External assurance of Sustainability Reports refers to the activity of reviewing an organization’s performance based on the contents of its sustainability report. It assists organizations in improving their reporting processes, data management, and accountability, which improves sustainability disclosures and ultimately, performance. External assurance confirms to stakeholders and key decision-makers that all information used for business decisions is credible and complies with recognized frameworks. It can also boost the trust in the validity of the company’s sustainability performance data.
The statements made in the reports must be accurate and credible for stakeholders, especially investors, to use in order to make effective decisions. This is the role of the globally recognized standard: AA1000 Assurance Standard.
AA1000 Assurance Standard
The AA1000 Assurance Standard (AA1000 AS v3) was developed by AccountAbility, and designed to ensure the quality of social and ethical accounting, auditing, and reporting. The AA1000 Assurance Standard (AA1000AS v3) is the leading methodology used by sustainability professionals worldwide for sustainability-related assurance engagements, to assess the nature and extent to which an organization adheres to the AccountAbility Principles. In 2021, the third version of the standard was released with additional changes, completely replacing the 2008 version. This standard is used by independent assurance providers to assess the quality of an organization’s sustainability reporting, which can help increase their transparency and accountability vis a vis their stakeholders. The final assurance report by the assurance providers will be part of the sustainability report published by the organization.
The AA1000AS v3 provides a holistic way of holding an organization accountable for its sustainability management, performance, and reporting practices by assessing the adherence of the organization to four principles:
- Inclusivity – People should have a say in the decisions that impact them.
- Materiality – Decision makers should identify and be clear about the sustainability topics that matter.
- Responsiveness – Organizations should act transparently on material sustainability topics and their related impacts.
- Impact – Organizations should monitor, measure, and be accountable for how their actions affect their broader ecosystems.
Levels of assurance
- High assurance: Processes and data are assessed to reduce the risk of error in the assurance’s final conclusions to a very low level. High assurance usually involves a massive amount of evidence gathering from all levels of the organization, including external stakeholders.
- Moderate assurance: An assessment of processes and data is conducted to reduce the risk of error in the assurance’s final conclusions to a limited level. For moderate assurance, evidence gathering at the corporate level with limited data sampling is sufficient.
Types of AA1000AS assurance engagement
There are two types of assurance engagement: Type 1 and Type 2.
- In the case of a Type 1 assurance engagement, the assurance provider must analyze and assess the extent to which the organization adheres to all four AA1000 AccountAbility Principles and offers applicable findings and conclusions.
- For a Type 2 assurance engagement, the assurance provider must review and demonstrate the reliability and quality of specified sustainability performance and information. In addition to that, the assurance provider assesses the level of the organization’s adherence to all four AA1000 AccountAbility Principles.
External Assurance Implementation Process
The implementation of external assurance entails three stages:
- Preconditions
An assurance provider should accept an assurance engagement only if the assessment reveals no conflicts of interest with the reporting entity or its key stakeholders. The assurance provider therefore cannot be the same entity that supported organizations with the development of their sustainability report. Assurance providers must be knowledgeable and proficient. They also need to be AA1000AS Licensed Providers to prove external assurance based on the AA1000 Assurance Standard. Before accepting an assurance engagement, the assurance provider must be convinced that the company will provide adequate information to support its findings and conclusions.
- Conducting Engagement
Conducting the assurance engagement requires following processes and practices that are implemented in a credible, legal, and transparent manner. To start with, the assurance provider will plan the assurance engagement and discuss with the organization the best ways to carry it out effectively. The assurance provider documents the essential resource requirements, the evidence to be gathered, tasks, activities, deliverables, and schedule in an Engagement Plan. Then, the assurance provider performs the engagement by assessing and questioning the validity of the evidence obtained and its implications. This is done via interviews, site visits, and evidence review.
- Issue Statement
The assurance provider will issue an assurance statement with findings and conclusions that accurately adhere to the AA1000 AccountAbility Principles. The assurance statements include detailed information, such as the intended users, responsibilities, reference to the AA1000AS v3, criteria, sources of disclosures, methodology, limitations, recommendations, name of the assurance provider, and date and place of the assurance. The organization reviews and accepts the assurance statement and includes it in the sustainability report. Usually, the assurance statement is found at the end f the report. If agreed with the organization, the assurance provider can also prepare a report to management that is materially consistent with the conclusions of the assurance statement and provides more information on the process and recommendations.
Is external assurance mandatory?
The European Commission has proposed amending the CSR Directive (Corporate Sustainability Reporting Directive) to broaden its scope and impose stricter standards. One of the most significant changes of the legislative proposal is that external assurance becomes mandatory. According to the proposal, all covered organizations would be compelled to perform an external audit to ensure the accuracy of the submitted sustainability data. Many businesses increasingly utilize external audits to assure the reliability of their reporting and to limit the risk of errors. External assurance had previously been optional; however, as the proposal is expected to be approved within 2022, it will be mandatory for all organizations.
How external assurance adds value to organizations?
External assurance ensures the validity, accuracy, and dependability of the organization’s data and operations. It can detect errors, fraud, and any data manipulation used in the report. It also adds value to the business and gives a competitive advantage by improving internal operations within the organization. This value addition to the corporation may strengthen the quality of decision-making, increase revenue, handle complicated compliance obligations, and encourage good business practices.
Through external assurance, credibility in performance is enhanced, ensuring that investors, rating agencies, and other stakeholders are more confident in their decisions and investments. Assurance providers give recommendations for future improvements, which can help reporters stand out boldly among the thousands of sustainability reports published globally.
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