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Independent and convincing third party assurance of corporate carbon data is lacking, but urgently needed, argues Esther Rodriguez
There is no denying that ‘sustainability’ has become a buzzword for corporate performance. Once limited in use to ‘deep green’ environmentalists, the concept of sustainability is now an increasingly important benchmark used to inform investment decisions.
Responsible investors understand that the environmental and social performance of a company is intrinsically linked with its long-term financial prospects and sustainability is now scrutinised as a measure of overall good business performance.
Published sustainability data allows investors to assess how ‘future-proof’ a business is i.e. how it is anticipating and addressing potential risks.
Carbon reporting is an important element of sustainability reporting. Investors recognise that a company that discloses its carbon emissions is taking the first step towards reducing these emissions and directly addressing the risk of climate change.
Similarly, managers are appreciating the economic imperative of addressing issues associated with the long-term sustainability of their business. Pioneered by the likes of pharmaceutical giant, Novo Nordisk, ‘ Integrated reporting’, whereby a company’s green credentials are seamlessly integrated with its financial performance, is gaining momentum across the global business sector.
In its most recent report, the Carbon Disclosure Project (CDP) documented a dramatic increase in the number of large companies disclosing their carbon emissions – response rates were up 10% to 82% in 2009 compared to 2008.
Disclosure is arguably even more important during volatile financial conditions, as, for many investors, carbon performance is now synonymous with a company’s ability to set the conditions for sustainable future growth.
Quality does count
However, an increase in carbon reporting does not necessarily lead to an increase in the quality of the data reported. Calls from investors and asset managers for greater disclosure of emissions data has succeeded in raising the importance of reporting but a lack of independent verification hinders the usefulness of reports.
In most cases there is often simply no way of telling whether carbon data is accurately reported or how complete and comparable such data is.
Independent third party assurance is the only viable mechanism to assure readers that reported information is reliable.
While we should not assume that the absence of an assurance statement automatically means that the data are unreliable, stakeholders may conclude that emissions disclosure is simply an exercise in green-washing, resulting in a loss of trust from customers and investors who perceive low levels of management commitment to sustainability.
Research conducted by management consultancy Accenture found that sustainability performance data gathering methods are nowhere near as rigorous as those used for measuring financial performance. This is simply unacceptable; Investors would not accept a financial report which had not been audited by an independent third party, so why should they accept sustainability data at face value?
The scale of the problem is huge. Our own investigation supported by the UK government, the Chartered Insurance Institute and Barclays among others, revealed that of the FTSE350 companies that publish sustainability reports, only 75 publish accompanying assurance statements and only 62 of these are independent and based on a recognised assurance standard.
The situation is even worse when looking at the carbon emissions data element of sustainability reports.
Time to raise our game
Only 10% of the FTSE350 companies include carbon data under the scope of their assurance and only 2 companies mention a recognised carbon standard as their preferred form of assurance.
This means that some of the world’s largest companies are presenting investors with performance data that is not independent or transparent: British Airways, Thomson Reuters and Carphone Warehouse are among the 275 companies that have disclosed unverified sustainability information to investors.
Many corporations are in fact desperate for an internationally accepted and consistent emissions reporting process that includes assurance procedures. Our research revealed that use of ISO 14064-3 to verify voluntary GHG statements is very limited.
The further uptake of this ISO standard is also at risk as the accounting profession is currently developing an International Standard on Assurance Engagements for GHG statements (ISAE 3410). However, the future success of internationally accepted assurance standards will depend on Government regulation and investor demand.
As a starting point, this summer we are launching the investor/business –led initiative, ‘A Call for Greater Credibility’, to leverage interest in this issue from the investment and corporate community.
Investors, companies and other stakeholders need to work together to devise consistent assurance procedures that include independent third party verification of data. This way, fair and meaningful comparisons can be made between companies as to their ability to manage sustainability and climate-related risks in the short, medium and long-term.
Rules on the way
Support for a mandatory framework of international assurance standards is growing.
Some have predicted that an assurance statement on green house gas emissions will soon be as important to shareholders, employees and other stakeholders as audited financial statements. With proper assurance, sustainability and carbon data can be an important tool used to inform investment decisions.
Without it, reporting simply becomes a form of green-washing, a way of promoting dubious claims about a company’s eco credentials which no investor should take the time to read.
It is time for companies to engage with their stakeholders to move sustainability reporting into the mainstream as a credible, transparent and comparable way to assess business performance.
Esther Rodriguez is Associate Director at Carbon Smart, a consultancy on sustainability and carbon. email@example.com / www.carbonsmart.co.uk A report on the topic of assurance is available. More details at: www.carbonsmart.co.uk/?q=Assurancebenchmarking
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