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Chapter 7: Sustainability, ESG, and Assurance65% Complete
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Needs Study

Assurance Chapters

Chapter 1: The Concept and Purpose of AssuranceChapter 2: Internal Controls and Information FlowsChapter 3: Business Cycle ControlsChapter 4: Internal Audit and Corporate GovernanceChapter 5: Gathering Assurance EvidenceChapter 6: Professional Ethics and Independence
Chapter 7: Sustainability, ESG, and Assurance
Chapter 8: Exam Practice and Integration

Chapter Sections

Purpose and Learning Goals7.1 Why Sustainability and ESG Matter7.2 Key Frameworks and Standards7.3 ESG Risks and Financial Reporting7.4 Assurance over ESG Reporting7.5 The Role of AccountantsTest Your Understanding

Chapter 7: Sustainability, ESG, and Assurance

Certificate Level

Purpose and Learning Goals

Sustainability and environmental, social, and governance (ESG) issues are now at the centre of business reporting. Stakeholders want confidence not only in financial results but also in how organisations manage climate risks, social responsibilities, and governance practices. This chapter explores the growing role of assurance in sustainability and ESG reporting.

By the end of this chapter, you will be able to:

  • Explain why sustainability and ESG are important for organisations.
  • Identify the global frameworks driving sustainability reporting (ISSB, TCFD, GRI).
  • Recognise the challenges of providing assurance over non-financial information.
  • Understand how ESG risks and opportunities affect financial reporting and audit.
  • Appreciate the role of accountants in building trust in sustainability reporting.

7.1 Why Sustainability and ESG Matter

Businesses are expected to operate responsibly and transparently. Investors, regulators, and the public want to know:

  • How is the company managing climate change risks?
  • Does it treat employees and communities fairly?
  • Is the board accountable and transparent?

Example:

A manufacturing company must report not only its profits but also its carbon footprint, energy usage, and supply chain practices.

Assurance helps ensure these reports are reliable and trusted.

7.2 Key Frameworks and Standards

Several international bodies shape sustainability reporting:

  • ISSB (International Sustainability Standards Board) – develops IFRS Sustainability Disclosure Standards (IFRS S1 on general disclosures, IFRS S2 on climate).
  • TCFD (Task Force on Climate-related Financial Disclosures) – framework focusing on governance, strategy, risk management, and metrics/targets.
  • GRI (Global Reporting Initiative) – standards for broader ESG topics including human rights, labour, and biodiversity.
  • UK Corporate Governance Code – includes sustainability disclosures for listed companies.

Unlike financial reporting, sustainability reporting is still evolving and may vary across jurisdictions.

7.3 ESG Risks and Financial Reporting

ESG issues can directly impact financial statements:

  • Environmental risks – asset impairments due to stricter carbon regulations.
  • Social risks – fines or reputational damage from poor labour practices.
  • Governance risks – weak controls leading to fraud or compliance breaches.

Auditors must consider whether climate and ESG risks create a risk of material misstatement in the accounts (e.g. valuations, provisions, disclosures).

7.4 Assurance over ESG Reporting

Assurance engagements in this area can be:

  • Reasonable assurance – high level, with positive opinion.
  • Limited assurance – lower level, often used for sustainability reports.

Challenges:

  • Non-financial data may lack consistent measurement standards.
  • Evidence can be harder to verify (e.g. CO₂ emissions, supply chain audits).
  • Risk of "greenwashing" — companies overstating their sustainability performance.

Practitioners must apply professional scepticism and adapt their procedures to non-financial subject matter.

7.5 The Role of Accountants

Accountants play a critical role in:

  • Integrating sustainability into business reporting.
  • Ensuring disclosures are complete and balanced, not biased.
  • Educating boards and management on ESG implications.
  • Providing assurance that strengthens investor and stakeholder trust.

Future direction:

As ESG frameworks mature, assurance over sustainability reports is expected to become mandatory in many countries.

Test Your Understanding – Quick Check

  1. Name two international sustainability reporting frameworks.
  2. Give one example of how environmental issues can create a financial reporting risk.
  3. What is "greenwashing" and why is it a concern for assurance?
  4. Why is limited assurance often used for ESG reporting?