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August 21, 2008

The Assurance Industry Grows in League with ESG Reporting
    by Anne Moore Odell

With more companies publishing sustainability reports, more third parties are stepping in to validate the information in CSR reports. -- In 2008, nearly 3,000 companies are planning to publish some type of corporate non-financial report or Corporate Social Responsibility (CSR) report, the website projects. However, only a quarter of the companies are also planning to include third-party verification of the information in the reports. Although the assurance industry is rapidly expanding to meet growing demand, the lack of third party verification throws into question the majority of CSR reports published.

Visit the
Prospectus Ordering recently produced "Assure View: The CSR Assurance Statement Report"" which examines the assurance industry. Its authors' Paul Scott and Iain McGhee find that even CSR reports that include an assurance statement can suffer from the lack of common standards and universal guidelines.

Corporateregister doesn't have a specific definition for what constitutes a CSR report per say, because there is such a wide range of reports they accept, from purely environmental and EHS reports through citizenship reports to CSR and sustainability reports. The site does insist a CSR report includes quantified data and a timescale to differentiate reports from marketing brochures. If there's a relevant section in an Annual Report or an 'integrated report' that is at least six pages long, Corporateregister also accepts it.

The inclusion of assurance statements has increased every year for the past 15 years, with 650 verified reports of the 2600 CSR reports published in 2007, up from 500 verified reports in 2005, and double the number of CSR reports with assurance statements in 2002. The site doesn't track whether the reporting companies are publicly or privately owned.

Companies employ three main methods to assure the information in their CSR reports. These methods include internal reviews of CSR reports, stakeholder review panels, and hiring CSR consultants or assurance companies.

"The question of independence goes to the heart of meaningful assurance, which is why we identify it as a 'Key Element'," said Paul Scott, managing director of Started in 1998, is a website dedicated to providing global CSR resources.

Beyond the added credibility of using a third party to verify the information found in reports, assurance organizations can also help companies gain insight into their risk management strategies and the management of CSR related issues. Assurance organizations catch human errors in reports that pull together information from all over the company and, perhaps most importantly of all, third party organizations can act as sounding boards for companies to see themselves from an outside point of view.

"One of the key messages of 'Assure View' is that companies which write the reports cannot at the same time be regarded as offering truly independent assurance. By taking on both tasks such an organization cannot be considered to be independent," said Scott.

The report examined assurance statements from 90 large cap companies from the UK, US, Germany, Australia and Japan, selecting the largest 18 companies in each country (by market cap) that publish a CSR report with an assurance statement. Using these assurance statements, the authors identified five "Key Elements" for a meaningful assurance statement.

The authors identify the first Key Element to a meaningful assurance statement as the reference to a standardized assurance approach, such as AccountAbility's AA1000AS or International Auditing and Assurance Standards Board's ISAE 3000. Unfortunately, some assurors are confusing the UN's Global Reporting Initiative (GRI) as an assurance standard.

"The GRI Guidelines are a reporting standard/tool, not an assurance standard/tool," said Scott. "We address the GRI Guidelines at several points in the report where we point out that some assurors give the impression that they are using the Guidelines as a protocol. This is unhelpful and is creating confusion - as if we didn't already have enough confusion in this field!"

Other Key Elements identified in the "Assure View" are the inclusion of specific declarations of audience, independence and responsibility; methodology stated; provider recommendation and opinions included; and an assurance conclusion, which Scott and McGee label the most import of the their Key Elements.

Scott explained, "Key goals must be to encourage greater uptake of assurance in CSR reports and to make this assurance 'meaningful' by which we mean following our identified Key Elements of assurance best practice. At the moment the three major assurance provider types are all coming from different directions, and their paths need to converge."

The report also looks at the type of independent organizations used to verify reports, the sectors most likely to include assurance reports, and at the patterns of assurance usage across the globe. European companies not only lead in issuing CSR reports, they also lead in including assurance statements in their reports with 30% of European reports assured in 2007. This compares to only 7.5% of North American companies including assurance statements in CSR reports.

"We don't know why, specifically, North American reporters are so reluctant to use assurance in their CSR reports, but the statistics show clearly that this is the case," said Scott. The authors write in the report, "US companies are reporting, but they are not covering the depth and breadth of issues seen in European reports. The development of assurance provision is contingent upon a foundation of quality disclosure."

As the "Assure View" report is sponsored by four of the largest assurors--SGS, KPMG, LRQA, and The Reassurance Network--it is interesting to think of the independence of the report itself. However, the conclusions and methodologies in the well written report all point to assurance statements growing in concert with CSR and sustainability reporting as companies realize the material risks of social, environmental, and governance issues.

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