The possibility of assurance on sustainability reports : a literature study

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The possibility of assurance on

sustainability reports

A Literature Study

Bachelor Thesis Economics and Business

Accounting & Control

Student: Marijn E. van Beek Student number: 10761497 First supervisor: dhr. A.T.A. (Andre) Koet

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Statement of originality

This document is written by Marijn van Beek who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Sustainability is becoming a more important topic in social, environmental and economic perspective. This literature study aims to explore the possibility of assurance on sustainability reports. Consequently, the study explains why companies invest in, and report on sustainability. Thereafter, assurance on sustainability reports is analysed and the value added by this assurance is questioned. The results show that it is not possible to give assurance on sustainability reports in the same level as assurance on financial reports. These findings could present a format of implications for future studies.

Keywords: Sustainability report, assurance, Global Reporting

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1 Introduction

In today’s world, climate change is a big topic. World leaders collaborate on changes that need to be made, to make sure that the environmental damage is minimized. For example, at the Paris climate conference, where 195 countries adopted the first universal and legally binding global climate deal (European Commission, 2015). Besides the development in politics on climate change, there is an increasing demand for the responsibility of corporations, specifically in sustainability.

The chairman and CEO of PepsiCo explains her perception of sustainability in the annual sustainability report: ‘The root of the word sustain is defined as cause to continue for an extended period or without interruption. From the goods and services we produce, to the energy and natural resources we use, to the lives and livelihoods we support, corporations have a big impact on our communities. And when we act responsible, we can contribute to the sustainability of our way of life around the world (PepsiCo, 2016).’

The direct cause of writing this literature study on sustainability comes from audit companies, for instance PricewaterhouseCoopers (PWC), that are already focusing on non-financial audits, and mainly on sustainability. They are helping companies to develop a sustainability report. These companies question the likelihood of assurance on sustainability reports. Specifically, they considered if it is possible to publish those reports in the same way as the financial reports at which PWC normally works on.

The standard practice that companies like PWC normally perform, is done by register accountants. As a register accountant, a person has the legal authority to give a statement, called opinion, on the reliability and accuracy of a company’s statements. These statements can be separated into the financial statements, and the non-financial statements that are not much developed yet. This literature study examines this subject, specifically on sustainability.

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6 growth is not possible unless this growth is socially and environmentally sustainable (Epstein, & Rejc, 2014). An example of this growing importance is that big companies like ING Group (2017) and Visa Inc. (2016), or small companies like the Dutch Tony Chocolonely (2016/2017), are asking audit companies such as PwC and EY to help them create a report of non-financial statements.

The purpose of this literature study is to answer the following question: ‘To what extend is assurance on sustainability reports possible?’ A literature research is, and studies on sustainability are examined. The relevance of this literature study is apparent from the fact that there is a growing awareness among companies and an increasing demand of customers on sustainability reports (EY, 2016; Ferguson, & Pündrich 2015). Furthermore, this study is a contribution to previous studies, because the quantity of research done on non-financial assurance like sustainability is relatively low compared with the research effort on auditing (Ferguson, & Pündrich, 2015). Hence, this literature study guides future study directions in more research and regulations on this matter, and therefore draws more attention to sustainability.

This literature study first provides a framework of definitions in section 2. By looking into scientific literature, a framework is build. The theoretical framework contains 4 issues, which are assurance (role of auditors), sustainability, accounting framework and stakeholders. In section 3, the methodology is described. The following section, section 4, discusses the limitations, future research, and practical and theoretical implications. Finally, a conclusion is drawn.

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2 Theoretical foundation

This theoretical foundation discusses four issues. First, the origin and meaning of assurance, the role of auditors, and the definition of sustainability are explained. Thereafter, an overview of existing accounting frameworks is given. Following, an explanation of relevance of assurance on sustainability reports in this matter is given. Therefore, the stakeholders are analysed.

2.1 Assurance

‘The fundamental purpose of the audit is to provide independent assurance that management has, in its financial statements, presented a “true and fair” view of a company’s financial performance and position.’ (PWC, 2013). Companies prepare these financial statements in accordance with accounting frameworks like Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS). By evaluating the financial statements with these frameworks, the auditor is able to determine whether the company has met the requirements and therefore can find misstatements like misappropriation of assets or fraudulent financial reporting (Simnett, Vanstraelen, & Chua, 2009). Simnett et al. (2009) refer to Blackwell, Noland and Winters (1998) to explain the existence of assurance, which is the reduction of information asymmetry with creditors, also called the ‘agency theory’. Kolk and Perego (2008) also refer to the agency theory. They state that the demand for assurance derives from the need to mitigate agency costs. These costs are associated with information asymmetry with the institutional creditors, and resultant loss of control due to lack of observability of managers’ behaviour.

In this literature review, the concepts ‘accountant’ and ‘auditor’ are distinguished by using an interpretation of Limperg’s ‘Theory of inspired confidence’ (Limperg Institute,

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8 1932/1985). Limperg gives a meaning to auditing by considering the auditing profession an indispensable function and an integral part of markets. The goal of Limperg was to define the function of an accountant and subsequently have the theory serve as a framework for the development of standards for accountants. Limperg suggests that there is a distinction between the controlling body of the management of a firm, and the controlling body of society. Furthermore, there is a need for a separation of the conducting and controlling function, because both functions require different characteristics and knowledge and more importantly, because the conducting function also can derive a profit from the results of the audit. The information given by the auditor is used by stakeholders for expectations and decisions and therefore need an independent accountant to determine whether the information issued is reliable.

In addition, Blackwell et al. (1998) describe four levels of ratings given by an auditor. The first level is reasonable assurance, which means a low risk of material misstatement. This valuation requires a comprehensive evaluation of the financial statement of the firm that is being audited, and therefore can only be given by a qualified external party, which is the auditor. The auditor gives his professional opinion on whether the financial statement fairly reflects the company’s performance over a given period, in accordance with a framework like GAAP or IFRS. The second level is a review, which is less comprehensive compared to the reasonable assurance, since it provides a negative assurance. This level of assurance indicates a moderate risk of material misstatement. The third level is a compilation, which is an assemblage of the firm’s financial information in a format like GAAP or IFRS. Using a compilation, the company does not have assurance on its statements. The final level of rating is given by the internal accountant, who makes a company-prepared statement, which gives no assurance like an independent assurance report.

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9 Assurance on sustainability reports can be provided by three groups. First, the professional accountants, who are subject to independence and professional conduct requirements. They work with professional standards and more detailed and consistent reporting formats, but limit the extent of wrong assurance opinions, which promotes the quality of the audit. Secondly, companies can engage with third-party sustainability consultants. This group has more expertise on the sustainability matter. The third group represent the internal auditors, who have the ability to add reliability to the sustainability report, and is often the less expensive option for a company (Peter, & Romi, 2015). Peter and Romi ( 2015) argue that companies who ask for assurance recognize the potential differences between these three groups when deciding whether to utilize assurance services.

2.2 Sustainability

The term sustainability has many definitions. However, according to Carter and Rogers (2008), the most widely accepted definition is described in the Brundtland Report (World Commission on Environment and Development, 1987), which states: ‘Meeting the needs of the present without compromising the needs of future generations. Sustainable development is not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs’.

Sustainability derives from the umbrella term non-financial information. This term covers issues related to sustainability, corporate responsibility, environmental and governance, ethics, human capital, environment and health and safety (EY, 2015). However, the main focus of this study is on sustainability.

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10 There are different understandings and views on the content of sustainability, mainly for the reason that it means different things to different stakeholders, who have different concerns. For example, stakeholders with interests in the environment may be more concerned with the reduction in air pollution, compared to customers who may have concerns related to product quality and safety (Lu, & Taylor, 2016). Mohrman and Worley (2010) state that there are varied opinions about the relation of companies with sustainability. At one extreme, the negative effect human activity as a contribution to global warming has, including corporate accountability that causes for instance toxicity, pollution, or social injustice. On the other extreme, they mention the positive effect that firms can have by building a more sustainable future. The understanding of Rezaee and Tuo (2017) is that the explanation of sustainability is build??t on the stakeholder theory (Freeman, 1984; Jensen, 2001; Ng, & Rezaee, 2015). This theory separates two aspects of sustainability: disclosure and performance, both interrelated and intended to benefit all stakeholders. They refer to the PWC report ‘Guide to forward looking information’ (2016), which states that management often pays attention to future environmental, social and governmental (ESG) sustainability that affect business operations to improve the corporate governance effectiveness, and align the firm’s interest with the interests of the stakeholders.

The final example of an explanation of sustainability is retrieved from ‘Making sustainability work’ (Epstein, & Rejc, 2014). They used 9 principles as a foundation throughout the book (Epstein, & Roy, 2003), which are shown in table 1.

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11 ● Ethics ● Governance ● Transparency ● Business relationships ● Financial return

● Community involvement/economic development ● Value of products and services

● Employment practices ● Protection of the environment

Table 1: Principles sustainability (Epstein, & Roy, 2003)

The main focus of this literature review will be on the criteria that are usually included in sustainability discussions, analyses, measurements and reports: social, environmental and economic, which are also the main focuses of the Brundtland Report (World Commission on Environment and Development, 1987) and many other reports (Ballou, Heitger, Landes, & Adams, 2006; Brown, de Jong, & Levy., 2009; Carter, & Rogers, 2008); Kolk, & Perego, 2008; Morali, & Searcy, 2012).

The interrelated dimensions social, environmental and economic are translated into different contexts, leading to different definitions of corporate sustainability, and the inconsistent application of the term (Carter, & Rogers, 2008). Carter and Rogers (2008) refer to the triple bottom line, a concept developed by Elkington (1998, 2004). The triple bottom line suggests that intersection (see figure 8) of social, environmental and economic performance, leads to a positive effect on all three levels.

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2.3 Accounting frameworks

When a firm is performing an audit, the goal is to determine whether to give assurance on the disclosed statements or not. In this process, the auditor uses a framework with criteria to give judgement on relevance, reliability, neutrality, understandbility and completeness (IFAC, 2013).

There are several reasons for the existence of accounting frameworks. There is a difference between what is actually being measured and what is expected to be known and represented. One example for this statement is the difference between historical cost of an asset and the fair value of an asset. Historical costs are often implicated because it is easier to measure when compared to the fair value of an asset, even though fair value gives a more fair representation of the financial statements (Baskin, & Krull, 2017).

Another reason highlighting the importance of accounting frameworks concerns the risk on faulty information for decision-making. Information has to be integer, which means the trustworthiness and dependability of information, also defined as ‘the accuracy, consistency, and reliability of information across content, process, system and environment’ (Ramamoorti, & Nayar, 2013). A framework should consist criteria for this integer information. Ramamoorti et al. (2017) state that the use of poor quality inputs, also lack of integrity of information, leads to faulty economic decisions. In this literature study, a ‘faulty economic decision’ exemplifies that assurance is given by the auditor, while not justified.

To apply the concept of accounting frameworks, Simnett et al. (2009) refer to the Brundtland Report (World Commission on Environment and Development, 1987). This report is an inspiration for many and varied initiatives in building frameworks for sustainability. They provide three examples: ‘pressure exerted by lobby groups for environmentally friendly disposal of unused assets, corporations banning the use of child labour in supply chains and the current emphasis on the reduction of carbon

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13 emissions.’ This report initiated cooperation in development in sustainability. Therefore, concepts have been developed on sustainability like human resource accounting in the 1970s, intellectual capital, environmental and triple bottom line reporting in the 1990s. The most recent version is the Global Reporting Initiative (2007).

In addition to the reference to the Brundtland Report (World Commission on Environment and Development, 1987), Simnett et al. (2009) exclude two categories. First, the special purpose reports, which are not intended for the general public but primary for internal decision-making. Second, the non-financial information disclosed in annual reports. Examples of specific regulators are the Sustainable Stock Exchange Initiative (SSE), the Investor Network on Climate Risk (INCR), a project of Ceres, and the Sustainable Working Group of the World Federation of Exchanges (WFE). These initiatives are led by both international organisations and by investors (GRI, 2007). The disclosed non-financial information has no regulations in the form of a stand-alone report for the general public. Currently, there are several criteria of sustainability. However, none of them are as usable as for example GAAP or IFRS. For usable criteria of sustainability, needs of all stakeholders need to be collected. Future generations and the environment are included in this group. It is difficult to create these criteria because every individual company has its own group of stakeholders, who needs its own criteria (Simnett et al., 2009).

Regarding these currently existing frameworks and criteria, Kolk and Perego (2008) state that the Global Reporting Initiative developed the most comprehensive standard. GRI is aiming to develop generally accepted standards for sustainable reporting and is reviewed as best usable compared to the other existing standards (Kolk, & Perego, 2008). The main goal of GRI is to make sustainability reporting standard practice. Therefore, guidelines are produced to enable all companies and organisations to report their economic, social and economic performance (GRI, 2013).

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14 On the contrary, the weakness of GRI is that it is unable to demonstrate significant instrumental value to intended users. Apart from that, GRI shows that information indeed must have a usable format and content (Brown et al., 2009).

Additionally, Kolk and Perego (2008) and Brown et al. (2009) show the development in assurance frameworks, which is presented in table 2. Next to that, GRI (2015) published national standards, which shows the sources for national standards of 15 countries1.

International standards:

● AA1000 Assurance Standard (AA1000AS) (AccountAbility, 2003a, 2003b)

○ Most recent version: AA1000AP 2018 ● International Standard on Assurance Engagements

(ISAE2000) (IAASB, 2003)

○ Most recent version: ISAE 3000 (IAASB, 2013)

National standards:

● Standards Australia (Australia, 2003)

○ Most recent version: Standards Australia/ Standards New Zealand (2013)

● Royal NIVRA (The Netherlands, 2005)

Table 2: Assurance standards (AA1000AP, 2018; Kolk, & Perego, 2008; Standards Australia/Standards New Zealand, 2013).

In summary, frameworks that consist criteria are needed. GRI is the most comprehensive initiative, leading to several frameworks. Development in guidelines for sustainability reports is due to specific regulators and cooperating between companies and countries.

1_{Australia/New Zealand, Brazil, Canada, China, France, Germany,}

Italy, Japan, The Netherlands, Spain, Sri Lanka, Sweden, Switzerland, USA.

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2.4 Stakeholders

Auditors working on financial statements are generally appointed by the stakeholders of a company to enhance the degree of confidence in the reports. However, sustainability reporting is different compared to financial reporting, because it is not only a matter of disclosure, it is also an integral element. Additionally, an audit could provide insights on areas where management may improve their controls or processes. Considering sustainability is mainly meant for stakeholders, this group needs to be identified. This group of stakeholders is different for all companies (Kolk, & Perego, 2008).

The identification of stakeholders is related to how the relationship to this group is considered and how they are involved in decision-making on sustainability. Epstein and Rejc (2014) refer to four different types of stakeholders. First, individuals that can either have effect on or are affected by the organisation. Second, an individual that can be both affected or affect the decision-making itself. Third, the core stakeholders, who are visible and have power or legitimacy and therefore are able to have impact on corporate decisions. Finally, the fringe stakeholders, who are disconnected from the company (Epstein, & Rejc, 2014). The most common stakeholders are shown in figure 1 (PWC, 2013).

Types of stakeholders vary among companies. A Dutch chocolate bar company, called, Tony’s Chocolonely, has the goal to make 100% slave free chocolate. Their stakeholders are the cocoa farmers, chocolate companies, shops, customers and governments, as seen in figure 2. Another example of stakeholders comes from The Coca Cola Company. Their key stakeholders are presented in table 3:

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16 ● Bottling partners ● Consumers ● Customers ● Communities ● Employees

● Governments and regulatory authorities ● Non-governmental organisations ● Shareowners and analysts ● Suppliers

● Trade groups and industry and policy organisations

Table 3: Stakeholders Coca-Cola Company (Coca-Cola Company, 2016).

Kolk and Perego (2008) and Simnett et al. (2009) explain the importance of the difference between common law and code law legal systems. Common law countries use the shareholder model. The main purpose of this model is to maximize shareholder wealth. Code law companies are considered to be socially responsible, achieving goals beyond economic efficiency, also referred to as the stakeholder model. This research mainly focuses on the code law companies and assume that companies and stakeholders cooperate on sustainability.

Adams and Frost (2008) state that the actions taken by company’s management on sustainability performance and the stakeholders’ reactions, affect the long-term corporate financial performance. That is why managers should make a performance framework reflecting their concerns and interests, to achieve actions. This framework is built by a set of Key Performance Indicators (KPI’s). KPI’s are used for decision-making, planning and performance management and measure financial, physical and attitudinal aspects of performance. A company identifies its KPI’s in consultation with key stakeholders (Adams, & Frost, 2008).

To conclude, the demand of society for assurance on sustainability report leads to development on this matter by companies. It helps to reduce agency costs and confers

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17 greater user confidence in accuracy and validity of the information provided in the reports. Since sustainability is a relatively new subject, and few studies on this subject exist, several interpretations are given and therefore several frameworks can be used. GRI is the most comprehensive standard. To decide on goals and to report on the achievements of sustainability, companies need to identify their stakeholders, who are different for every company.

3 Literature study

3.1 What are companies’ incentives to invest

in sustainability?

‘To ensure long-term financial success, businesses need to recognize that they are operating within a larger biophysical and social environment, and respect the limits and processes governing the sustainability of the larger ecosystem as the global economy expands rapidly toward the carrying capacity of the planet’ (Joshi, & Li, 2016). Hence, firms are being challenged to invest in sustainability and to maintain and improve shareholder value.

Given the growing interest in sustainability, it is important to distinguish the three most important interests of stakeholders in this matter. They seek information on environmental and social impacts of business operations, as well on disclosure of the material environmental risks and related costs and liabilities, which is part of the economic impact (Joshi, & Li, 2016). Subsequently, the most important motives for managers for deciding to invest in sustainability are for legitimation reasons, image building or economic reasons (Asif, Searcy, Santos, & Kensah 2012).

Complementary to the motives given by Asif et al. (2012), Morali and Searcy (2013) state that the most common

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18 motives for sustainability investments are pressures from customers and other stakeholders, competitive advantage, supplier management for risks and performance, and environmental and social advocacy.

Hales, Matsumura, Moser, and Payne (2016), describe the debate on viewpoints on the economic decisions of investment in sustainability. A first view states that the goal of all investments is to maximize owner’s wealth. Therefore, all benefits to society that arise from a company’s investment in sustainability, are by-products of management’s decisions to maximize its company value. Consequently, managers should only be obligated to disclose information that is material to investors, since the main goal is to maximize owner’s wealth. A second view is that managers should invest in sustainability, even though it leads to lower profits. Since the company’s investments affect society, this will eventually lead to owner’s utility. Therefore, managers should be obligated to disclose information on sustainability along with financial information, in order to maximize their utility for investors. The third view draws on the stakeholder theory. This theory states that businesses exist in a social setting and therefore rely on society, which in this context means that they rely on environmental capital. As a result, they need to consider stakeholders and the external impacts on sustainability in their decision-making (as cited in Joshi, & Li, 2016).

Another economic perspective on the main motive for investment in sustainability is given by Lys, Naughton and Wang (2015), who suggest that a firm may undertake sustainability because the firm expects strong future financial performance. This is a different hypothesis compared to most comparable studies because others often suggest that evidence of a positive association implies that sustainability expenditures lead to improvements in a firm’s performance. They state that a firm’s motive for investing in sustainability can be in anticipation of its strong future performance, instead of improved financial performance being the consequence of investment in sustainability. Béhabou and Tirole (2010)

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19 suggest that sustainability expenditures are made on behalf of stakeholders, in a form of delegated philanthropy (as cited in Lys et al., 2015). However, Lys et al. (2015) refute this statement in their research. Other studies that highlight the future financial performance state that sustainability investment may attract and retain high quality employees, improve effectiveness of the marketing of products and services, increase demand for products and services, or provide superior access to valuable resources. It may also improve companies’ financial prospects because it can act as a form of reputation insurance or mitigate the likelihood of negative regulatory or legislative action (Cochran, & Wood, 1984). Lastly, Dhaliwal, Tsang and Yang (2011) find that the disclosure of sustainability information leads to a reduction in cost of capital, higher institutional investor ownership, and broader analyst coverage.

Morali and Searcy (2013) explain three theories that also provide reasons for the adoption of sustainability practices: the contingency, institutional and stakeholder theory. The contingency theory states that the optimal design and leadership style of an organisation depends on internal and external restraints. An organisation must fit with the environment in which it operates. Therefore, firms must account for their size and strategy, and organisational structure when applying sustainability into their strategies. For example, large companies are more likely to invest in sustainability compared to small companies. The institutional theory examines how the external environment acts as incentive for organisations to adapt internally. Specifically, it facilitates the ability to examine interactions with different stakeholders and how to consider stakeholders in their strategies. Lastly, the stakeholder theory, which is already explained by Joshi and Li (2016). Morali and Searcy (2013) interpret this theory in the sense of internal and external parties exerting pressure on firms to change organisational pressures. This theory is applicable because stakeholders’ pressures may lead firms to adopt sustainability in its strategies (Morali, & Searcy, 2013).

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20 Finally, as a result of investment in sustainability, Clarkson, Fang and Richardson (2013) state that operational efficiency is improved. Because development contributes to society and to the firm’s own economic performance. However, it can be argued that not every company can benefit from these investments. Firm-specific resources cannot be replaced easily by new, sustainable investments (Joshi, & Li, 2016).

3.2 What are companies’ incentives to report

on sustainability performance?

To begin with, Joshi and Li (2016) studied a large body of accounting research that shows that disclosure of information on sustainability is likely to be strategic. In addition, many studies prove that the information to be disclosed is relevant for industrial settings. Moreover, it is proven that performance on sustainability affects the behaviour of for instance creditors, shareholders, analysts, and managers (Joshi, & Li, 2016). Many companies including DuPont, Mobil, Allstate, Gap Inc., and British Petroleum-Amoco recognise the potential comparative advantages of publicly disclosing their goals and achievements related to sustainability (Ballou et al., 2006).

Additionally, the World Business Council For Sustainable Development WBCSD (2017) shows that the importance of disclosing on sustainability is growing on national and international level. In 2016 and 2017, by collaborating, 17 countries2 introduced at least 86 significant constitutive instruments that ask companies to disclose environmental, social and governance (ESG) performance. Furthermore, stock exchanges in India, Norway, Poland and Singapore have introduced listing requirements that require

2_{Austria, Belgium, Canada, Czech Republic, Denmark, Finland,}

France, Germany, Greece, Hungary, India, Italy, the Netherlands, Panama, Romania, the UK and the United States.

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21 clear disclosures on good corporate governance and on environmental and social issues (WBCSD, 2017).

KPMG (2017) also investigates the international growth of sustainability reporting. The global head of sustainability services José Luis Blasco states that the number of reporting regulation is growing. He argues that the international reporting landscape will continue to cooperate on building frameworks. Moreover, he claims that non-financial is the new financial, which implies that non-financial information is becoming more relevant. Thirdly, he states that ‘times are changing,’ and that more than three quarters of the world’s largest 250 companies are including non-financial information in their annual financial reports. Another statement mentioned in this survey is from the Chair of Corporate Reporting Dialogue Ian Mackintosh. Mackintosh is quoted by saying that he expects to see greater alignment and consistency among the various reporting standards and frameworks, which makes reporting easier and therefore, gives greater clarity for governments and regulators. He is expecting a growth over the next five years as well. Olivier Boutellis-Taft, Chief Executive of Accountancy Europe, explains one of the reasons for the difference of sustainability reports among countries in the European Union (EU). Countries that already had regulations for sustainability within companies were able to shape the requirements to new regulations given by for example the EU Non-Financial Reporting Directive. Countries that lacked existing regulation had to play a ‘waiting game’ to see how the new requirements would be applied in national law.

The EU Non-Financial Reporting Directive is an EU law, which requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. The companies that have to apply this new regulation are large public-interest companies with more than 500 employees. This covers approximately 6000 large companies and groups across the EU. The information that companies are required to disclose is about the policies they implement in relation to environmental protection, social

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22 responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards. To disclose this information, companies may use international, European or national guidelines to produce their statements. For instance, they can rely on the OECD guidelines (2011) for multinational enterprises and ISO 26000 guidelines (2010). Companies can choose the guidelines they use themselves because they have their own characteristics (European Commission, 2017).

The guidelines in the OECD guidelines report (2011) express the shared value of the governments of countries from which a large share of international direct investment originates and which are home to many of the largest multinational enterprises. The guidelines aim to promote positive contributions by enterprises to economic, environmental and social progress worldwide. The report starts with concepts and principles about how the guidelines should be interpreted. These guidelines encourage enterprises to support the initiatives and social dialogue on the responsibility of companies in this matter. The OECD guidelines (2011) use the concept of materiality, which can be defined as ‘information whose omission or misstatement could influence the economic decisions taken by users of information’. In order to determine what information should be included in the disclosure, they use materiality as a minimum. They also state that the disclosed information should be in accordance with high quality standards, to be able to be reliable and comparable for investors and to improve insight into its performance. The guidelines should contribute to improve this quality.

The second standard recommended by the European Commission is the ISO 26000 guidelines (2010), which provides guidelines on how businesses and organisations can operate in a social responsible way. The main idea of this framework is for companies to act in an ethical and transparent way that contributes to the health and welfare on society.

Prior studies show different opinions on these sustainability reports. As stated before, transparent disclosure

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23 can enhance trust with stakeholders, affect internal and external behaviour, and increase comparability and competitively between companies (Deegan, & Rankin, 1996; Holder-Web, Cohen, Nath, & Wood, 2009; Lougee, & Wallace, 2008). Negative aspects of GRI-oriented sustainability reporting are for example given in a study published by Hahn and Lülfs (2014). They state that companies can misuse sustainability reports by only disclosing positive information, and therefore present a lack of negative information. They often try to use positive information to hide what is not profitable to be shown and to improve their reputation and legitimacy, which is also called ‘greenwashing’. Therefore, the main reason for these reports to exist, which is to improve transparency, can be questioned since these reports might not give a fair representation of the company’s performance. GRI created reporting principles for organisations to observe, that are relevant for avoiding ‘greenwashing’, stated in table 4 (GRI, 2011-2014).

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24 ● Balance: The report should reflect an organization’s

positive and negative sustainability impacts to enable a reasoned assessment of overall performance.

● Comparability: Issues and information should be selected, compiled, and reported consistently. Reported information should be presented in a manner that enables

stakeholders to analyse changes in the organization’s performance over time, and analyse performance in comparison to other organizations.

● Timeliness: Reporting should follow a regular schedule, and information should be available in time for

stakeholders to make informed decisions.

● Accuracy: The reported information should be sufficiently accurate and detailed for stakeholders to assess

performance.

● Clarity: Information should be presented in a manner that is understandable and accessible to stakeholders. ● Reliability: Information and processes used in the

preparation of the report should be disclosed in a way that could be subject to examination, and that establishes the quality and materiality of the information.

Table 4: Reporting principles (GRI, 2011-2014)

Nevertheless, such initiatives cannot completely solve this problem. The main reason for this, is the lack of studies within this area. Hahn and Lülfs (2014) state that the dimension of legitimizing strategies regarding language and rhetoric in sustainability reports are not thoroughly examined yet. On the other hand, it can be harmful for a company to mislead stakeholders with hiding negative information, since it can lead to mistrust and scepticism regarding the reliability of their sustainability disclosure. Moreover, greenwashing will be likely outweighed by the market’s awareness on the reliability on such disclosures. Finally, disclosing negative information can give a positive signal in terms of actively managing risk, thus helping to avoid future issues (Hahn, & Lülfs, 2014; Peter, & Romi, 2015).

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3.3 How do companies currently report on

sustainability performance?

To disclose information on sustainability, companies choose to develop a sustainability report. The World Business Council for Sustainable Development (WBCSD, 2017) defines sustainable development reports as ‘public reports by companies to provide internal and external stakeholders with a picture of the corporate position and activities on economic, environmental, and social dimensions’.

For the development of sustainability reports, companies have set achievements by using for instance the externally created Sustainable Development Goals (SDG’s) or internally created KPI’s. The SDG’s, created by the United Nations (2015), give context to the way companies can contribute to sustainability. KPI’s are indicators that a company uses to measure and compare its performance. These indicators are created by the company, specifically on material issues of its targets and goals.

To disclose information on these goals and its achievements, reports are prepared based on reporting criteria. These criteria are generally established by outside organisations, or internal guidelines. Many articles state that the guidelines created by GRI are the most widely used (Ballou et al., 2006; Brown et al., 2009; Kolk, & Perego, 2008; Srivastava et al., 2013.; WBCSD, 2017). The guidelines were launched by GRI in 1997. They were eventually meant to serve as generally accepted reporting standards. Because of these guidelines, more and more organisations began to develop standards and help GRI to build reporting guidelines that are accepted worldwide. As a consequence of the development of these guidelines, widely shared assumptions were formed. Brown et al. (2009) describe three of these assumptions. The first assumption is the empowerment of social actors to demand accountability and performance from companies. The second assumption is that companies are expected to being socially responsible, transparent and accountable to gain

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26 competitive advantage. The third assumption underlying GRI is that stakeholders are a new form of civil regulators or collaborative governance.

WBCSD (2017) shows that 85% of the questioned companies follow either GRI guidelines or standards when developing their sustainability reports. Brown et al. (2009) state that by the end of 2007, approximately 350.000 organisations and individuals have participated in the development of GRI guidelines. In October 2006, GRI released its second set of reporting guidelines, called the G3 Reporting Framework, which led to a rapid increase of companies around the world adopting GRI standards and developing sustainability reports (Ballou et al., 2006; Global reporting, 2006). The G3 version of the GRI guidelines was innovative for several reasons. Among other things, it attempted to facilitate the standardisation process with the criteria ‘accuracy,’ ‘completeness,’ ‘reliability,’ ‘balance,’ and ‘fairness.’ This framework was most recently updated in October 2016, called the G4 guidelines. As stated in the G4 report, the aim of G4 is: ‘To help reporters prepare sustainability reports that matter, and to make robust and purposeful sustainability reporting standard practice.’

According to WBCSD (2017), GRI describes two kinds of disclosures that should be included in a companies’ report. First, the General Standard Disclosures, which set the overall context for the report, providing a description of the organisation and its reporting process. Second, the Specific Standard Disclosures, which are divided into two areas: Management Approach (DMA) and Indicators. The DMA explains how the company is managing its material economic, environmental and social impacts, thus providing an overview of its approach to sustainability issues. The indicators give quantitative information, providing the company comparable information on their impacts and performance. Because sustainability reporting is not ‘one-size-fits-all’, companies can either decide to disclose information on the essential elements of their sustainability performance, which is the ‘core option’, or to disclose information more specific, which is the

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27 ‘comprehensive option’. The six essential elements to include in a G4 report are stated in figure 4 (Brown et al. (2009); WBCSD, 2017).

3.4 Why do companies want assurance on

sustainability reports?

The main reason for companies to get assurance on their sustainability reports is to increase the quality reliability of information. The costs of assurance services are high, therefore it is assumed that buying assurance on sustainability reports is done when benefits outweigh the costs. Furthermore, companies voluntarily want assurance on their reports to reduce information asymmetry between company and public (Carey, Simnett, & Tanewski, 2000; Kolk, & Perego, 2008; KPMG/UvA, 2002, p18; Simnett et al., 2009). Ballou et al. (2006) explain that organisations buy assurance services to enhance the credibility of their reports by the use of a variety of approaches, either by internal or external assurance. Internal assurance includes systems or internal controls and audit functions, as a part of an organisation’s process for managing and reporting information. With internal assurance, a company increases the integrity and credibility of its reports. External assurance for sustainability reports is mostly recommended by GRI (2007). External assurance can be given in several ways, including the use of professional assurance providers, stakeholder panels, and other external groups or individuals. GRI (2007) uses the term external assurance to refer to activities designed to result in published conclusions on the quality of the report and the information it contains.

Simnett et al. (2009) find that companies that have the desire to build a corporate reputation have greater probability of getting their sustainability reports assured. They support this with research on the factors that increase the desire to improve credibility like company, industry, and country characteristics. Companies that belong to industries having greater

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28 environmental or social impact, are expected to buy assurance services when they are exposed to greater environmental and social risks. Furthermore, they have a greater need to manage these risks and prove credibility on their disclosed information. Next to that, protectionism differs on country-level. Simnett et al. (2009) state that companies operating in weaker legal environments have a greater need for assurance to show credibility. Moreover, Kolk and Perego (2008) claim that firms domiciled in stakeholder-oriented countries are more likely to have their sustainability reports assured compared to shareholder-oriented countries. Additionally, Peter and Romi (2015) find a positive relationship between the cumulative measure of the number of firms that have provided assurance within each industry per year and sustainability report assurance. Considering this positive relationship, they argue that some firms may choose assurance because other firms in their industry provide assurance.

Additionally, Kolk and Perego (2008) state that auditing services fulfil a substituting role in ensuring control over the credibility of disclosed sustainability information. Because companies mostly purchase assurance for credibility, Simnett et al. (2009) assume that they therefore choose a higher quality of assurance provider. It is shown for the period of 2002-2004, that 42 % of the questioned companies let members of the auditing profession assure their sustainability reports. Hence, there is a strong link between the need for credibility and the provider companies choose. Simnett et al. (2009) state that high-quality assurance providers like the Big Four companies bring a high level of assurance because of their reputation. However, non-auditing specialist providers can also possess a higher level of subject-matter expertise. Their research shows little support for the association between profitability of a company and assurance provider. They do find a significant positive association between the size of a company and the choice of the assurance provider.

Furthermore, Kolk and Perego (2008) find significant positive associations related to assurance on sustainability.

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29 First, they also state that the size of a company and choice of assurance provider are related, and secondly that the probability of adoption of an assurance provider on sustainability statements increases in countries with a higher institutional pressure for corporate sustainability.

3.5 How would companies get assurance on

their reports on sustainability?

‘The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements’ (IAASB, 2013). Auditors gather evidence in order to express an opinion on whether the financial statements are presented fairly in all material aspects or give a true and fair view of the entity’s financial position for that period (IAASB, 2013).

Currently, there are no professional bodies that regulate the provision of assurance services for sustainability reporting. Additionally, there are no official criteria and standards. Organisations can use a variety of reports or assurance standards. Deegan, Rankin and Tobin (2002) found that different regions and countries use a variability of presentation formats and contents of assurance on sustainability reports (as cited in Kolk, & Perego, 2008). The current absence of an agreed set of standards reduces the comparability of assurance statements and causes significant variation between reports, mostly between countries, and the type of assurance provided (Kolk, & Perego, 2008).

Srivastava et al. (2013) build a framework to show that assurance providers can use assertions for planning and conducting a cost efficient audit on sustainability. They discuss the relevant assertions being considered in a sustainability report by using the G3 guidelines. The G3 guidelines are ‘social assertions,’ ‘environmental assertions,’ and ‘economic assertions’. Table 5 shows the sub-assertions used in this study.

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30 A1: Social reporting:

A1.1 Labour Practices A1.2 Human Rights A1.3 Social Interaction A1.4 Product Responsibility

A2. Environmental Reporting assertion: A2.1 Materials

A2.2 Energy A2.3 Water A2.4 Biodiversity

A2.5 Emissions, Effluents, and Waste A2.6 Products and Services

A2.7 Compliance

A3. Economic Reporting assertion: A3.1 Economic Performance A3.2 Financial Performance A3.3 Market Presence

A3.4 Indirect Economic Impacts

Table 5: Sub-assertions G3 guidelines (Srivastava et al., 2013)

Srivastava et al. (2013) state that the assurance provider needs to plan and collect information considering these assertions, to get evidence to support an assurance conclusion. Based on the outcomes of these assertions, which can be positive, negative or mixed, the assurance provider can estimate the level of support (Srivastava et al., 2013).

At the end of the audit, an auditor determines which level of assurance he can give on the sustainability reports. Srivastava et al. (2013) demonstrate that assurance on sustainability reports sometimes provide different levels of assurance that differ across assertions. This differs from financial audits, where one final opinion is given, which is possible when there are established criteria. They can for instance provide ‘reasonable assurance’ on some assertions, and ‘moderate assurance’ on others. They assume that evidence gathered by the assurance provider of sustainability

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31 reports is similar to audits when judging on the level of assurance, which can be low, medium and high.

Ballou et al. (2006) refer to the Starbucks independent sustainability report of 2005 (see figure 5), developed according to IAASB 2005. The conclusion of the assurance was that it was prepared consistent with its internal policies. The information disclosed in the report was reasonably supported by documentation, internal processes and activities. As written in the statement, a restriction is given by the assurance provider, who states that ‘the statement should be considered in conjunction with the inherent limitations of accuracy and completeness for CSR data, as well as in the connection with Starbucks internal reporting guidelines.’ A second restriction is given, which states that ‘currently, there are no statutory requirements or generally accepted verification standards in the United States of America that relate to the preparation, presentation, and verification of CSR reports.’ They used IAASB 2005 approved standards. However they cannot officially express an opinion compared to an opinion given in an audit in accordance with the International Standards of Auditing. The opinion given on Starbucks’ sustainability report is that it gives a fair representation of the CSR performance and activities (Starbucks, 2005). When comparing this report to the most recent sustainability report developed by Starbucks of 2016 (see figure 6), a significant difference can be noted. Whereas, the former report highlighted two restrictions the new report did not mention their relevance. However, they state that they conducted the examination in accordance to the standards established by the American Institute of Certified Public Accountants (AICPA), which is accordingly IAASB 2013, also ISAE 3000. According to Rao (2017), this framework can be used by the assurance provider to determine the terms of assurance engagement, plan and perform the engagement, and obtain evidence and ethical requirements. The assurance report states that the examination according to these standards, provide a reasonable basis for their opinion. The opinion is that the data

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32 is fairly represented, in all material aspects. The assurance provider does not give for example limited assurance, like in assurance reports on financial data.

Additionally, Shell’s sustainability report of 2005 was ranked first as number 1 in Pleon’s 2005 Global Stakeholder Report (Ballou et al., 2006). More importantly, Shell changed its approach for its 2005 report from using the independent accounting firm Moss Adams LLP, to an independent panel of experts who reviewed the development in sustainability. Therefore, Ballou et al. (2006) state that it cannot be concluded that accounting firms are the most effective assurance providers. It suggests organisations should consider several methods for providing assurance. Currently, Shell still uses the method implemented in 2005. An article on Shell’s website on the sustainability report for 2017 suggests that the Report Review Panel of independent experts helps them to make sure their reporting is balanced, relevant and responsive to stakeholders’ interests. They bought assurance from Lloyd’s Register Quality Assurance Ltd, who provided limited assurance on their data for 2017. They state that limited assurance means that nothing has come to the auditor’s attention that would indicate that their data and information is not materially correct (Shell, 2017). Therefore, the statement provided by Ballou et al. (2006) can still be applied.

There is still little understanding of the nature and extent of the practice. Therefore, Kolk and Perego (2008) show that many studies regarding assurance on sustainability provide criticism and concerns on key features of emerging practices in this area, such as assuror independence in the verification assessment, major inconsistencies regarding scope of assurance, criteria employed and levels of assurance provided, and general absence of stakeholder participation during the assurance process (Ball, Owen, & Gray, 2000). In addition, Brown et al. (2009) find that sustainability reports include a wide range of inconsistent needs and uneven data quality, selective reporting, and selective choosing of reporting frameworks.

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33 According to Asif et al. (2013) and Simnett et al. (2009), 75% of the companies publish their assured sustainability reports on both websites and formal PDF reports. The rest of the questioned companies only published their reports in formal PDF format. The issues that have moderate impact are often shown on their website, this is for example done by Shell (Shell, 2017). Additionally, 61% explicitly linked their sustainability initiatives with broader public policy. This reflects how companies implement their sustainability goals in their main corporate goals. Furthermore, Asif et al. (2013) state that this shows leadership and it will lead to other companies to follow this trend. However, sustainability reports have major gaps in the content and structure of disclosed information. It can also be questioned whether the assurance gives a good representation of the relevant facts (Asif et al., 2013).

Moreover, according to Brown et al. (2009), the most important unsolved question is whether the report, or the sustainability performance needs external assurance. Big audit firms are specialized on the financial reports of companies, while specific regulators like sustainability consultants are specialized in the sustainability performance. Peters and Romi (2015) suggest that internal audit is also an important source of assurance, because companies may utilize internal audit as a source or substitute for external assurance. Hence, the question of who should conduct the verification should be answered.

As Joshi and Li (2016) conclude, it is questionable if firms’ accounting systems built for financial reports will ever be able to address a broad system for sustainability reports. Financial accounting systems do not fit the requirements for sustainability reports and are also too limited in using for assurance on sustainability reports, because they focus on financial transactions. Additionally, it should be questioned whether sustainability accounting addresses the global sustainability issue, because currently it is not possible to define what a sustainable company looks like.

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34 On the other hand, many studies show the demand for sustainability reports of stakeholders (Ballou et al., 2006; Carey, Simnett, & Tanewski, 2000; Kolk, & Perego, 2008; KPMG/UvA, 2002, p18; Simnett et al., 2009). Because of a decrease in information asymmetry and therefore, an increase in credibility of the reported information, the trend of disclosing information on sustainability will keep on developing (Yoshi, & Li, 2016). As GRI states, the increase in sustainability reporting and the publication of the reports have been accompanied by a growing interest in the accuracy of these reports (GRI, 2013). Moreover, the demand of development in reporting and investing in sustainability is nationally and internationally encouraged, and guidelines like the GRI guidelines are developing because of a growing demand of criteria (WBCSD, 2017).

4 Discussion

This chapter discusses the limitations of this literature study, and provides suggestions for further research. Furthermore, it examines the practical implications for companies, stakeholders and the society.

4.1 Limitations and future research

The purpose of this literature study is to identify whether assurance on sustainability reports is possible. An auditor determines whether the company has met the requirements, to give assurance on a report. Currently, no mandatory criteria and frameworks exist to examine these requirements. Therefore, it is difficult to compare performance on sustainability and reliability of reports between companies on this matter. It is questionable if accounting systems for sustainability reports will ever be able to guide assurance processes like accounting systems do for financial reports. Guidelines developed by GRI are currently the most

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35 comprehensive standards to hold on for companies. However, they are not applicable in the same manner for all companies.

The main limitation of this study stems from the lack of literature to be studied, since there is no literature to be found with the explicit answer. The quantity of research done on sustainability assurance is relatively low compared with the research effort on financial assurance. Therefore, this literature study guides future study directions in more research and regulations for sustainability accounting. This leads to qualitative studies that can implicate whether assurance on sustainability reports is possible. Further research could study the difference in the possibility of assurance given by audit firms, sustainability consultants and internal accountants. It is likely that there will be a difference, since these three groups of assurance providers use different standards and criteria. Therefore, it should be researched whether one of these providers can live up to stakeholders’ demand regarding relevant information.

Additionally, this literature study implicates that the difficulty of a general set of criteria derives from the different groups of stakeholders and goals companies have. Therefore, future studies could focus on the difference between several industries. Moreover, these studies should research the impact of sustainability reports on social, environmental and economic assertions.

Moreover, this study only focusses on voluntary assurance on sustainability reports. There is no focus on advisory on sustainability reports. Therefore, future studies should research the value added by such advice, and compare this value to assurance on sustainability reports.

Finally, future studies could examine the consequences of mandatory sustainability reporting and assurance, since reporting and assurance in financial reports is also mandatory.

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36

4.2 Practical implications

The outcomes of this literature study are relevant for several groups. First, the main reason for developing sustainability reports comes from companies’ stakeholders. This study shows the growing awareness of demand for these reports, for the reason of a reduction in information asymmetry. Secondly, it is shown that it is in the strategic interest of a firm, since it enhances a companies’ competitive position, effects internal and external decisions, shows credibility of the reports, and it might cover up negative information on sustainability. Finally, the outcomes are relevant for society, since development in sustainability performance of companies will lead to a better social, environment and economy.

5 Conclusion

Sustainability is becoming a more important topic in today’s world. Therefore, companies are encouraged to invest in this matter, mainly to maintain and improve shareholder value. Several reasons are provided as incentives for companies to invest in sustainability. First, stakeholders are interested in the impacts of a company on environmental, social and economic level. Second, managers are interested in investing in sustainability for legitimation reasons, image building and these economic reasons. Present studies explain different theories on the economic decisions on this investment. Three views are given by Matsumura et al. (2016), who compare the goal of maximizing owner’s wealth, affecting society’s wealth, and the dependence on society and therefore environmental capital. Additionally, Lys et al. (2015) state that a firm’s motive for investing in sustainability can be in anticipation of its strong future performance, instead of improved financial performance being the consequence of investment in sustainability. Moreover, Morali and Searcy (2013) provide three theories that give reasons for investing: the contingency, institutional and

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37 stakeholder theory. Finally, Clarkson et al. (2013) state that operational efficiency is improved.

Companies develop sustainability reports using criteria. The most widely used criteria are based on guidelines created by the Global Reporting Initiative. Next to developing the sustainability reports, companies are interested in buying assurance on these reports. The main reasons are the increasing quality reliability of the information and de reduction of information asymmetry between company and public, also known as the ‘agency theory’.

Concluding, the results show that the assurance on sustainability reports cannot be compared to assurance on financial reports. Assurance on financial reports is done by determining the fairness of the representation of the disclosed information, by using official criteria and standards. Hence, the current absence of an agreed set of criteria and standards for the sustainability reports, makes it difficult to give a comparable assurance. Additionally, both parties, professional audits firms and interdependent experts, can practice the assurance on sustainability reports. This makes it hard to compare companies’ reports because both parties use their own set of criteria and standards.

Further research should compare assurance reports to give a more comprehensive view of the current content of assurance on sustainability reports. Furthermore, these findings can be used as a bases for further research on the assurance on sustainability reports.

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The possibility of assurance on sustainability reports : a literature study