ED-5000: Great milestone - and what next?

The closure of the comment period for the IAASB’s proposed sustainability assurance standard ISSA 5000 is a significant milestone on the journey to developing reliable investment grade sustainability reporting.

We should all be congratulating the IAASB on their enormous efforts to get to this stage, which involved an unprecedented level of work as well as significant outreach and discussion of their proposals, including eight roundtables on six continents.

I am particularly pleased to see the progress being made in this area at a time when the world's attention is increasingly turning to sustainability issues, including, of course, at COP28.

The exposure draft - ED 5000 - has a number of really important features. It provides a global framework that will support consistency and comparability in the assurance market. It will also help build trust among investors and other stakeholders that sustainability information being reported is reliable. The proposed standard can be used for all entities regardless of their size or complexity and is designed to address all sustainability topics including climate, biodiversity, water and human capital, covering areas such as risks and opportunities, scenario analysis, KPIs and governance. 

It can be used by both assurance practitioners who are professional accountants and other assurance practitioners with different backgrounds and qualifications and may be adopted anywhere in the world, regardless of what reporting standards are used by entities. Crucially, it supports the highest standards of quality management and ethics as established by the international audit and assurance and ethical standards boards, the IAASB and IESBA.

ED 5000 also provides additional focus on important aspects of sustainability reporting, such as the assurance practitioner's understanding of the entity’s materiality process - how the entity identifies what to report - and the risk of fraud, which includes intentional management bias and encompasses the concept of 'greenwashing'.

Although the IAASB has delivered a really important piece of work, there are some areas of sustainability reporting and assurance where both reporters and assurance professionals will need more guidance. For example, for lots of preparers, sustainability reporting requires entities to report information from across their value chain outside their own organisational boundary. This is in many cases a really tough ask - entities will not only need to source this information, but also get comfortable with its reliability. For this type of information the availability of evidence for assurance practitioners may be patchy, which raises questions about how much information is actually capable of being assured.

Another tricky area is the difference between Limited and Reasonable Assurance. The IAASB has taken steps to clarify this in the standard, including the extent of evidence to be obtained by assurance practitioners in a Limited Assurance engagement, but I still feel that some investors and user groups do not understand the difference between these two levels of assurance, which in many cases can be significant. I worry about the expectation gap this could create, and this is therefore an area where further guidance and education will be critical.

Whilst the development of ED 5000 is an important part of the journey towards reliable investment grade sustainability reporting, we are still at a really early stage. I often refer to the ecosystem in my policy work, and sustainability reporting is no different - other stakeholders within the ecosystem also have a critical role to play. These include reporting entity management, who need to develop robust reporting processes and systems of internal control; those charged with governance who need to exercise oversight and rigour in this new area; and markets and assurance regulators, to provide oversight and enforcement of both preparers and assurance practitioners.

In addition to these responsibilities of players within the ecosystem there are several other actions that I think are essential if we are to achieve the overall goal of consistent high quality reporting and assurance. 

First, it is important to build consensus around a globally adopted assurance standard as inconsistency will result in confusion. Users of reporting by large multinational clients reporting in multiple jurisdictions, for example, will particularly benefit from their assurance providers having a consistent set of global standards. At present some jurisdictions already have their own sustainability assurance standards and others may opt to delay adoption of, or modify, the global standard.

Second, regulators have a key role to play in determining whether jurisdictional ethical and quality management requirements for assurance providers are at least as demanding as the requirements set out by the IESBA and IAASB. This includes developing guidance for local use in this area and clarifying requirements to be able to assert minimum compliance.

Third, we need to be open with market participants that many early assurance reports may be qualified due to limitations on available evidence. Sustainability reporting is still immature, as are preparers’ processes and systems of internal control related to that information. The need for information from throughout the value chain only multiplies the challenge. I’d like to see markets regulators support us in raising awareness of this issue with investors so they are not alarmed by this likely trend in the initial years of reporting.

Finally, there is the question of which bodies will have ultimate oversight of the sustainability reporting ecosystem, including the supervision, monitoring and (if needed) enforcement of sustainability reporting and assurance requirements. This issue of regulatory responsibility is being actively considered in some jurisdictions, notably the EU, but in many other places it’s not yet on the agenda. It is principally a matter to be determined at a jurisdictional level so we welcome the involvement of IOSCO, IFIAR and other stakeholders with a global interest in encouraging consistent and concerted action in this area. 

In addition to the important work of the IAASB I’m also staying close to the related work of the IESBA in developing revised ethical and independence standards for professional accounting and other assurance practitioners. We look forward to responding to the IESBA’s upcoming exposure draft, scheduled for approval in December 2023.

The development of ED 5000 is a fantastic achievement and one that the IAASB should be immensely proud of. It is vital that this milestone now acts as a catalyst to drive momentum amongst regulators, preparers and the wider community so we can collectively and decisively move forward along the road to globally consistent and reliable sustainability reporting.