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  • Writer's pictureDaniel Goelzer

Ceres Advocates Climate Disclosure Reasonable Assurance

Ceres, a nonprofit organization that works with capital market leaders to address sustainability challenges, has released Closing the Gap: Investor Insights into Decision-Useful Climate Data Assurance.  The report explores the challenges investors face in obtaining reliable and rigorous climate-related information and highlights the need for independent, third-party assurance to validate and ensure the credibility of corporate sustainability reports.  Ceres states: ​


“The tools to protect our capital markets are available to investors and companies today—processes and controls, transparency, and high-quality independent assurance. Fortunately, the model of reasonable assurance that is standard for financial reporting can be applied to climate data to support markets that operate on quality decision-useful information.”


Ceres suggests steps that companies and assurance providers can take to afford investors greater confidence in climate data disclosures.  Several of these suggestions are aimed at audit committees.


Based on the results of a “listening tour” with investors who use climate-related information to make investment decisions, Ceres finds that investors do not currently have access to consistent, comparable, decision-useful climate data. The investors the Ceres team spoke with identified several challenges to using climate data.


  • Poor data quality. “High quality data requires accuracy, completeness, reliability, relevance, and timeliness. During the interviews, investors voiced concerns about inadequate data quality, often citing at least one of these characteristics as lacking.”


  • Limited disclosure.  “There are significant gaps in the information that is available for investors. Risks that can crystallize into business issues are not clearly being disclosed, nor are the strategic ways businesses are capitalizing on related opportunities, leaving investors in the dark.”


  • Lack of connectivity between sustainability reporting and financial reporting.  “Investors often cannot see a clear through line between companies’ sustainability and climate disclosures, on the one hand, and their financial position and results, on the other.”


  • Inconsistent assurance quality.  “While some companies obtain third-party assurance over certain disclosures, such as GHG emissions, the inconsistencies in approaches to assurance make it difficult for investors to compare and use assurance reports. That is, the variation in the level of assurance, extent of procedures, and form of reporting on results of those procedures is an impediment to meeting capital market needs.”


  • Weak corporate governance.  “Investors expressed concerns that inadequate governance lies at the root of these challenges. Good governance plays a foundational role in the development and disclosure of meaningful and credible disclosure.”


The steps that Ceres recommends companies and assurance providers take to address these problems and instill greater investor confidence in climate disclosures include several that fall within the scope of the audit committee’s responsibilities.  These include:


  • Ensure the audit committee oversees all assurance providers and is involved in determining the type, scope, and procedures of assurance engagements necessary to support investor trust in the company’s reporting.”  Assurance providers should be required to demonstrate “that they have a robust and transparent ethics framework, particularly to demon­strate independence, and a system of quality control over the assurance engagement to ensure procedures and judgments are applied consistently.”


  • The audit committee should ensure that there is “open and relevant communication” between  assurance providers.  Companies may engage different assurance providers for different disclosures (e.g., the financial statements and GHG emissions) and the audit committee should make sure that these providers communicate with each other.


  • Companies should phase out or reduce the use of limited assurance.  A limited assurance engagement results only in a statement that the assurance provider performed certain procedures and that nothing came to the provider’s attention that would indicate the disclosure is inaccurate. “Financial statements have long been subject to reasonable assurance, which results in an opinion by the expert third-party as to whether the disclosure is fairly presented in conformity with the relevant disclosure framework and is free of material misstatement. Only such an opinion is a true attestation to the reliability of the disclosure.”  (In contrast, the SEC’s climate rules require only limited assurance over GHG disclosure for many companies.  See SEC Adopts Landmark Climate Change Disclosure Rules in this Update.)


  • Companies should require sustainability assurance providers to make certain disclosures in their reports.  As with the level of assurance, the disclosures in the assurance provider’s report would presumably be a matter of negotiation between the audit committee and the provider.  Ceres recommends that sustainability assurance providers disclose:


  • The provider’s qualifications, team lead and characteristics, quality controls, independence, and compliance with standards.


  • The suitability of measures used in voluntary disclosures. “[I]nvestors told us they would find considerable value in the auditor of sus­tainability disclosures discussing the results of its evaluation of the reporting criteria the company used (or perhaps developed itself). Bespoke metrics can be useful to measure a company’s progress on a company-specific plan, but they may also be an opportunity for greenwashing.”


  • Critical assurance matters. Under PCAOB and international auditing standards, reports on financial statement audits must include a discussion of key or critical audit matters, i.e., challenging aspects of the audit and how the auditor addressed the challenges. Reports on assurance over sustainability disclosures should include a similar discussion.


  • Audit committees should explain the company’s choices about the scope, level, and approach to obtaining assurance to enhance investor trust and confidence in the company’s disclosures, as well as its selection of assurance providers.”  In its annual report, the audit committee should discuss the decisions it made around issues such as the professional selected to provide assurance over climate disclosures, the level of assurance, and other issues Ceres highlights. If the audit committee decides not to use the same provider for financial statement assurance and sustainability assurance, it should explain “how it has ensured fluid communication amongst providers in a way that supports audit quality.”

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