‘‘Sustainability reporting’ and ‘assurance of sustainability reporting’ are certainly not new concepts, especially in South Africa: ‘triple bottom ’line' reporting was introduced in the King Report on Corporate Governance, 2002 (King II) and the King Report has advocated for assurance of sustainability information for many years. The landscapes of sustainability reporting and assurance thereof are however currently undergoing rapid change.
Sustainability projects of international standard-setters have gained considerable momentum in the last year.
The IFRS Foundation Trustees announced the creation of the International Sustainability Standards Board (ISSB) on 3 November 2021. The ISSB has a mandate to deliver a global baseline of sustainability disclosures to meet capital market needs. The ISSB issued its first two exposure drafts in March 2022 and is on track to deliver its final disclosure standards in Q1 of 2023.1
There are also growing calls for assurance of sustainability information. For example, the European Parliament is expected to adopt a directive in November 2022 which will require certain companies to obtain limited assurance on their sustainability reporting, with an aim to move towards reasonable assurance.2
The International Auditing and Assurance Standards Board (IAASB) approved a Project Proposal at its September 2022 board meeting to develop an overarching standard on sustainability assurance. The IAASB leadership considered the numbering and description for the standard and concluded that International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, would be the most appropriate. While appreciating that this project is still in the project proposal stage, this article refers to ‘ISSA 5000’ when referring to the IAASB’s overarching standard for assurance on sustainability reporting.
Why develop a new standard when we already have ISAE 3000 (Revised) and ISRE 3410?
In 2022, the IAASB engaged with key stakeholders3 who acknowledged that ISAE 3000 (Revised) Assurance Engagements Other than Audits or Reviews of Historical Financial Information, ISAE 3410 Assurance Engagements on Greenhouse Gas Statements and the IAASB’s Non-Authoritative Guidance on Sustainability and Other Extended External Reporting Assurance Engagements are widely accepted and currently used to perform these engagements. Although ISAE 3000 (Revised) and ISAE 3410 remain robust and appropriate, a need was identified for standards that are focused on, and provide more specificity for, assurance on sustainability reporting.
What ISSA 5000 could look like
The project proposal indicates that ISSA 5000 will be:
- Developed for use by all assurance practitioners (professional accountants and other professionals performing assurance engagements)
- Framework-neutral, in other words suitable for assurance of sustainability information irrespective of the underlying criteria used to prepare the sustainability information
- Principles-based to be suitable for assurance engagements of all sustainability information irrespective of the reporting mechanism(s) applied by the entity
- Suitable for assurance engagements of sustainability reporting regardless of the intended users and
- Standalone – that is, the practitioner would not be expected to apply both ISAE 3000 (Revised) and ISSA 5000
The project proposal furthermore indicates that ISSA 5000 will address:
- Both limited assurance and reasonable assurance
- The conduct of an assurance engagement in its entirety by addressing all elements of the engagement, from engagement acceptance through to reporting
- Areas of sustainability assurance engagements where priority challenges have been identified
Priority areas where specificity will be provided in ISSA 5000
The IAASB intends to more specifically consider requirements and application material for the following priority areas:
- The difference in work effort between limited and reasonable assurance, including the sufficiency of evidence
- The suitability of the reporting criteria, including addressing concepts such as ‘double materiality’
- The scope of the assurance engagement
- Evidence, including the reliability of information and what comprises sufficient appropriate evidence
- The entity’s system of internal control and its impact on the ability of the practitioner to obtain sufficient appropriate evidence
- Materiality in the context of the assurance engagement, including materiality in the context of the narrative and qualitative information
What is double materiality?
The concept of ‘double materiality’ relates to the development of the content of the sustainability report. Double materiality is not an ‘assurance’ materiality concept – ISSA 5000 would reference materiality in the context of the assurance engagement.
Put simplistically, the concept of double materiality requires an undertaking to report the material information necessary to allow users of its sustainability report to understand its impacts on sustainability matters (looking ‘inside out’) and how sustainability matters affect the undertaking (looking ‘outside in’).
Source: Double materiality: what is it and why does it matter?4
ISSA 5000’s relationship with ISAE 3000 (Revised) and ISAE 3410
Unlike existing subject-matter-specific standards that build on ISAE 3000 (Revised), ISSA 5000 will be standalone. Nevertheless, ISSA 5000 will be developed in a manner consistent with ISAE 3000 (Revised).
The IAASB will also use the principles of ISAE 3410, when appropriate, in developing a baseline of definitions, requirements and application material.
Conforming amendments will be made to the scope of ISAE 3000 (Revised) and ISAE 3410 to clarify when ISAE 3000 (Revised), ISAE 3410 or ISSA 5000 apply to a particular assurance engagement.
Is it envisaged that there may be standards other than ISSA 5000 in the 5000 suite?
Yes. The project proposal indicates that the IAASB envisages that a suite of standards for assurance on sustainability reporting will likely need to be developed over time, which will be explored as part of the IAASB’s future standard-setting activities.
It also indicates that the IAASB is aware that the integration of sustainability information within the financial statements is a challenging area in practice. However, the IAASB does not plan to address this matter as part of its immediate standard-setting action or guidance. This issue may be considered as part of future standard-setting activities.
When could we expect to see ISSA 5000?
It is expected that the IAASB will publish an exposure draft in the second half of 2023 / first half of 2024. IAASB approval of the final pronouncement is expected from December 2024 to March 2025.
Sustainability assurance in South Africa
The Independent Regulatory Board for Auditors (IRBA) published Staff Audit Practice Alert 8_FAQ – Sustainability Assurance Engagements in October 2022. This IRBA publication provides assurance practitioners with a summary of key references, where to source guidance and matters to consider with respect to sustainability assurance engagements as at this point in time.
The King Report on Governance for South Africa, 2009 (King III) included a Principle5 that sustainability reporting and disclosure should be independently assured, which was expanded in the King IV Report on Corporate Governance for South Africa, 2016 (King IV).6 The King Report is however not in itself a piece of legislation. And while the JSE Limited Listings Requirements require issuers to ‘apply and explain’ their application of King IV, assurance of sustainability reporting, in general, remains voluntary in South Africa.
Regulators and standard-setters in South Africa are already discussing the future of sustainability reporting and sustainability assurance in our local environment. We look forward to how South Africa’s positioning in this area will unfold in the coming months.
Neelam Diah, SAICA Enterprise Development ESD Programme Manager
1 ISSB on track to finalise standards in Q1 2023.
2 Celsia, Corporate sustainability reporting: what will the new CSRD requirements mean for companies.
3 The IAASB’s stakeholder engagement included the Financial Stability Board, the International Organization of Securities Commissions, the European Commission, the United States Securities Exchange Commission, the International Forum of Independent Audit Regulators, the Committee of European Auditing Oversight Bodies, the International Sustainability Standards Board, the Global Reporting Initiative, the Global Public Policy Committee, the Forum of Firms and Jurisdictional / National Standard Setters.
4 Matthias Täger, 21 April 2021, ‘Double materiality’: what is it and why does it matter?, https://www.lse.ac.uk/granthaminstitute/news/double-materiality-what-is-it-and-why-does-it-matter/.
5 King III, Principle 9.3.
6 King IV, Principles 5 and 15.