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How external auditors can help corporates report on non-financial information and meet Sustainable Development Goals

Sustainable Development Goals (SDGs) were made for governments. However, they can only be achieved if the private sector embraces the SDGs and understands that a company’s societal added-value is as important as the financial value it creates. Such non-financial information needs to be collected, provided against certain standards, and verified in order to be credible and provide reliable insights on progress towards achieving the UN 2030 Agenda. This Long Read is authored by Valérie Arnold, Corporate Responsibility and Sustainability (CRS) Leader, and Krisztina Szenci, CRS Manager at PwC Luxembourg. They share their views on why SDGs integration -and reporting creates new opportunities for businesses, and what role private audit firms can play in building trust in corporate non-financial reporting.

By Valérie Arnold and Krisztina Szenci, PwC Luxembourg

A fractured world sharing one vulnerable Earth

We are living in times of unprecedented global wealth — at a cost. Our relentless pursuit of economic development has introduced inequalities and compromised our climate, water, air, biodiversity, forests and oceans.

According to Oxfam, 99% of total wealth generated in the world goes to the ultra-rich (1% of the world population), the poorest half of humanity got nothing [1]. Meanwhile, 3.7 billion people, in the poorest half of the world, saw no increase in their wealth. Over 2 billion homes still lack safe drinking water, and more than twice that number lack safe sanitation [2]. Other than in wealth, the world is fractured by demographics. Africa is young, with an average age of 19 years. Europe is middleaged, with an average age of 41 years in France and 46 years in Germany [3]. At the same time, 44 400 people a day are forced to flee their homes due to war and persecution [4].

The world is also divided according to the skills gap between skilled workers and others. This is becoming increasingly acute as technological progress and disruption displace labour markets and calls established orders into question.

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Global initiatives — international agreements, such as Paris and the UN 2030 Agenda globally strive to foster many SDGs for all actors — private and public sectors, citizens, investors, consumers etc. — not just political forces. Businesses have a vital role to meet these goals.

Non-Financial Information (NFI) and Sustainability Reporting — the push for NFI will helps companies to share information on how they contribute to society and the environment, although this differs across EU Member States. This way, their reporting helps recognise accountability, contribute to trust and show strategy.

Sustainability reporting will grow, helps organisations to communicate their impacts on social, human and environmental issues and carve out their reputation and long-term risks.

Sustainability reporting — this opens up questions on which standards to use, also to avoid greenwashing. Yet only few companies employ measurable targets and have it integrated in their strategy. While SDGs can open up new opportunities, add financial value and avoid business risks.

Extra-financial audit — auditing has made the transition from a contractual accountancy nature to a publicinterest exercise. Extra-financial reporting frameworks are not stabilised and its disclosures combine both qualitative and quantitative information.

Role of assurance vis à vis confidence — it is important for the accountancy profession to give way to ensure data reported is reliable, complete, accurate and supported. The tendency is to have third-parties to provide assurance for long term societal value.

Given the extent of inequality, social exclusion and climate change, it came as no surprise that when world leaders met in Davos, Switzerland, in 2018 at the World Economic Forum (WEF), they did so to address the issue of ‘Creating a Shared Future in a Fractured World.’

What is required is a systems-level change to deliver a clean, resource-secure and inclusive economy that is enabled by technology and supported by public policy and private investments. Technology alone is not the answer. If not designed and scaled in a smart and sustainable way, it may have unintended consequences that imperil the Earth and society [5].

Global initiatives

The two international agreements that call for collective solutions and set the framework to ensure a sustainable future in a global economy are:

  1. The Paris Agreement (COP 21) ‘Save the planet, protect humanity’;

2. The United Nations 2030 Agenda for Sustainable Development signed by all UN countries [6].

Sustainable Development Goals (SDGs) are pertinent to governments, regulators, investors and millions of consumers. They are central to equitable and safe businesses and societal development in the coming years. As former Unilever CEO, Paul Polman, puts it: ‘We are at a turning point. Only businesses that help people and planet thrive will succeed.’

Businesses — Purpose and Profit

The vital role of businesses, as resource consumers and engines of economic growth, in meeting the goals of the 2030 Agenda is well acknowledged. They can help address basic needs of personal well-being, providing decent work, and tackling the planet’s biggest challenges of resource security, ensuring a healthy ecosystem, and working towards climate stability [7]. We are already seeing companies that have the power to be a ‘force for good’ and SDG ambassadors. Typically, these companies have a clear corporate purpose and core strategy that is aligned with the SDG agenda.

A strategic approach to sustainability can drive long-term financial value while improving productivity and growth today [8].However, for some companies, it remains a challenge to put SDGs at the core of their strategies and balance them with profitability, even though there is a clear consensus among the world business community on moving the agenda further by valuing the relevance and the opportunities they could have during this ‘transition.’ SDGs need to be at the heart of all executive agendas, according to Paul Polman, ‘SDGs offer the greatest economic opportunity of a lifetime.’ The Business and Sustainable Development Commission, launched in Davos in January 2016, in its ‘Better Business Better World’ report (2017) agrees. Reportedly, achieving SDGs could open up an estimated $12 trillion in market opportunities.

Adopting SDGs will require businesses to drastically rethink how they engage with their entire supply chain. Their coalitions will need to be able to generate profits, and have a positive social, environmental and economic impact. If they hope to attract and retain staff, investors and clients, they will increasingly need to account to shareholders and stakeholders on both financial and non-financial performance. They will need to adopt and report on the ‘Triple Bottom Line’ of people, planet and profit.

Non-financial reporting

The push for non-financial reporting will require companies to account to shareholders and stakeholders on both their financial and non-financial information (NFI). The details will necessarily have to be provided in annual reports. Ultimately, NFI will help organisations understand how they contribute, positively and/or negatively, to society and the environment. Current EU rules on non-financial reporting only apply to large public-interest entities with more than 500 employees. As a result, around 6 000 businesses, including banks and insurance companies, are subject to non-financial reporting. We believe that over time, and with some modifications, reporting will extend to companies of all sizes.

There is also a difference in how EU member states have adopted the regulation. France has extended the scope of NFI statements to cover certain unlisted companies. UK and France require NFI statements to be included in a single company annual management report, rather than publishing one separately. The approach to verification also varies between member states. Italy requires internal and external audits for all reporting companies. France requires audits for companies above certain financial thresholds.

In general, reporting leads to accountability. Honest reporting fosters stakeholder confidence, trust and employment loyalty. It facilitates sharing values and contributes towards building a more cohesive society. In a competitive landscape, it can serve as an important differentiator.

Reporting should be seen as a strategic tool to shape the company’s sustainability implementation strategy. It is a good start towards increasing sustainability performance and efficiency. Importantly, it engages stakeholders, supports sustainable decision-making processes that guides innovation and drives better performance and value creation. Other than improving client relationships and corporate reputation through transparency, reporting leads to improved long-term risk monitoring and management.

Sustainability reporting

The Global Reporting Initiative (GRI) is an independent international standards organisation that helps businesses, governments and other organisations understand and communicate their impacts on issues such as climate change, human rights and corruption. It enables companies to assess the environmental impact from their activities, and those of their supply chains.

The GRI was launched in 1997 as a result of the work between the Coalition for Environmentally Responsible Economies (Ceres) and the UN Environment Programme (UNEP). The GRI Sustainability Reporting Standards (GRI Standards) are the first and most widely adopted global standards for sustainability reporting. Of the world’s largest 250 corporations, 92% report on their sustainability performance and 74% of these use GRI’s Standards to do so.

Given corporate tendencies and government interest towards integrated financial and sustainability reporting, it’s more likely that integrated reporting will become compulsory. As a result, we expect that the need for external assurance of sustainability reports will also grow.

The GRI’s publication ‘Sustainability and Reporting Trends in 2025: Preparing for the Future’ suggests that companies will be held more accountable for their ability to create value for business and for society at large, and decision makers will be guided by ethical values, reputation and risk management. As sustainability data becomes more digitally available, technology will enable companies and stakeholders to access, collect, check, analyse, correlate and present data. As a result, business decision makers will have to take sustainability issues into account more extensively.

Source: PwC

Interestingly, according to the ‘Integrating the SDG into Corporate Reporting: A Practical Guide’by United Nations Global Compact (UNGC), GRI and PwC (2018), many companies already act and report on topics covered by the SDGs, such as climate change, water management and working conditions. To promote SDG adoption and accurate reporting, while avoiding ‘SDG washing’ (sometimes also called ‘greenwashing’), the UNGC and GRI, in collaboration with the PRI (Principles for Responsible Investment), aim to leverage on the GRI Standards and the Ten Principles of the UNGC that help businesses incorporate SDG reporting into their existing processes.

PwC’s SDG Reporting Challenge

In 2018, PwC issued its publication SDG Reporting Challenge: From promise to reality to assess whether businesses really care about the SDGs. PwC looked at the corporate reporting of more than 700 global companies (mainly listed companies), analysing their commitments to individual Goals and how their reporting reflected integration of these Goals in their business strategy.

In 2019, PwC SDG Reporting Challenge went deeper, and sought to determine how many companies had actually embedded SDG Goals in their core business strategy. The results showed that although corporate reports mention SDGs, companies report descriptively and very few have set measurable targets, or linked them to societal values. More alarmingly, even the NFI-reporting, so sustainability-focused, companies have not aligned their reporting with the SDG framework.

While 72% of the listed companies mention SDGs in their reporting, only 27% include them in their business strategy. CEOs also need to take the lead on SDG engagement. Currently, only 19% of them mention SDGs in the context of their business strategy, performance or outlook statements. CEO involvement is essential for corporate commitment to make SDGs a living reality.

Figure 1– Results at glance

Source: PwC

Main observations around corporate SDG reporting are that:

  • companies produce better quality reporting on sustainability indicators that predate the SDGs. Reporting quality is best for indicators such as ‘GHG emissions reduction, representation of women on boards and energy efficiency.’ This is likely due to companies having established processes and metrics to account for them;
  • companies that prioritise specific goals had better quality reporting than those which stated they supported SDGs in general. Companies with clearly thought-out SDG strategies prioritise the most relevant goals, and commit resources to meeting those goals;
  • companies with prioritised SDGs are more likely to have metrics and numerical targets to add weight to their reporting. Metrics and targets demonstrate a license to operate, help mitigate risks, maintain reputation and prove the business case for the SDGs;
  • companies need to understand the SDG model, with all its 169 targets and 17 goals, to select the right metrics and KPIs. This will help them avoid ´shoe horning’ more general sustainability work into the framework of and reporting on specific targets.

SDGs and Financial Value

SDGs can be used to demonstrate the financial value of sustainable action for both organisations and society at large. However, this is only possible if businesses take a reporting approach that takes into account specific SDGs and meaningfully measure progress against them. Currently, businesses need guidance on how to adopt and report on SDGs, and how to holistically integrate them into their business strategies:

  1. Awareness: Improve SDG awareness of key stakeholders in the organisation and focus on setting targets;
  2. Prioritisation: Use inside-out, as well as outside-in perspectives when prioritising the SDGs;
  3. Strategy & Implementation: Set company priorities in line with SDGs, set targets and take actions to meet those Source: PwC targets; and
  4. Impact Measurement & Reporting: Define indicators and collect data to communicate company-specific SDG impact to stakeholders.

Figure 2 — SDG integration

Source: PwC

The benefit for businesses is that stepping up to SDGs can open up new opportunities and pave the way to mitigate underlying business risks that may otherwise have remained unaddressed. Once businesses embark on their SDG journey, their goal selection and reporting will become more sophisticated and fine-tuned over time. According the 2019 PwC SDG Challenge, a blueprint for SDG success involves the following factors:

  • active CEO and senior executive interest and involvement;
  • a commitment to provide the same level of quality of reporting on financial and non-financial information;
  • selecting meaningful KPIs to use to drive action and report on progress; and
  • a sincere realisation that everyone in the organisation has a role to play in sustainability.

Climate-related Financial Disclosures

Next to the Sustainability Global Agenda, the COP 21-Paris Agreement generated strong signals to address climate change: national policies are put in place to accelerate the transition to a low carbon economy. Businesses should be prepared and do adequate reporting to respond to emerging risks and opportunities generated by climate change. Insufficient disclosure hinders the capital markets from making well-informed asset allocation and risk pricing decisions, and could pose a financial stability problem.

The Task Force on Climate-related Financial Disclosures (TCFD) advocates a scenario-based analysis approach for organisations to understand how the changing climate will impact their business. The TCFD suggests starting with at least a 2 degree Celsius (or less) scenario and following with a business-as-usual scenario. There are strong signals that the TCFD recommendations will become the benchmark disclosure standard for climate change-related reporting:

  • prominent investors, such as BlackRock and State Street, have made climate change a top engagement priority and are using their voting power to get investees to disclose against the TCFD;
  • credible sustainability benchmarks and indices, such as CDP and PRI, are aligning their scoring methodologies to TCFD;
  • the European Commission’s guideline on reporting climate related information was launched on 18 June 2019, specifically to look at incorporating the TCFD recommendations in a practical way. This guide is aimed towards companies to better report on the impact their activities have on climate, as well as the impact of climate change on their business.
  • According to the second status report issued by the TCFD in June 2019 on adoption of the TCFD recommendations, 785 organisations have expressed their support for the TCFD recommendations, a more than 50% increase since the publication of the first status report in September 2018. Leading the way is the ‘financial’ sector with 374 supporting firms (responsible for $118 trillion of assets), followed by the ‘non-financial’ sector at 297, and finally ‘others,’ such as governments and business associations, at 114.

Figure 3 — Suppport for TCFDrecommandations

Source: TCFD status report (September 2018)

With PwC’s support in artificial intelligence technology, the task force reviewed reports from 1 126 companies in 142 countries. The results indicate that while the average number of recommended disclosures implemented per company has increased by 29% from 2.8 in 2016 to 3.6 in 2018, ‘more progress is needed.’

The TCFD report of June 2019 notes that, according to the United Nations, delays in tackling climate change could cost companies nearly $1.2 trillion over the next 15 years. In June, the Carbon Disclosure Project’s (CDP’s) Global Climate Analysis report warned that 215 of the biggest global companies report almost US$1 trillion at risk from climate impacts, with many likely to be hit within the next five years. In his opening letter, Michael Bloomberg, Chair of the Taskforce, acknowledges the need for accelerating the adoption of climate-related financial disclosures saying’ […] progress must be accelerated. Today’s disclosures remain far from the scale the markets need to channel investment to sustainable and resilient solutions, opportunities, and business models. I believe in the power of transparency to spur action on climate change through market forces.’

Mandatory climate change disclosure legislation, while incredibly useful and necessary, is not sufficient. We will need to see a suite of other measures, including enforcement, practical guidance and exchange of good practices, to support an effective and efficient implementation of the TCFD recommendations.

Furthermore, if the TCFD is to provide greater transparency and clarity on the potential impacts of climate-related issues on companies, disclosures need to urgently move into the mainstream report and not principally be included in separate climate risk or sustainability reports. By including disclosures in the mainstream report, climate-related information can be better connected to financial information. This will help achieve the intended outcome of providing decision-useful information to enable the investment community to make better informed decisions on where and how they want to allocate their capital.


As non-financial information — NFI — is still in its infancy, establishing appropriate reporting systems is a challenge. Currently, many of the key leading bodies globally, such as standard setters, benchmarking organisations and industry bodies, are working together to try to create a consistent set of indicators for business to measure their performance (based on the 169 SDG targets and climate-related Key Performance Indicators — KPIs). This would be a transformative step, particularly if those KPIs could be disclosed in monetary terms, which would enable true comparison and understanding of a business’ contribution to achieving the global sustainability agenda.

Also imperative for stakeholders is the matter of trust. Companies in their reporting can claim all sorts of virtues, but can they be trusted? Trust is not only a matter of faith, global trends show that the credibility of reporting can also be enhanced by external third party assurance. This gives stakeholders confidence in the data and the integrity of companies’ reporting.

According to a study of the World Business Council for Sustainable Development (WBCSD) and PwC [9], investors interviewed said they want assurance reports to give them a better understanding of the assurance work performed on NFI and where significant judgements have been applied. Some reflected that what has been developed for financial statement audit reports could potentially be adapted for NFI assurance reports. Investors also prefer that an assurance report should be presented within the same report containing the NFI. They thought that the frequency of assurance on such information should be annual.

Extra-financial audit: still optional but could lead towards standardisation

Although financial auditing has faced its own challenges, and undergone a series of reforms, its principles are now set in stone. The movement has its origins within the accounting profession, which felt the need to develop a robust accounting framework and to more clearly define how auditors work and the terms of their engagement. The nature of auditing changed when early voluntary initiatives gave way to formal obligations, at which point auditing shifted from being a contractual to a public-interest exercise under government supervision. The IAASB [10] International Framework for Assurance Engagements (adopted in 2015) divides standards into three main categories:

  • International Standards on Auditing (ISAs);
  • International Standards on Review Engagements (ISREs);
  • International Standards on Assurance Engagements (ISAEs).

In the past 15 years, financial audit standard-setting bodies have branched out into extra-financial standards. The IAASB’s first extra-financial standard, ISAE 3000, was adopted in 2005 in response to growing demand within the profession for a framework covering non-financial audit and review exercises. ISAE 3000 (Revised), adopted several years later, introduced a series of improvements, although the basis remained the same. Like its predecessor, the revised version is similar in approach to financial audit and review standards (ISAs and ISREs).

ISAE 3000 also follows exactly the same model as financial audit and review standards on the conclusion that auditors are expected to express, offering two options: ‘reasonable assurance’ or ‘limited assurance’ [11]. The key point here is that the standard treats extra-financial information in almost exactly the same way as financial information for audit and assurance purposes — an ambitious aim given that extra-financial reporting is an innovative and constantly evolving discipline. In that sense, ISAE 3000 represents a deliberate move towards standardisation.

WBCSD’s Reporting matters 2018 showed that out of 158 sustainability reports reviewed globally, 60% opted for limited assurance, 13% had reports with a combination of reasonable and limited assurance, and only 6% had reasonable assurance. 22% of the companies reviewed did not engage any external assurance provider.

Since audits are optional, only a handful of companies willingly have their extra-financial information externally verified. According to Accountancy Europe, challenges that impact assurance engagements on NFI relate to the variety of existing reporting standards and frameworks that can cause a practical issue for the assurance practitioners to determine their approach and scope of their work.

Standardisation initiatives are ongoing in the European Union as how Member States are implementing the non-financial reporting directive [12].The directive does not require external assurance on NFI. Some countries, for example Italy and France, require mandatory verification. Notably, even without any legal obligation, many large European corporates engage an independent third party to provide assurance on NFI disclosures for management and sustainability reports, and specific key performance indicators (KPIs), etc.

While much work has gone into building an extra-financial audit and review framework, there are inherent problems that cannot be overlooked:

  • a lack of standardisation means that audit and review standards remain necessarily generic and of limited practical use. There is a strong argument to suggest that, in the coming years, audit and review standards will need to evolve in parallel with frameworks governing the substance and format of extra-financial reporting;
  • extra-financial assurance is still a largely optional exercise, meaning that engagements are performed by relatively small teams of specialist practitioners (unlike financial audit teams).

The second challenge next to the fact that extra-financial reporting frameworks are not stabilised (in form or substance) is that extra-financial disclosures combine both qualitative and quantitative information. Since qualitative information is by nature largely ‘subjective,’ practitioners can only check whether issuers’ disclosures are consistent, exhaustive and neutral, and are typically restricted to expressing limited-assurance (as opposed to reasonable assurance) conclusions.

Also, there is an important distinction between historical and forward-looking information. While auditors can use observable, verifiable evidence and indicators to check historical information, forward-looking disclosures are qualitative because, in most cases, they take the form of forecasts or commitments. Even for quantitative forward-looking information, auditors can only check whether the figures are consistent, exhaustive and neutral — and are unlikely to be able to give the same degree of assurance from one disclosure to the next.

Role of assurance in providing confidence

As the role of the accountancy profession on NFI is not clearly defined, it gives an opportunity for the profession to engage with companies on these matters to make sure data reported is reliable, complete, and supported by appropriate evidence.

At present, not all NFI can be assured in accordance with the International Standard on Assurance Engagements (ISAE) 3000 (Revised) if it does not meet certain criteria. However, there is an increasing tendency to have third-party insights. When planning and executing an engagement standard auditor concerns will remain. For example, auditors will need to consider:

  • how to evaluate the suitability of the criteria being assured;
  • materiality considerations;
  • consideration of management assertions;
  • the nature and robustness of systems being used;
  • consistency of measurement;
  • standards used for measurement and general acceptance;
  • narrative information and its assurance;
  • future orientated information and how to audit;
  • effective audit evidence needed and what can be obtained.

The good news is that practice shows that, even where frameworks were lacking, having extra-financial disclosures externally audited had helped them become more rigorous and consistent in their reporting — and made their disclosures more reliable and material. Together with standard setters and regulators, assurance providers have a role to play in education about assurance, for both companies and investors. A better understanding of what assurance tries to do can help narrow any expectation gap, enhance benefits for both parties and can improve the usefulness of assurance.

SDGs pushing businesses to long term societal value

Businesses need to create shared value to continue their role as employers, and providers of goods and services to civil society. At the same time, civil society wants to understand the purpose of a business — why are they here, what are they doing, and how will they be able to sustain the business in the long term. Businesses need to demonstrate what they are doing. Their societal value is as important as the financial value they create.

The way that businesses use information about natural capital (and human capital), for example, is already making its way into their decision-making. Companies need to look at how they:

  • measure this multicapital value;
  • understand its implications;
  • collect the important data;
  • check that it’s accurate.

This is something important for companies to report on, and something for audits to check on to build trust in the future viability of the business.The remarkable thing about SDGs is that it has only taken a few years for 193 countries around the world to come together over a common reporting platform. SDGs are going to be around for a long time, and businesses can plan and invest, given this certainty.

However, adopting the label alone is not enough. Businesses need to demonstrate a deeper understanding and engagement with the SDGs, the targets that sit under the goals, and the actions that are being taken to achieve that target and how KPIs link to these actions. Remember what Paul Polman said, ‘SDGs offer the greatest economic opportunity of a lifetime.’

[1] Oxfam, Reward work not Wealth, 2018.

[2] United Nations Children’s Fund (UNICEF) and the World Health Organisation (2015).

[3] WorldoMeters — https://www.worldometers.info/

[4] UN Refugee Agency.

[5] PwC report on ‘Innovation for the Earth’ (2017).

[6] In total 193 countries signed the UN 2030 Agenda, all the members of the United Nations. There are only two countries, the Vatican (officially known as the Holy See), which is an independent nation, and the Palestinian Authority, which is a quasi-governmental body, which cannot cast votes in the General Assembly and therefore are not signatories.

[7] CISL: In search of impact, measuring the full value of capital, 2019.

[8] UN Global Compact, 2018.

[9] WBCSD and PwC, Enhancing the credibility of non-financial information: the investor perspective, https://www.wbcsd.org/Programs/Redefining-Value/ External-Disclosure/Assurance-Internal-Controls/Resources/Enhancing-the-credibility-of-non-financial-information-the-investor-perspective

[10] The International Auditing and Assurance Standards Board (IAASB), an independent standard-setting body supported by the International Federation of Accountants (IFAC), a non-profit organisation established in 1977 under Swiss law and headquartered in New York.

[11] Limited assurance: Lower level than audit — procedures are usually inquiry or analysis, provides statement that did not encounter anything that indicates that information is not materially prepared in accordance with the appropriate framework. Reasonable assurance: Usually used for financial statements audits, provides opinion on whether statements are fairly presented, in all material respects, in accordance with appropriate framework.

[11] EU directive 2014/95

This article was first published on the 3/2019 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.



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