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We would like to see SRD II support shareholders rights by, for instance:

• removing remaining barriers to a modern and efficient voting process, by banning burdensome power of attorney requirements, physical attendance requirements, obstacles to split-voting, and manual processes. The European Commission should also ensure the ban on share blocking is implemented by all market participants in the European Economic Area (EEA).
• recognising investors’ concerns about decisions in some Member States to make the COVID-19 emergency measures of fully virtual AGMs or closed-doors AGMs permanent. This significantly limits the ability of shareholders, especially retail and minority shareholders, to interact with boards and management, ask unmoderated questions, and make statements from the floor. 
• introducing, at a minimum, a mandatory time-based sunset clause of 7 years or less on dual-class share structures, safeguarding the interests of minority shareholders and beneficiaries. Unequal voting rights are problematic because they dilute the voice of minority shareholders. They may allow founders and controlling shareholders to monopolise the decision-making and maximise their private benefits rather than company value. This can put minority shareholder interests at risk. 

At a time when regulators are encouraging investors to play a greater, and more responsible, stewardship role in promoting the long-term success of companies through monitoring, voting and engagement, the imposition of weaker voting rights will have the opposite effect, by inhibiting investor influence. If you dilute minority investors’ voting power, it becomes a much less effective tool.  

Voting helps investors hold company boards accountable and is an important escalation tool in company engagement. ICGN hopes to see SRD II support shareholder rights and remove barriers to exercising them. 

See the recent ESG Investor article quoting ICGN on SRD II. 

At ICGN, we think that to produce reliable, comparable sustainable disclosures, the first key thing is that companies must be prepared to produce sustainability information, with strong governance, internal processes and controls for that. This is a crucial element to build trust for investors, but also to ensure that the information disclosed is verifiable, ready to be assured. Companies need to introduce rigorous processes to collect the data and document the information. There needs to be similar quality control as for traditional financial information. There must be Board oversight over this process and sign off of the results by the Board. Audit Committees should demonstrate competence for the oversight of sustainability and how this impacts the financial statements.

Once that reporting is prepared by the company, assurance is the next step. Sustainability reporting covers a broad range of very complex topics, so auditors and other assurance providers will need to build capacity and the necessary expertise to assure this information. An important part of sustainability data is based on estimates and/or dependent on other companies’ reporting. Some of the information is forward looking. Methodologies are still under development, and for some topics there is a lack of clear quantifiable metrics (e.g. human rights). This is a new and difficult territory for assurance providers. So, firms need to build the right capability, with appropriate training and resourcing.

So to get this right, consistent, predictable regulation and standards are going to be important, so that companies, assurance providers and also investors can invest in the right systems, knowledge and capability to produce, assure and use this information. ICGN welcomes the work of the IAASB in proposing a global baseline for sustainability assurance engagements and of the IESBA in developing an ethics framework for sustainability reporting and assurance, including independence standards. We encourage the FRC and other national regulators to adopt these upcoming international standards, in order to have consistency in assurance engagements globally, regardless of who conducts the assurance.

While we welcome the review done by the FRC, it’s important to remember that from a user perspective, we shouldn’t let the desire for competition between service providers get in the way of a laser focus on quality.  We hope there will be a thriving market for this assurance over time, that will drive trust and value for investors, but the assurance itself needs to be high quality, consistent and reliable for that to happen.

There is debate about who should conduct the assurance of sustainability reporting; we consulted our members and found investors tend to be agnostic about this, but they want consistency in the quality of assurance, regardless of who provides it. There are a few crucial elements that need to be in place, such as appropriate independence and quality control functions, as well as having the right expertise and transparency. We also believe the assurance provider must be instructed by the board of directors, rather than the executive team, and view the company’s investors as their ultimate clients. This is key to foster trust in corporate sustainability reporting. So, it is somewhat understandable that the Big 4 and other accounting firms are doing a lot of this work at this stage – they have the experience and systems in providing independent assurance.   

ICGN sees the assurance of sustainability reporting as an important topic and will continue to work on it. We have some resources available if you want to learn more:

• Webinar interview with Barry C. Melancon, President & CEO of AICPA & CIMA, 8 July.

• ICGN Investor Viewpoint: The Assurance of Sustainability Reporting

And of course, if you come along to the ICGN Melbourne Conference we have plenary sessions on ‘Responding to the ESG backlash, why good governance is material for investors’ (which will look at how and why investors integrate governance and sustainability considerations in their investment analysis) and ‘Climate Change and Biodiversity: Transition Planning’ (which will consider climate-related disclosures).

The Corporate Sustainability Reporting Directive (CSRD) requires a range of companies to report against the European Sustainability Reporting Standards (ESRS) standards, with a double materiality perspective, and to provide limited assurance of their sustainability reporting for 2024 activities, in reports published in 2025.

This is going to be a game changer and represents a big challenge for companies. Investors will see a lot of reporting, a lot of assurance reports, and probably – a wide range of outcomes of that assurance.

As an industry we are not really used to that - most audit reports are “clean” opinions on the financial statements and there is a lot of trust built into the system that allows investors to feel comfortable relying on company financial reporting. This is a result of a mature and regulated system.

The sustainability landscape is different. We will see a range of both “limited” and “reasonable” assurance opinions, with outcomes that include “clean bills of health”, “scope limitations”, “emphasis of matter” and “qualified opinions”. What does this mean? What should we do about it? If investors see “limited” or “qualified” on a sustainability assurance opinion and think it can’t be relied on, that would be counter-productive, as those opinions give us an indication of where the company is on its journey. A qualified opinion is just as important as an unqualified opinion because what we’re seeing is the assurance provider alerting the user when something isn’t working, or the data isn’t up to standard. That can be a trigger for engagement.

Who is doing the assurance is also potentially going to be different to financial audits; the standards are still in development, but will allow for a range of providers. How will the assurance providers ensure quality, how will they build skills and capacity, how will they be regulated? There is a lot still to work out here. But we can’t just wait and see – these reports and this assurance is coming, so we need to think about it and understand what it means. Because we need to use the information now. ICGN is putting in place a series of ways to bring people together to discuss and learn about this important topic, to get the ball rolling we have:

• A member-only webinar interview with Barry C. Melancon, President & CEO of AICPA & CIMA on the 8 July.
• A plenary session, ‘Standards for sustainability reporting and assurance’, with the Chairs of the International Ethics Standards Board for Accountants (IESBA) and the International Auditing and Assurance Standards Board (IAASB), the Vice-Chair of the International Sustainability Standards Board (ISSB), and a representative of the Japan Financial Services Agency at the ICGN 2024 Annual Conference, 15-27 July.
• An Investor Viewpoint on the Assurance of Sustainability Reporting, to be published on 15 July. Come and join us to get involved