Why Canadian companies need to prepare for ESG assurance

Environmental, social and governance (ESG) reporting isn’t about producing reports. It’s about telling your organization’s sustainability story and giving stakeholders the insights they need to make informed decisions.

Your stakeholders require more than generic statements about your organization’s sustainability ambitions.

They want to know how you’re monitoring and managing your performance in the ESG areas that are most important to them. They want to understand where you’re starting from, where you aspire to be and the progress you’re making toward those goals. And they want to know that your disclosures are accurate, reliable and complete.

Establishing key performance indicators (KPIs), setting targets and developing assurance-ready systems help companies build trust with their stakeholders and prepare for upcoming mandatory ESG reporting and assurance requirements. Without these quantifiable metrics and external verification, organizations risk stakeholders greeting their sustainability claims with skepticism.

Telling a credible ESG story

We recently analyzed the ESG reporting of Canada’s top 250 public companies. We found reporting around KPIs, metrics and targets is improving, particularly on climate-related topics. But we also saw opportunities for many organizations to tell a more effective and credible story of their ESG performance.

The following elements make your disclosures more comparable and help curtail any perceptions of management cherry-picking metrics that reflect positively on their organization:

Setting targets. These should be specific, quantifiable and cover both short- and medium-term timeframes. Currently, only 22% of Canada’s top companies disclose targets for more than three-quarters of their KPIs.

Showing progress by disclosing historical data. Among the Canadian companies in our analysis, 50% include a historical data point for the majority of their KPIs. But only 34% share two or more historical data points.

Aligning reporting with global standards. Many climate-related reporting standards are aligned to the pillars of the Task Force on Climate-Related Financial Disclosures (TCFD). But 59% of companies in our analysis don’t mention the TCFD or its principles in their disclosures, leaving them potentially unready for mandatory reporting requirements.

New disclosure rules will force many companies to include additional metrics in their reporting. This will result in companies telling a more complete story of their ESG performance. Some metrics may paint an unflattering picture. As you prepare for these regulations, it’s worth thinking about how these potentially unfavourable metrics could affect your stakeholders’ decision-making—as well as how you can develop and communicate a plan to track, monitor and improve your performance.

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The importance of ESG assurance

Effectively using metrics, targets and KPIs help create a comprehensive picture of your ESG performance. But for this information to be useful, it must be trusted. Companies face growing pressure to demonstrate the credibility of their reporting by obtaining external assurance, especially as investors, lenders and regulators rely more on ESG disclosures. Assurance helps stakeholders trust your ESG reporting and reduces the risk of critics accusing your organization of greenwashing.

Limited assurance is a good first step. But it’s only an interim measure in the eyes of regulators and investors. Our Global Investor Survey 2022 explored the factors that increase confidence in assessing the accuracy of an organization’s sustainability reporting. Nearly three-quarters (73%) of investors in Canadian companies say reasonable assurance helps. By contrast, only 46% feel the same way about limited assurance—underscoring the importance of preparing for reasonable assurance and producing investor-grade ESG reporting.

In Canada, only 8% of companies in our analysis subject their sustainability reporting to the same level of reasonable assurance as their financial statements.

Limited assurance opinions are more common and are obtained by 18% of the country’s top companies.

Steps to improve your ESG assurance readiness

Many Canadian companies will likely want to report audited ESG data in the near future, especially as regulators consider mandating organizations to obtain assurance of certain metrics. European regulators recently took this step under the new Corporate Sustainability Reporting Directive (CSRD), which requires companies operating in the EU to report on ESG issues and obtain limited assurance over their sustainability disclosures. That will later switch to reasonable assurance.

We’re seeing leading organizations take common steps to improve their assurance-readiness. Reflecting on the following questions—and your ability to answer them—helps pinpoint gaps and the actions your organization can take before seeking assurance of its ESG reports:

Data: What’s the source of your data? Is there an audit trail? What’s the quality of your data?

Estimates: Is there a clear log of your key estimates? Are they reasonable? What’s the sensitivity of your estimates?

Processes, controls and governance: What processes and controls are in place? Have you defined and documented management tests of your controls? To what extent are you relying on manual processes versus automated tools? And what’s your metric protocols and quality assurance procedures?

It’s beneficial to engage your auditor as you progress on your assurance-readiness journey. They can help your wider ESG team understand the assurance process, what’s needed to obtain limited assurance and how you can prepare for a reasonable assurance engagement. They can also help assess the quality of the data your organization is reporting.

Using assurance to build trust through ESG reporting

Measuring, tracking and assuring your ESG information on a consistent basis helps stakeholders understand and compare your sustainability performance and impact. It’s a powerful way to build trust through ESG reporting and can help you meet upcoming mandatory disclosure and assurance requirements.

But developing the processes to collect the right information and create audit-ready systems takes time. As regulations evolve and stakeholder expectations for credible ESG reporting rise, now is the moment to act.