Building block 5: Assurance

IFRS S1 & S2 (by ISSB)

ESRS (by EFRAG) SEC26). The SEC is considering amendments which lower the burden on small entities. economic activity. Furthermore, we suggest developing a set of simplified sustainability disclosure standards which are tailored to the characteristics of SMEs.

The standards do not provide simplified SME reporting standards. We encourage the ISSB to develop a set of simplified sustainability disclosure standards, which are tailored to the characteristics of SMEs.

The EU currently asks Member States to consider introducing measures to support SMEs in applying the voluntary simplified reporting standards.27 Article 19c requires the Commission to adopt sustainability reporting standards for small and medium-sized companies by 31 October 2023.28 We welcome the development of simplified SME reporting standards. We suggest lowering the administrative burden for SMEs through reduced complexity and potentially by providing a clear list of sector-specific material sustainability issues to begin with.

Definition: Assurance refers to the external verification of financial or ESG reporting by entities. The aim of third-party assurance is to provide a higher degree of reliability and credibility to the disclosed information. Regulations and standards can demand different assurance requirements, ranging from “consistency checks” and “limited” assurance, to stronger and demanding levels, such as “reasonable” or “full” assurance.

Overall recommendation: The scientific literature provides evidence for positive effects of assurance on investors’ credibility perception of the disclosed information.29 As such, assurance requirements are likely to increase the extent to which capital market participants use ESG information in their decision-making processes, by fostering the perception of the sustainability disclosures as reliable sources of information. Although assurance obligations are scarce in currently implemented sustainability disclosure measures, it is an emerging aspect in the proposals. We argue that the ISSB needs to consider assurance more ambitiously, while we recommend the SEC to maintain its innovative course with the coherent and ambitious timeline for reasonable assurance. We also welcome the ambitious aim of the ESRS to strive for a similar level of assurance for sustainability reporting as is in place for financial reporting.

Design choice: Assurance of sustainability disclosures should be mandated to generate reliable information.

26 The Enhancement and Standardization of Climate-Related Disclosures for Investors(2022)link 27 Directive of The European Parliament And Of The Council amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting (2021) link 28 Ibid 29 Quick &Inwinkl(2020)link;Reimsbachet al.(2017)link