In today’s discussion about Environmental, Social, and Governance (ESG), let’s start with a story about salt. This mineral is a fundamental part of human life and has many uses. The World Health Organization (WHO) advises that adults consume no more than 5 grams of salt, or 2,000 mg of sodium, each day. There is also a popular Ghanaian proverb that says, “salt does not praise itself.” This adage suggests that individuals should not boast about their qualities but instead let others recognize and appreciate their good deeds. This proverb can be applied to investors or companies and their environmental sustainability disclosures. Let’s explore how this idea relates to ESG practices.
It is a question of whether investors are really committed to upholding Environmental, Social and Governance (ESG) standard practices in their operations. How can consumers, communities or the public have a clear assurance and an understanding that they are not being shortchanged by investors whose primary motive is to make profit at the expense of their lives? These questions are at the backdrop of the phenomenon called greenwashing.
Greenwashing
Greenwashing is a communication strategy mainly used by companies to give false impression to the public that they have embedded ESG standard practices in their operations. In some instances, they use it to exaggerate their environmental sustainability practices than they are in reality. Companies that intentionally adopt greenwashing communication strategies often do so to cover up their environmental lapses or those of their suppliers in the value chain. In effect, they use it as a ploy to improve public perception of their brands. To my mind, I consider greenwashing as self-serving for the short-term gains. It is done without being mindful of the risks it poses to long-term opportunities companies could derive from complying with standard sustainability practices. Thus, in the long-run, the sunlight of time exposes the negative effects of greenwashing in the forms of fines, reputational risks (mistrust by the public, bad press) or temporary closure and withdrawal of regulatory licences in extreme situations. To deal with the problem of greenwashing brings to the fore the need for sustainability assurance.
Sustainability Assurance
Sustainability assurance is an evaluation of environmental factors, social responsibility and governance criteria in companies’ policies and practices to provide a thorough picture of their compliance with ESG standards. Sustainability assurance bridges the gap between corporate social responsibility and environmental compliance by verifying companies’ environmental friendliness and ethical conduct thereby creating value for all stakeholders. That said, the main essence of sustainability assurance is to demonstrate accountability and transparency to all stakeholders especially consumers that companies operating in their communities are actually living up to their ESG standards.
Companies need to have their performance with respect to ESG issues reviewed continuously because there are always changes within the external environment that can affect their operations. Sustainability assurance normally requires a third-party’s independent verification of your company’s sustainability practices to guarantee the integrity of your sustainability disclosures and the way in which your data is collected, governed and controlled.
The rationale behind an independent sustainability assurance has increased in recent years to meet consumer demand for environmentally-friendly goods and services. Nonetheless, there has been conflicting or different standards on sustainability disclosures. For instance, for multinational companies to be compliant with the standards, they face the challenge of navigating between the ESG standards of their parent companies and their host countries.
Conflict of Standards
The dilemma many independent third-parties could face or face relates to which standards to adopt to satisfy reporting entities peculiar circumstances, what to report, and how to report it. This is premised on the fact that there are many Environmental, Social and Governance (ESG) assurance reporting standards. These standards include the SASB (Sustainability Accounting Standards Board), ESRS (EU Sustainability Reporting Standards), EU Taxonomy, the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Project (CDP) and the Greenhouse Gas (GHG) Protocol. Apart from all these standards, ISO (the International Organisation for Standards) also has its guidelines (ISO14016:2020) on the assurance of environmental reports.
What’s more, as at February 2023, the International Sustainability Standard Board (ISSB) also met to redeliberate on its Exposure Drafts S1-General Sustainability-related Disclosures (draft 1) and IFRS S2-Climate-related Disclosures (draft 2). Harmonisation of all the Environmental, Social and Governance (ESG) related standards could be ideal to provide a single reference point for stakeholders including governments, investors, people and communities but the crux of the matter is that these stakeholders have conflicting interests coupled with the amount of resources they can commit to environmental sustainability projects and activities.
Roadmap
Despite the array of standards and the conflicting interests, an objective sustainability assurance exercise must be comprehensive by disclosing all the relevant information related to the company’s sustainability impacts. Be that as it may, the following factors largely influence which of the standards an independent third-party can use for the sustainability assurance exercises and reporting.
I-Regulatory Requirements
For compliance purposes, it may be necessary to use standards stipulated in enabling legislations on the environment in the country. But those legislations should not preclude the use of other standards to assess the effects of a company’s operations on the environment, impacts of its social responsibility programs and governance related issues. To solicit relevant information, independent third-parties must have their checklist (aide memoire) so designed that it can tick the box of detailed disclosure. Where necessary, independent third-parties can harmonise their checklists with guidelines from state institutions, agencies or commissions which have oversight responsibilities over clients’ regulatory requirements.
II -Industry Best Practices & Economic Risks
Every industry faces its own unique risks and opportunities. Hence, it will also be worthwhile to use industry-specific standards which consider those key Environmental, Social and Governance (ESG) issues pertaining to the industry. This can ensure relevant disclosure of the company’s sustainability projects or impacts. For instance, sustainability assurance services for companies in the oil and gas fields will need to adapt templates of international best practices so required by the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP) alongside the standards from regulatory agencies like the Environmental Protection Agency.
III-Investors’ interests & Corporate Values
Investors are often inclined towards their interest when it comes to assessing their companies’ Environmental, Social and Governance (ESG) performance. Depending on the industry and their orientation towards the environment, investors require sustainability information specific to their business interest. Indeed, we should not lose sight of the fact that investors have trade secrets which can influence data collection during the assessment and the amount of disclosure during reporting.
My assertion is that a sustainability assurance exercise worth its salt should consider all these factors- regulatory requirements, industry practices and investors’ interests exclusively to obtain relevant disclosures for comprehensive reports. This way, sustainability assurance will protect the interest of all stakeholders by upholding the fundamental principles of environmental sustainability.
Businesses which have integrated environmental sustainability practices in their operations and undertake sustainability assurance exercises regularly from independent third-parties continue to win their customers’ trust and confidence and support from the public. But barriers still exist in sustainability assurance enterprise. Some companies still don’t consider it as a priority in their establishments. In some cases, they prefer not to disclose their sustainability information. This is married to the fact that some entities have limited knowledge and awareness of how to document their sustainability impacts. Here again, some companies are worried about the cost implications and do not have a dedicated team to coordinate their environmental sustainability programs. In sum, all these interrelated issues I have considered in this article, in effect, explain the nexus of sustainability assurance.
BERNARD BEMPONG
Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.
Our Office is located at Lagos Avenue, East Legon, Accra.
Contact: +233 302 528 977
+233 244 566 092
Website: www.jsmorlu.com.gh
