The secret to sustainability: why assurance means better decisions

Assurance and audit might not get your heart racing – but they’re at the very heart of how profit-making firms can contribute to sustainability. Our columnist Jeremy Nicholls on why it’s time to fall in love with the nuts and bolts of business. First up, how assurance gives meaning to sustainability reporting.

If sustainability reporting is going to be good for anything, the people who use the reports will need assurance that they can make decisions based on the information provided. If there is no demand for independent assurance, it can only be because no one is using the information. These reports are only good for marketing or for propping the door open.  

Civil society organisations as well as investment managers and politicians are now concerned about the level of green-, impact- or sustainability-washing going on. For those of us who have been banging the drum for assurance for years, this is a good thing. Assurance, done well, provides a real opportunity for increasing accountability to those whose lives are impacted by a business. Done in ways that follow the logic of financial auditing, it will end up questioning the very basis of capital markets. But there are significant risks as well: if assurance is not acting in the interest of the people whose lives are impacted, assurance will not increase accountability. Capitalism resists change, and forces of darkness are gathering to avoid more accountability. There is a way around this. But the devil will be in the detail.

In this four-part series – part of my wider series on financial accounting and auditing – I explore our opportunity to have assurance on the performance of businesses in contributing to sustainability and generating financial returns. This, the first, explores the idea of assurance in general. The second applies these ideas to financial audit and the third uses the same logic to think about assurance of sustainability disclosures for the same user as the financial report. The fourth considers assurance of these reports prepared for people experiencing the consequences of a business model, irrespective of any financial implications; it also covers some of the oddities and more fundamental problems with current approaches to both financial and sustainability assurance. All this means getting down into some of the weeds, nuts and bolts, plumbing or whatever metaphor helps think about the exciting and critical issues around assurance and auditing.

Assurance, done well, provides a real opportunity for increasing accountability to those whose lives are impacted by a business

 

What is assurance? What is audit?

Assurance is implicit in any decision we make, whether personally or in an organisation. Without assurance we don’t make decisions. We want assurance that we are not about to make the wrong decision. And we know there is always going to be a risk, as decisions are choices between different futures. Which means we have some expectation that there is a purpose behind our decisions (and that purpose will come with a timescale) and a level of risk that we are willing to accept.

So, there are four elements to assurance: i) someone making a decision, ii) accepting a level of risk, with iii) a purpose behind the decision and iv) an opinion provided to someone making a decision.

In theory the bigger the decision, the more assurance we need because the consequences of getting it wrong will be higher (though think about how much time is spent on the decision to buy a new home compared with time spent choosing next year’s holiday). But if we don’t have whatever level of assurance we think we need, we won’t decide at all. And we’ll be biased towards the do-nothing option. In part because we tend to forget that not deciding is still a decision; in part because we don’t like change; and in part because if we are comparing what we are doing now with an alternative, we think sticking to doing what we are doing now is less risky. Human beings are not very good at risk assessment. And this is what assurance does: it provides a way of assessing and then reducing the risk that we make a make suboptimal or even a bad decision.

This means that we don’t only need assurance that information we are given is useful, we also need assurance that organisations are using that information effectively. The importance of assurance of effective use is often missed, as it is so embedded in our current economic system that we don’t notice it. Our economic system and creative destruction provide us with assurance that organisations are not choosing the do-nothing option too frequently. If we are, we are almost certainly not making the best decisions – where ‘best’ is defined by reference to the purpose that was behind our decisions. The second is assurance in the information we are using to inform our choice between uncertain futures. Either way, without these two levels we may not achieve our purpose, either at all or as fast as we could.

Assurance provides a way of reducing the risk that we make a make suboptimal or even a bad decision

So we all need assurance in all our decision-making, personal as well as organisational. When it is a group of people making a decision, there will be some additional requirements: we will need to have a common understanding of the level of assurance the group needs, and a common process to achieve that level of assurance.

There are also some new risks. There may be conflicts of interest between those preparing information, assuring information and using information. This is why assurance is defined with reference to a three-party relationship. If the people producing the information also assure the information, then the people using the information will not have enough assurance. This is also the case if the people producing the information employ an agent to assure the information for them. An agent acts for their principal, not for the users. Assurance is a process which makes potentially useful information, actually useful.

 

Assurance or evaluation: not the same thing, but related

Assurance is a special type of an evaluation. In an evaluation the evaluator could be working to a scope that has been determined by a variety of people, and the report could be prepared in the interests of a wide variety of people, and the extent to which the evaluator can make findings public will also vary. The approaches used by an evaluator will depend on discussions between the evaluator and whoever has determined the scope. The competency requirements for the evaluator will also be set by whoever is paying and, while there are professional standards and qualifications, having these is not a legal requirement for those involved in an evaluation.

I cannot understand why anyone interested in social impact would argue against assurance of social impact reports

In assurance there is a predefined scope, set by reference to the interests of a group that has not prepared the information, and generally not paid for it and which follow international standards for preparation and disclosure. The work that will be done follows international standards for assurance. The organisations providing assurance must be approved and the staff must meet standards for their competence; there will be external review to ensure adherence to all these requirements.

Given social impact is mainly experienced by people with the least power, who generally cannot hold organisations to account, I cannot understand why anyone interested in social impact would argue against assurance of social impact reports – assurance that the information is useful and that the organisation is using it effectively.

Coming soon: why assurance matters in our existing economic system and in financial audit.

 

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