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  • Writer's pictureDaniel Goelzer

Sustainability Assurance is the New Expectations Gap

Updated: Jun 14

Companies frequently obtain third-party assurance over portions of their sustainability reporting, and sustainability reporting rules typically require assurance.  However, assurance reports on sustainability disclosures often provide only limited, rather than reasonable, assurance.  See Large Companies Worldwide Continue to Expand Their ESG Disclosure and Assurance, February 2024 Update (95 percent of sustainability assurance reports worldwide provided limited assurance).  Similarly, the SEC’s climate rules initially require only limited assurance over GHG disclosures, and, for many smaller companies, reasonable assurance will never be required.  See SEC Adopts Landmark Climate Change Disclosure Rules, March 2024 Update.  In contrast, under PCAOB standards, an auditor’s opinion on financial statements must provide “reasonable assurance” that the statements are fairly presented in conformity with GAAP.


In Managing Expectations: How Assurance Level and Sustainability Reporting Approach Affect Investor and Auditor Confidence, Lori Shefchik Bhaskar (Indiana University), Jeffrey Hales (University of Texas at Austin and a member of the International Sustainability Standards Board), Tamara A. Lambert (Lehigh University), and Roshan K. Sinha (Indiana University) explore how the choice between reasonable and limited assurance) affects nonprofessional investor confidence in sustainability information.  They find “significant expectation gaps” and that “investors fail to sufficiently adjust for the lower level of assurance that a limited-assurance engagement provides.”


In simplified terms, the approach of the Managing Expectations study was to ask two sets of participants to review an ESG disclosure regarding water management and an independent auditor’s report on that disclosure.  One group of participants – the proxies for investors – consisted of 117 MBA students.  The second group consisted of 110 large firm auditors with ESG experience.  The researchers varied the disclosures participants reviewed in two respects.  First, they described the company’s approach to disclosure as either investor-oriented or broad-stakeholder oriented (i.e., the company’s disclosure objective was either to provide information specifically relevant to investors or to provide information relevant to a broader range of stakeholders).  Second, the auditor’s report on the disclosure provided either reasonable assurance or limited assurance. 


The researchers measured the level of confidence participants reported in the various disclosures.  They also calculated the difference between the confidence levels reported by experienced auditors – who are presumably familiar with the difference between reasonable assurance and limited assurance engagements – and those reported by the more generalist MBA students. 


The core finding of the study is that, while investors understand that there is a difference between reasonable and limited assurance, they overestimate the value of limited assurance:


“Consistent with our predictions, results reveal investor confidence depends on assurance type, such that investors differentiate limited from reasonable assurance. However, results also reveal significant expectation gaps between investors and auditors, with investor confidence being significantly higher than auditor confidence for sustainability disclosures with limited assurance. Interestingly, the expectation gap is avoided entirely for sustainability disclosures with reasonable assurance. Thus, our results highlight an area of concern related to companies obtaining limited assurance on sustainability disclosures and suggest reasonable assurance as one potential solution. Alternatively, while limited assurance remains a popular choice, and is already mandated for some sustainability disclosures, our study highlights the need to better inform investors about the meaning and limitations of limited assurance.”


Ceres and others have argued that the use of limited assurance reports on sustainability disclosures should be curtailed in favor of reasonable assurance.  See Ceres Advocates Climate Disclosure Reasonable Assurance, March 2024 Update.   Managing Expectations lends support to those arguments:


“[O]ur finding that the expectation gap can be fully alleviated with reasonable assurance gives credence to investors’ and audit firms’ calls for reasonable assurance on sustainability disclosures. . .In the absence of reasonable assurance, our findings highlight the need to better inform investors on how to interpret limited assurance. . . .” 


Audit committees may want to consider the findings of this study when discussing with sustainability assurance providers the level of assurance they will provide.  

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