Concerns over 'immaturity' of sustainability assurance market as demand soars

An initial market study highlights market immaturity, quality inconsistencies, and the need for a clear regulatory framework, as demand for sustainability assurance services ramps up.

FTSE 100 companies are increasingly turning to their auditors to provide assurance about some of the sustainability claims they make, fuelled by a clampdown on greenwashing and growing regulatory requirements. 

The proportion of auditors providing sustainability assurance to the FTSE 100 increased from 25% in 2019 to 33% in 2022 – according to emerging findings from a sustainability assurance market study published this month by UK regulator the Financial Reporting Council (FRC).

The FRC’s analysis found that the proportion of FTSE 350 companies obtaining sustainability assurance had increased by 19 percentage points from 2019 to 2022. In 2022, there were 64 providers of assurance to FTSE 350 companies, although 44 carried out only one or two assurance engagements. Large companies reported a choice of three to four providers, but smaller companies claimed to have fewer options. 

Assessing sustainability assurance quality

However, many companies reported difficulties in determining the suitability of sustainability assurance providers and assessing their likely quality, especially when appointing a new provider, the FRC report warns. 

Although most UK companies say they had sufficient choice of providers, some raised concerns that the market is starting to consolidate around the Big Four accountancy firms, which some respondents warn may limit market choice and effective competition in the future.

The report also highlights possible issues around consistency in the quality of sustainability assurance services, with some respondents blaming the lack of an established framework for the quality of assurance for creating inconsistencies in the market. 

Lack of clarity on regulatory requirements

The UK’s approach to sustainability assurance is yet to be defined, but without an established regulatory framework, the UK sustainability assurance market may not produce consistent, high-quality sustainability information for decision-making, the study warns. 

Respondents to the study said there was a clear need for clarity on likely future regulatory requirements to enable adequate planning, investment and future compliance. Many also said they would like any UK regulatory requirements to be fully interoperable with other international regulations.

The FRC's Executive Director of Regulatory Standards, Mark Babington, said for many investors, sustainability-related reporting is becoming an increasingly prevalent factor in their decisions to allocate capital and invest in UK companies.

“Independent assurance of this reporting is vital in ensuring trust and transparency in companies non-financial reporting. These emerging findings demonstrate the increasing demand for sustainability assurance that we are continuing to see from UK companies,” Babington said.

CSRD impact on sustainability assurance

Growth in the number of organisations seeking sustainability assurance is likely the result of international changes affecting some UK companies, for example the EU’s Corporate Sustainability Reporting Directive (CSRD), which requires certain aspects of the business to be externally assured.

At the same time, development of the UK corporate governance code is ramping up expectations around the material controls that large and listed organisations have in place around their sustainability claims. In particular, the Economic Corporate Crime and Transparency Act makes it a criminal corporate offence to fail to prevent greenwashing or inaccurate or misleading claims about a company’s ESG credentials. 

Carolyn Clarke, Founding Partner of governance consultancy BRAVE, says companies need to determine how external skills are combined with their internal capabilities to provide assurance to directors. “You need to be confident that the things that you're saying about sustainability are founded in truth, in processes, in behaviours in the organisation,” Clarke tells CSO Futures. 

“Where there is an internal audit function, it should be possible for boutique firms to be engaged and to work under the auspices and standards of internal audit to provide meaningful assurance using a recognised methodology. If there is not an internal audit function and the assurance needs to be provided entirely independently, the key question is how to combine the skill set and recognised methodology of audit, with the expertise around non-financial issues that tends to be more widely available within boutique firms.”

Sustainability assurance skills shortage

However, Clarke warns that the combination of scientific knowledge overlayed with experience in following assurance-type standards remains in short supply. “There's no shortage of auditors, and there's no shortage of scientists. The challenge is the coming together of those two disciplines in a meaningful regulatory context,” Clarke says. 

Clarke says being clear on the sustainability commitments your organisation is making and to whom is the starting point for success. “The alphabet soup of different reporting requirements does make it more difficult, because you've got to work out that whole picture. 

“Be clear about what assurance you have internally over what and how and who's responsible for it. And make sure you understand stakeholder expectations about the need for an external perspective and where you need to go for external assurance.” 

Clarks also urges organisations to be clear on where responsibility for sustainability assurance programmes sits internally – for example, the audit committee or a sustainability committee – and where the resource and budget to coordinate this comes from. “Without that clarity, you'll have multiple people trying to do the right thing, but there'll be a risk of excess cost and duplication, or things falling between the cracks.”