What Explains the Rise of ESG Assurance?

Over the last decade, investors and other stakeholders have demonstrated a preference for firms that embrace good environmental, social, and governance (ESG) practices. It is natural, therefore for firms to try to improve their ESG profiles through ESG disclosures. The central issue faced by investors and other stakeholders is to separate firms that “talk the talk” from firms that “walk the talk.” As a result, more and more firms have hired third parties to verify the metrics they use in disclosing their ESG performance, a practice known as “ESG assurance.”

In a recent study, we study the nature and extent of ESG assurance among S&P 500 firms. In particular, we ask and address two questions. First, what is the landscape and evolution of ESG assurance in the U.S. over the last decade? Second, what has motivated firms to obtain ESG assurance?

We answer those questions using data hand-collected from over 4,000 ESG reports issued by S&P 500 companies from 2010-2020. From those reports, we obtain data on firms’ overall assurance practices at the firm-year level and manually collect additional data on firms’ reporting and assurance at the firm-year-metric level for six environmental and five social metrics.

 As to the first question, about the landscape and evolution of ESG assurance, we highlight six of our many findings.

  1. ESG assurance is trending upward. Assured ESG reports are outpacing non-assured ESG reports in number, confirming the anecdotal trend that firms are increasingly and voluntarily obtaining assurance of various ESG data.
  2. Increased number of assured metrics within ESG reports, especially various environmental metrics. There are increasing numbers of assured metrics within ESG reports over the last decade. Environmental metrics are the most likely to be assured, particularly greenhouse gas metrics; however, social metrics also receive some assurance, particularly employee safety measures. Yet the proportion of assured metrics in ESG reports has remained relatively constant over the last five years, compared with the five years before, due to a rise in the number of disclosed metrics. We find that the mix of reported metrics is trending toward more social measures, attenuating the scope of ESG metric assurance within reports.
  3. Fragmented assurer market with increased consolidation. While the market for ESG assurance is relatively fragmented compared with the financial statement audit market, it shows increased concentration among non-financial assurers (i.e., assurance firms that do not offer financial statement audits). Over the last decade, the share of ESG assurance among financial statement auditors (also, “traditional auditors,” such as the Big Four firms) has remained stable at around 20 percent.
  4. ESG assurance coincides with firms’ adoption of ESG reporting frameworks. Beyond assurance, the use of various ESG reporting frameworks is also on the rise (i.e., reporting via CDP, GRI standards, SASB standards, or TCFD principles), including the utilization of multiple frameworks.
  5. Increased accessibility of ESG assurance information. Firms are making ESG assurance information more accessible. Assurance statements are increasingly referenced in assurance statements appended to the ESG report (as opposed to the statement only being referenced and only sometimes available elsewhere), and assurance statements are more often addressed to those outside the firm (e.g., owners, stakeholders) rather than insiders (e.g., management, board).
  6. Considerable heterogeneity in ESG assurance. The increase in ESG assurance comes with considerable heterogeneity in various dimensions, including the standards used by assurers to validate ESG metrics and the level of assurance, among others. Notably, the vast majority of ESG assurance is “limited assurance,” which is substantially less rigorous than “reasonable assurance” – the assurance level required for financial reporting audits.

As to the second question, about the motivation for obtaining ESG assurance, the most salient factor is firms’ adoption of ESG reporting frameworks (e.g., GRI, SASB, TCFD). Like skilled auditors, competent ESG assurers must develop an expertise in ESG measurement and reporting that enables them to supply tailored services meeting firms’ demands. Voluntarily hiring an ESG assurer recognized for competence could be a signal that complements the adoption of ESG reporting frameworks. As such, assurance can strengthen the signal of the firm’s commitment to provide credible ESG information to stakeholders because stakeholders believe that assurers have expertise in both ESG reporting frameworks and the underlying measurement standards for environmental and social metrics. In addition, ESG reporting frameworks include references to detailed measurement standards, which allow assurers to assess whether disclosed ESG metrics are properly measured against a stated standard, and in turn, to conduct more and potentially higher quality assurance.

This post comes to us from Professor Shawn Shi at the University of Washington’s Michael G. Foster School of Business. It is based on their recent article, “ESG Assurance in the United States,” which is co-authored by Brandon Gipper, an associate professor of accounting at Stanford University Graduate School of Business, and Samantha Ross, an affiliated scholar at UC Law San Francisco. The article is available here.