ireland (CGI), told ESG Investor, this variety was a “good thing”, contrasting it with the dominance of audit firms in European markets.
“Any future regulation would do well to preserve and protect it,” she said.
But Tim Bush, Head of Governance and Financial Analysis at the Pensions and Investment Research Consultants (PIRC), argued that sustainability assurance should fall under the remit of auditors only.
“Investment consultants, for example, have no statutory bearing in signing off on sustainability-related numbers that appear in annual reports,” Bush said, noting that they are “essentially actuaries by a different name”.
In contrast, such an exercise already falls under the remit of auditors.
The FRC reported an increase in the proportion of auditors providing sustainability assurance to FTSE 100 companies, from 25% in 2019 to 33% in 2022. Further, 38% of auditors are providing sustainability assurance to FTSE 350 but only 12% are serving FTSE 250 companies.
Some respondents told the FRC the UK sustainability assurance market runs the risk of becoming dominated by the Big Four audit firms – EY, Deloitte, PwC and KPMG – limiting future choice and effective competition.
These firms have been under heightened scrutiny following high-profile audit scandals, such as the collapse of Carillion in 2018.
“We shouldn’t let the desire for competition between service providers get in the way of a laser focus on quality,” said Jen Sisson, CEO of the International Corporate Governance Network (ICGN).
ICGN consulted its members and found investors to be “agnostic”, highlighting the importance of consistency and quality – regardless of who provides it.
“Appropriate independence and quality control functions are crucial, as well as having the right expertise and transparency,” Sisson said.
“We also believe the assurance provider must be instructed by the board of directors, rather than the executive team, and view the company’s investors as their ultimate clients. This is key to foster trust in corporate sustainability reporting.”
Constructing a rulebook
The FRC report raised concerns that the UK sustainability assurance market “may not produce” consistent, high-quality sustainability information for decision-making without an established regulatory framework.
Further, a current lack of clarity on the UK’s regulatory position on sustainability assurance could hinder investment, planning and capacity development by providers, respondents to the market study said, calling for transparency and clarity.
Mandated sustainability-related disclosures in the UK – such as the Task Force on Climate-related Financial Disclosures – call for third-party assurance of aligned reporting, but there are not yet rules in place for who should carry out sustainability assurance and how it should be carried out.
Recent international developments include the International Auditing and Assurance Board’s ISSA 5000 sustainability assurance standard, and the International Ethics Standards Board for Accountants’ (IESBA) consultation on proposed frameworks for expected behaviours and ethical provisions for sustainability assurance providers.
In addition, the EU’s Corporate Sustainability Reporting Directive (CSRD) requires large companies to publish specified sustainability information and obtain limited assurance over aligned disclosures.
“There is a need for clarity in reporting and assurance requirements to enable all firms to invest with certainty and address any gaps in capacity and expertise,” a spokesperson for the Institute of Chartered Accountants in England and Wales (ICAEW) told ESG Investor.
“It is important that there is capability and capacity across all tiers of firms to address risks of market concentration, improve competition and choice, and strengthen the resilience of the fledgling assurance market.”
In July, the ICGN issued guidance to investors on how to interpret emerging sustainability reporting assurance standards.
“We encourage the FRC and other national regulators to adopt these upcoming international standards, in order to have consistency in assurance engagements globally, regardless of who conducts the assurance,” said Sisson.
The promise of ARGA
Others argue that the FRC should not be the authority to regulate the sustainability assurance market, because of its expected but long-delayed replacement.
PIRC’s Bush said that any regulation should be the responsibility of the much anticipated Audit, Reporting and Governance Authority (ARGA), which will replace the FRC.
The establishment of ARGA has been subject to lengthy delays, although legislation was included in the most recent King’s Speech.
“Any action taken needs to wait until we know where we are with ARGA,” Bush said.
In the interim, CGI has called for the establishment of a code of conduct for sustainability assurance providers.
“This could be applied on a voluntary basis whilst regulation is under development and would allow providers to demonstrate the quality and rigour of their important work,” said Ford.
The FRC has invited stakeholders to provide further input until 29 November and will produce a final report outlining proposals for action by early 2025.
“Disclosure of a company’s sustainability-related risks, opportunities and material performance metrics […] helps investors make informed decisions around investment, risk management and stewardship, and supports investors’ own reporting to their clients and beneficiaries,” said Sisson.
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