Standard setter Mark Babington places just as much importance on the quality of an organisation’s sustainability reports as he does on the quality of their financial accounts.

“Sustainability information is being used for capital allocation decisions in the same way that financial information is being used,” he says. “People want to know what the impact is on the planet of the company’s activities, and that’s an important consideration for some investors about whether or not they put their money there.”

In addition to his role as executive director of regulatory standards at the UK’s Financial Reporting Council, Babington is a member of the International Ethics Standards Board for Accountants (IESBA). He chairs the board’s taskforce developing the ethical standards for sustainability reporting, and so is in a key position to ensuring sustainability reports are robust.

Framework not just for accountants

Babington and his colleagues are aiming to develop a framework of ethics and independent standards for sustainability reporting, equivalent to those which apply to financial audits. They are facing several challenges.

In some jurisdictions a sustainability assurance engagement – IESBA reserves the term ‘audit’ for financial accounts – isn’t carried out by accountants and auditors.

In response, IESBA is trying to develop a professional, agnostic standard which could be used by engineers and other sustainability professionals, as well as by accountants and auditors.

Sustainability reports are more forward looking, more uncertain, and subject to a lot more judgement and analysis than financial accounts. They also rely on information provided by third parties, such as details of customer and supplier emissions.

“That is a real challenge because you’ve got information being provided by other third parties that needs to be incorporated within a sustainability report,” says Babington.

IESBA is drawing on the framework and fundamental principles for the ethical standards for audits and tailoring them for sustainability reports.

For instance, just as IESBA doesn’t want auditors providing assurance over their own records, it also doesn’t want sustainability professionals ‘marking their own work’.

There is also the issue of using information from third parties for Scope 2 emissions – incurred in generating electricity for use by the organisation – and Scope 3 emissions – the emissions of customers and suppliers.

“You’ve got to be able to evaluate whether you can place reliance on that person’s work. Have they got the appropriate competence and the skills to do the work? Are they subject to any conflicts of interest? Is there anything that might undermine their independence or objectivity?” he says.

“One of the challenges is that this information is perhaps not necessarily as mature as financial reporting, so it’s still developing, albeit at pace.”

“One of the challenges is that [sustainability reporting] information is perhaps not necessarily as mature as financial reporting, so it’s still developing, albeit at pace.”

It may be that the sustainability assurance providers are not able to assure the information, or they might have to find another source.

Babington notes that the ethical standards apply to both those who prepare the sustainability reports and those who provide assurance. Just as auditors need to consider the risk of non-compliance with laws or regulations in financial accounts, sustainability assurance professionals will also need to verify that reports are compliant.

“You may be subject to a very different framework of law and regulations in a sustainability engagement compared with what you would find in the audit of financial statements. So, the auditor needs to understand what that framework is and they need to be able to evaluate what those risks are,” says Babington.

Sustainability reporting deadlines

Babington and his colleagues are moving quickly on the ethics standards because they need to be available for use when sustainability reporting comes into effect at the end of 2024 in some jurisdictions.

“One of the real challenges has been that we are under real time pressure to deliver, because standard setting normally is something that proceeds at quite a glacial pace and we’ve had a really, really fast timetable in order to be able to support high quality reporting,” he says.

Following a board meeting in December, IESBA started a three- or four-month consultation on the proposed text from January. It will incorporate feedback and finalise the standard so it is ready for use by 1 July 2024.

IESBA has devoted most of its staff to ensuring the ethical standard can be ready in time and is also drawing on the expertise of the IESBA board.

The taskforce has already held 18 months of consultation and has found strong engagement and interest, Babington says.

As important as financial audit

At a roundtable in Sydney, Babington asked if the same levels of ethics and independence should apply in a sustainability engagement as applied in an audit of financial statements. The vast majority agreed that it should be an equally high bar because of the way companies and investors will be using sustainability reports.

The ethics standard will place a similar premium on the independence of preparers and assurance professionals.

“Are you placing reliance on information where someone has a conflict of interest? Could you have a situation where you have a provider of information or provider of assurance who has a financial interest in the organisation the information is coming from that undermines their independence?” Babington asks.

Greenwashing – making false or unverifiable claims about an organisation’s sustainability performance – is a major focus of regulators around the world, and is also in the sights of Babington’s taskforce.

“Is it really greenwashing or is it just fraud?” he asks. “If an assurance provider comes across something that they might say is greenwashing or information has been omitted, then they need to consider whether or not that information is misleading. And they need to ask the provider to change it and, if the provider doesn’t, they have to consider whether or not they can carry on in that engagement.”

Government mandate

The new ethical code will apply to accountants; whether it applies to professions which provide assurance over sustainability reports is up to individual governments.

“We are providing a resource there that can be used by different professionals, and it’s there and it provides high-quality ethics and independence requirements,” Babington says. “It’s not for IESBA to mandate it.”

“We are providing a resource there that can be used by different professionals, and it’s there and it provides high-quality ethics and independence requirements.”

On the likely successful adoption and use of the code, Babington says the proof of the pudding will be in the eating – “when people see it and they can actually say, ‘Well, what does this mean for the way in which I work?’.

“I think we’ve gone through a very thorough and well informed, well supported exercise to help us get to a position where we’re able to issue something that will be high quality and will be reliable.”

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Accountant turned standard setter

Mark Babington wasn’t considering a career in auditing when he enrolled at the University of York to undertake a Bachelor of Arts in history. But while he was studying history – all of it pre-1603, the year Queen Elizabeth I died – he thought about his post-university career and started applying for jobs.

“One of those I applied for was a training scheme at the UK National Audit Office,” he recalls. “I was successful, and I got a job there and I trained as an accountant, and I had some fantastic experiences auditing different parts of the UK government but also international organisations, like the United Nations as well.”

His last accounting role was as auditor of HM Revenue & Customs in the UK, before he left to join the UK Financial Reporting Council about four years ago.

“I enjoy the variety and the fact that it gives you a chance to work with a diverse range of people coming from all parts of the world, because ultimately this is about the regulation of global business and global auditors,” he says.

“The challenge is that sometimes you face a difficult decision because what you do will create a precedent. You have to make sure that you create the right precedent.”

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CA ANZ’s position on sustainability reporting

Chartered Accountants Australia and New Zealand (CA ANZ) is a strong advocate for globally consistent and comparable sustainability reporting standards.

In Australia, Treasury is proposing that companies with more than 500 employees, A$1 billion in assets or A$500 million in consolidated revenue be required to report their emissions from 1 July 2024. Smaller companies would be included in subsequent years.

They will be required to disclose their Scope 1, 2 and 3 emissions and progress towards any reduction targets they have set. They will also have to disclose their governance of climate-related risks; their strategy for the anticipated impact of climate-related risks; and their risk management processes.

In New Zealand, mandatory climate reporting for years beginning on or after 1 January 2023 has already been introduced for about 200 climate reporting entities.

These entities will have to prepare climate statements and for reporting years beginning on or after 27 October 2024 will need to obtain independent assurance about the part of the climate statements that relates to the disclosure of greenhouse gas emissions.

CA ANZ has been advocating with regulators in both countries.

“We advocate for stable and consistent policy to support the just transition to zero-emission economies in both Australia and New Zealand (in line with commitments) to provide more certainty for business and encourage investment,” CA ANZ said in its Policy Priorities 2023 document. “We are raising awareness within the membership of the important role the profession can play in supporting businesses navigating climate risks and opportunities.”

In both countries, CA ANZ is advocating for appropriate and flexible regulatory frameworks and policy settings to integrate broader sustainability disclosures into domestic reporting frameworks, including connectivity with financial information. It is also driving conversations to develop an interdisciplinary and collaborative approach in relation to sustainability generally.