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RR86 - The future of sustainability assurance
Zadek and Raynard, 2004
Executive summary
The goal of sustainable development requires that organisations take responsibility for their social, environmental and economic impacts. Credible information about performance is crucial in effectively managing these impacts and communicating with diverse stakeholders. Organisations are therefore seeking to give assurance concerning how their actions and impacts affect their stakeholders.
A variety of approaches has been developed to satisfy the demands of managers, trading partners, investors, consumers, regulators and non-governmental organisations (NGOs) for relevant, timely and accurate information relating to aspects of economic, social and environmental performance. This report provides a review of the current state of sustainability assurance and offers perspectives on where it is going in the future.
What is Assurance?
Assurance is an evaluation method that uses a specified set of principles and standards to assess the quality of an organisation’s subject matter and the underlying systems, processes and competencies that underpin its performance. Assurance includes the communication of the results of this evaluation to give the subject matter credibility for its users. Auditing, verification and validation are some of the tools and processes by which assurance is obtained. Various organisations (audit firms, NGOs, quality assurance consultants) and individuals (opinion leaders) provide assurance. Assurance often is assumed to apply only to a company’s published reports, but it applies equally to the assurance of the company’s underlying systems and processes, as well as its products, services and governance.
Four dimensions and eight key questions have been used to map the current diverse approaches to assurance and to signpost possible future directions for development.
1. Assurance appetite
What is assurance for?
- Meeting legal compliance requirements: eg for financial and environmental reporting.
- Convincing: building trust and credibility or gaining specific certification.
- Decision-making: ensuring credible information to facilitate decision-making by stakeholders.
- Learning: improving management systems through use of standards and processes of continuous improvement.
Who is assurance for?
- Indoor stakeholders: management and board concerned with risk and value creation require assurance that information is accurate and complete.
- Back-door stakeholders: investors and regulators interested in assurance that looks at risk and legal breaches.
- Front-door stakeholders: media and NGOs remain cynical about assurance. Some customers are responsive to product certification.
The bottom line
Generalised public reporting has so far driven external assurance but may not in the future. Assurance is not simply about boosting the credibility and usefulness of an organisation’s claims to the outside world. Companies at the forefront of sustainability assurance developments recognise that it plays a key role in ensuring the credibility and usefulness of information flows within the organisation, particularly information from non-traditional and non-commercial sources. There may come a time when public reporting is seen to be an end-of-pipe mechanism that is part of a wider set of approaches to providing assurance employed by organisations to their stakeholders. This will mean that other drivers of external assurance will appear, as demands arise for greater alignment between stakeholders’ and business’s imperatives.
Therefore, sustainability assurance that is conducive to the fulfilment of different stakeholder needs will be more effective in enabling accountability to drive performance improvement. Limited forms of assurance, which guarantee data accuracy and reporting of well-established issues, can help to deliver accountability to consumers and civil society as well as performance in terms of compliance with basic standards. However, there are likely to be complex trade-offs between different areas of impact or controversies over whether issues fall within a company’s responsibility or challenges that require completely new ways of working. Consequently only assurance that ensures that more than lip service is paid to stakeholder engagement, and that ensures measurement and management systems are able to translate this into learning and innovation, will be able to deliver the requisite performance changes.
2. Assurance methodology
What standards and principles govern the assurance process?
Standards inform assurance by providing normative frameworks, management standards, or process and reporting standards. They can be:
- definitive frameworks based on international agreement or accepted science
- membership requirements for specific markets or organisations
- stakeholder standards that codify concerns of stakeholder groups
- legal frameworks backed by compliance mechanisms or the potential for litigation.
What level of assurance is offered?
There are different levels of assurance.
- Data – is the information presented accurate and complete?
- Systems – are the systems for collecting data and managing performance robust?
- Materiality/risk – is the scope of information provided sufficient? What are the implications for the company?
- Compliance/responsiveness – is the organisation meeting its commitments, responding to stakeholders and complying with standards?
- Commentary – how well is the company doing? What else should it be doing in this area?
The bottom line
A range of principles and standards can be used to govern the assurance process and provide benchmarks and guidance for carrying out the assurance engagement. The emerging global architecture of standards can be understood better when framed by two distinct sets of characteristics – what they govern and how they bite. Standards govern in three distinct ways: by prescribing what an organisation should or should not do (eg normative frameworks or laws); by providing guidance on how to do it (eg management standards); and by prescribing what an organisation should account for and how (eg process and reporting standards). Standards then ‘bite’ in the following ways: by providing the last word on an issue; by providing an entrance into a rating system such as the Dow Jones Sustainability Index (DJSI); by codifying stakeholder concerns; and by their basis in law.
One key remaining gap in the array of standards on offer, identified both by technical bodies and multi-stakeholder initiatives, is a common process framework for reporting and assurance of sustainability. This would require a complementary set of Generally Accepted Accounting Principles for Sustainability (GAAPS) and Generally Accepted Assurance Standards for Sustainability (GAASS), as well as a definitive management system standard (eg SIGMA). The GAASS would need to provide a common platform for assurance, integrating the range of standards that provide guidance in specific areas.
3. Assurance scope
What issues are covered?
Assurance can cover specific areas of performance:
- social, eg human rights, labour standards, diversity
- environmental, eg emissions, energy use, environmental management systems
- economic, eg financial performance, multiplier effects.
What level of organisation is covered?
Assurance may cover different organisational units:
- specific, eg supplier audits, product level assurance and labelling
- company level – the assurance of statements, systems and metrics covering the whole company or group. This may take the form of assurance of a sustainability report, separate social, environmental and financial reports, or stakeholder engagement processes.
The bottom line
While some assurance approaches focus on a predefined set of performance indicators (financial profit and loss, carbon emissions or child labour, for example), sustainability assurance aims to capture the entirety of a company’s impacts. Limited-scope assurance is useful for stakeholders interested in specific issues (a product line free from genetically modified organisms, for example) and for managers of functional areas. Sustainability assurance must cover these issues as well as emerging areas and risks, which cannot be captured with predetermined and limited scope. It is here that the material issues of concern to stakeholders will be key in defining the scope.
Materiality will be an ever-present issue, as it is in financial auditing, but it seems to be today’s hot topic. For those involved in sustainability reporting, it is deemed to be the key issue in disclosing relevant and meaningful information to stakeholders, as well as persuading the financial markets of the importance and relevance of sustainability. One of the key challenges will be in balancing out the power and influence of stakeholders, where because some stakeholder voices may be louder than others (eg media vs community group), certain issues are seen to be more material than they actually are, while others are not considered important. Nonetheless, assessment of materiality to stakeholders must form the basis of determining scope within sustainability assurance.
4. Assurance providers
Who provides assurance?
Assurance is carried out by a range of different providers.
External:
- audit professional
- corporate social responsibility (CSR) specialist consultancy
- civil society organisation
- opinion leaders/advisory panel.
Internal:
- functional areas
- risk assessment/internal audit
- board level.
How are they able to offer assurance?
A range of competencies is necessary:
- credibility/stakeholder representation
- general assurance competency, eg in checking data, understanding the role of assurance and analysing systems
- process competencies, eg communicating with stakeholders, determining materiality and assessing the company’s responsiveness
- substantive/content competencies on relevant social, scientific, economic and industrial issues.
The bottom line
Assurance providers of sustainability reports and processes are an eclectic grouping and reflect the diversity of subject matter and approaches to assurance. They also reflect the different appetites of stakeholders. Generally, civil society and opinion leaders tend to make more normative and prescriptive judgements, akin to evaluations of substantive performance. Professional accountants, quality assurers and CSR consultancies follow an approach similar to that in financial audit reports and limit themselves to more clearly delineated judgements about the accuracy of the data and systems that produced the information. Within the company itself, staff from relevant departments, the internal audit function and members of the board also have responsibility for collecting and verifying information and providing appropriate levels of assurance to others.
No single assurance provider is able to assure the sustainability of an organisation. Multiple sources of legitimacy and expertise will need to be involved in sustainability assurance, reflecting technical and process competencies and specific expertise. This is neither a feature of the newness of the field nor of the inexperience of those involved, but it reflects the need to understand information and concerns from outside commercial and professional spheres.
The future of sustainability assurance
In order to speculate on the future direction of the field of sustainability assurance and understand the kinds of dynamics that are likely to lead towards different outcomes, we have outlined three different colour-coded scenarios for the next 15 years.
Grey
Legislation is introduced, requiring companies to disclose a range of social and environmental performance indicators. Assurance focuses on data accuracy but has little effect on improving performance.
Gold
A set of overarching GAASS is established. Assurance moves away from a limited focus on public reporting to providing information for learning and innovation based on stakeholder engagement and examination of management systems. This is accompanied by enabling legislation.
Black
A multitude of competing assurance approaches initially flourish but lack of rigour leads to tarnishing of the assurance profession by involvement in mismanagement scandals. Assurance becomes an internally-directed tool for ensuring legal compliance.
The grey scenario offers universal application and mainstreaming beyond leading companies. However, reporting and assurance become removed from stakeholders’ concerns and the basis on which performance is achieved. In the black scenario, approaches to assurance flourish at the outset but end in a collapse of credibility and a return to greater regulation of business’ social and environmental impacts – with all the strengths and weaknesses that national regulation of the international business environment implies. The gold scenario provides flexibility with rigour and offers the greatest contribution to sustainable development through assurance and more enabling legislation. It remains the most ambitious outcome for advocates of sustainability assurance to aim for.
In order to see where experts in the field believe sustainability assurance will be in 2010, we asked them to give their ‘real world’ views, using the scenarios as a point of reference.
Respondents believe that the current diversity in approaches is likely to continue over the medium term, reflecting the needs of companies and stakeholders in relation to different industries, issues, cultures and national regulatory environments. They identify a series of mechanisms in which best practice in assurance is likely to be developed and mainstreamed over coming years, through the leadership of pioneering companies and practitioners, development of voluntary and professional standards, and finally ‘soft’ enabling regulation. Views centre on a number of key tensions and problems facing the development of a robust and widespread assurance methodology. These include: the need to ensure both materiality and comparability, the issue of assurer liability, the problem of how to integrate the ‘three pillars of sustainability’ and the need to demonstrate that the benefits of assurance justify its costs.
A crucial step towards addressing these tensions and realising the gold scenario is the development of GAASS. To be effective drivers of enhanced organisational sustainability, these would have the following characteristics.
- Focus on driving performance. Assurance of timely and appropriate data and underlying systems is essential to enable stakeholder decision-making and compliance with standards and policies. Assurance that incorporates stakeholder engagement will go further in capturing controversial and contested areas of responsibility and driving necessary learning and innovation.
- Based on materiality and stakeholder engagement. Assurance that is limited to a predefined set of issues may overlook issues material to the present and future decisions of stakeholders and the health of the company. A redefinition of materiality is needed, that does not limit assurance to a predefined set of issues but defines it in relation to the full range of compliance requirements, policy positions, peer-based norms and stakeholder concerns affecting the organisation.
- Enable a range of organisations and individuals to provide assurance. No single assurance provider is able to assure the sustainability of an organisation. Multiple sources of legitimacy and expertise will need to be involved in sustainability assurance.
- Build on diverse assurance processes. Specific assurance processes have been developed to meet different stakeholder appetites (these include financial assurance, supply chain assurance, labelling schemes, etc). GAASS would not replace these, but provide a common platform for overall assurance, which would go further in understanding trade-offs, emerging issues and the relative importance of different areas of impact.
- Enable integration. Assurance must be able to provide an evaluation of an organisation’s overall performance and forward-looking indications of its abilities. Integration is not only a matter of aggregating information flows from within the company and from specific assurance processes but also of ensuring the quality of these systems, which underpin performance.
Issue-specific standards (eg SA8000) and audit-type assurance standards currently in development by accounting bodies (eg ISAE3000) offer the foundations for what could become a more stabilised architecture of standards for assurance. However, what is not clear is the extent to which such developments can provide a common platform for assurance that includes the required wide array of assurance processes and levels inherent in assessing sustainability.
What is required from standard developers, business and civil society groups is cooperation and the consequent development of an architecture of standards that integrates accounting, reporting and assurance of sustainability. The Global Reporting Initiative (GRI) provides the basis for a generally accepted reporting standard into which other standards can be drawn. The AA1000 Assurance Standard offers the basis for a common platform for assurance that allows for the inclusion of other specific standards, such as SA8000 and ISAE3000. It allows for the inclusion of stakeholder views in determining materiality and enables different assurance providers and levels of assurance to be used within a single assurance framework. AccountAbility and the GRI are consequently working closely to facilitate harmonisation between sustainability reporting and sustainability assurance.
For sustainability assurance to contribute significantly to sustainable development it must become the way that organisations attest to their overall performance. This will neither happen by chance, nor because it says so in any standard, but will come about only if sustainability assurance can prove itself by providing a better set of signals about an organisation’s ongoing health and performance than financial figures alone.
This partly will be dependent on the development of GAASS with the characteristics outlined above, but also on the ability of regulators, investors, pricing mechanisms, industry and consumers to use this information to affect the business environment, ensuring the internalisation of environmental and social costs and catalysing significant changes in patterns of production and consumption. If this happens, sustainability assurance will become less driven by the need to appear trustworthy to all and more aligned to the needs of investors, regulators and managers to identify, reward and invest in strategies that deliver innovation and performance.