Mandatory climate reporting

Climate-related financial disclosures need assurance: ‘limited’ then ‘reasonable’. What does this mean?

Mandatory statutory financial auditing has been established in some global jurisdictions for decades and is a routine activity in annual business operations. The processes, systems, internal controls, skills and structures that we see across mature businesses today support their ability to comply with mandatory auditing requirements.

However, a new era is upon us. Countries around the world are mandating climate-related financial disclosure with, over time, a requirement for those reports to be subject to limited and then ultimately, reasonable assurance. The structures that exist in companies today to support financial disclosure do not automatically nor easily support climate-related financial disclosure. From the outset, agreement must be reached across sustainability, strategy, risk, legal and finance functions to determine what is financially material information as relates to climate risks and opportunities. In addition to bridging this divide between the functions, a business needs robust approaches to not only understand and disclose climate-related financial issues, but also ensure they have the mechanisms to manage them as part of a broader climate strategy.

Currently the processes and systems that many companies have for sustainability and climate risk reporting are immature - relying on less sophisticated tools like manual spreadsheets with very few standardised controls. Some are building internal audit capability, but they are the exception.

Structural changes normally take time for a business. So, while under the new climate reporting regime the assurance of all required disclosures does not begin immediately, and for some businesses may be a number of years away, the extent of the preparations needed to reasonably assure climate-related financial disclosures means that work needs to be underway now.

In August this year ERM CVS (Certification and Verification Services – part of the ERM Group, but operating independently), ran a webinar titled “What to consider in moving towards reasonable assurance” which covered topics such as:

• Market trends and the growing need for reasonable assurance
• The difference between limited and reasonable assurance
• Methods for conducting reasonable assurance
• Why it’s important to address this now
• Preparation checklist.

The speakers from ERM CVS are Australia-based Matty Lunn, Partner and Asia Pacific Lead for Assurance and Certification, Sylvia Choi who is Technical Director Corporate Assurance and an expert in CSRD, and Riley Shaw. Riley is a Project Manager in ESG Corporate Assurance. This article discusses some of the webinar's highlights.

A global trend

ESG-related regulations are becoming more prominent across geographies. In APAC, for example:

• The Singapore Stock Exchange (SGX) requires all issuers to start reporting Scope 1 and 2 GHG emissions from FY25 and begin incorporating the climate-related requirements of the ISSB Standards[1]
• The Reserve Bank of India (RBI) has published a draft disclosure framework for regulated banks requiring disclosure of climate-related financial risks and opportunities in line with the four pillars used in IFRS S1[2]
• The Hong Kong Financial Services and Treasury Bureau has committed to aligning the local sustainability requirements with the ISSB Standards with a roadmap to be published this year[3].

In Australia, which has now legislated a start date for mandatory reporting of financial years beginning on or after 1 January 2025 based on the size of the entity. The phased approach for both reporting and assurance is as follows:

Figure 1: Summary of requirements for Australian Sustainability Reporting Standards

What is the difference between limited and reasonable assurance?

‘Limited’ assurance is designed to reduce the assurance provider’s risk of reaching an inappropriate conclusion to a moderate level. Such assurance tends to be more negative in its language in assessing and assuring a report. This is because an assurer works with a limited set of data and has insight into about 10-20% of what is reported and its conclusions. They are simply less confident and therefore much more cautious. Examples of conclusions include “We are not aware that, in all material respects, XYZ are not appropriately stated/effective”.

With ‘reasonable’ assurance the intention is to reduce the assurance provider’s risk of reaching an inappropriate conclusion to a low level. As a result we see far more positive language which in turn reflects far greater confidence in an assurer’s determinations. Under reasonable assurance, the assurer has 80-90% coverage of the issues, the impacts and the management’s response. They can ask more questions and access more evidentiary documents. Examples of language used include, “We conclude that, in all material respects, XYZ are appropriately stated/effective”.

The webinar also discussed ways to conduct reasonable assurance in order to determine the “Risk of Material Misstatement” – either through an “Inherent Entity Risk Assessment” or a “Control Risk Assessment”. Time is also given to examples of “strong control environments”, examples of which – as presented in the webinar - include:

• A demonstrated commitment to integrity and ethical values (tone at the top)
• Independent board of directors’ oversight and separate committees
• Assigning responsibilities with specificity and documentation
• Providing informal knowledge-sharing opportunities or formal training to familiarise employee with sustainability
• Signoffs and approvals for employee accountability (site and corporate)
• Sustainability risk integrated within enterprise risk management system
• Leveraging existing technologies, modernising and investing in innovative tech solutions (less human error)
• Formalising existing ad hoc policies and procedures
• Utilising insights raised by external auditors.

Mapping a pathway to reasonable assurance

The discussion in the webinar concluded with the presenters sharing views on the stages to reasonable assurance, with an example of a path over up to a 5 year period, beginning with pre-assurance, to limited assurance in year 2, limited assurance with reasonable readiness by year 3, and then, depending on the outcomes of the assessment of reasonable readiness, either limited assurance or reasonable assurance.

The webinar also described what was involved and the value of a readiness assessment for reasonable assurance – noting that while such an assessment is not mandatory, it is highly recommended. The presenters shared checklists as guidance.

To see the checklists and hear more about the guidance, view the webinar here.

ERM CVS offers support for your business on its assurance pathway

ERM CVS are specialists, as mentioned earlier in this article, operating independently within the ERM Group. With deep expertise their work aligns with international certification and assurance methodologies, providing global consistency and quality. They combine this robust approach with local knowledge and the ability to address the specific needs of clients – to help individual businesses respond to evolving pressures and to support their understanding and reporting of both financial and non-financial performance, risks to their stakeholders, and to drive sustainable business performance.

ERM CVS provide tailored second and third-party verification and assurance services from gap assessment and assurance readiness to pre, limited and reasonable assurance levels and audit services which include voluntary and regulatory corporate reporting assurance.

As Australian companies ready for reporting under the Australian Sustainability Reporting Standard – a new, rigorous and unfamiliar disclosure regime – the team at ERM CVS can provide insights and advice to ensure that preparations tie to the requirements of assurance.