If sustainability reports are to be used for anything, people using the reports will need to be confident that they can make decisions based on the information provided. If there is no independent assurance claim, it can only be because no one is using the information. These reports are only good for marketing or opening the door.
Civil society organizations as well as investment managers and politicians are now concerned about the level of greenwashing, impact or sustainability taking place. For those of us who have been drumming for insurance for years, that’s a good thing. Insurance, done right, offers a real opportunity to increase accountability to those whose lives are affected by a business. Carried out according to methods consistent with the logic of financial auditing, it will end up calling into question the very basis of capital markets. But there are also significant risks: if the insurance does not act in the interest of the people whose lives are affected, the insurance will not increase liability. Capitalism is resisting change and the forces of darkness are gathering to avoid more accountability. There is a way around this. But the devil will be in the details.
In this four-part series – part of my larger series on financial accounting and auditing – I explore our opportunity to have assurance on business performance by contributing to sustainability and generating financial returns. . This one, the first, explores the idea of insurance in general. The second applies these ideas to financial auditing and the third uses the same logic to think about assuring sustainability information for the same user as the financial report. The fourth considers the assurance of these prepared reports for those affected by the consequences of a business model, regardless of any financial implications; it also covers some of the more fundamental quirks and problems with current approaches to financial assurance and sustainability. All of this means getting into some of the weeds, nuts and bolts, plumbing, or any other metaphor that helps one think about the exciting and critical issues related to assurance and auditing.
Insurance, done right, offers a real opportunity to increase accountability to those whose lives are affected by a business
What is insurance? What is auditing?
Assurance is implicit in every decision we make, whether personally or in an organization. Without insurance, we don’t make decisions. We want to be sure that we are not about to make the wrong decision. And we know there will always be risk, because decisions are choices between different futures. Which means we expect there to be a purpose behind our decisions (and that purpose will come with a timeline) and a level of risk we’re willing to accept.
Thus, there are four elements of assurance: i) someone making a decision, ii) accepting a level of risk, with iii) a purpose behind the decision, and iv) an opinion provided to someone making a decision. decision.
In theory, the bigger the decision, the more reassurance we need, because the consequences of making a mistake will be greater (but think about the time spent on the decision to buy a new home versus the time spent choosing the holidays next year). But if we don’t have the level of assurance we think we need, we won’t decide at all. And we will be biased towards the option of doing nothing. Partly because we tend to forget that not deciding is still a decision; partly because we don’t like change; and partly because if we compare what we’re doing now with an alternative, we think continuing to do what we’re doing now is less risky. Human beings are not very good at assessing risk. And that’s what insurance does: it provides a way to assess and then reduce the risk that we make a suboptimal or even a bad decision.
This means that we not only need to be confident that the information provided to us is useful, we also need to be confident that organizations are using that information effectively. The importance of ensuring efficient use often goes unnoticed because it is so ingrained in our current economic system that we don’t notice it. Our economic system and our creative destruction assure us that organizations do not too often choose the option of doing nothing. If so, we are almost certainly not making the best decisions – “best” being defined by reference to the purpose behind our decisions. The second is the assurance of information that we use to inform our choice between uncertain futures. Either way, without these two tiers, we may not achieve our goal at all or as quickly as possible.
Insurance provides a way to reduce the risk that we make a suboptimal or even a bad decision
So we all need assurance in all of our decision-making, both personal and organizational. When it comes to a group of people making a decision, there will be additional requirements: we will need to have a common understanding of the level of assurance the group needs and a common process to achieve that level of assurance. .
There are also new risks. There may be conflicts of interest between those who prepare the information, guarantee the information and use the information. This is why insurance is defined by reference to a tripartite relationship. If the people who produce the information also insure the information, then the people who use the information will not be confident enough. This is also the case if the people producing the information employ an agent to provide the information for them. An agent acts for its principal, not for the users. Assurance is a process of making potentially useful information actually useful.
Insurance or appraisal: not the same, but related
Insurance is a special type of assessment. In an assessment, the assessor may work on a scope that has been determined by a variety of people, and the report may be prepared for the benefit of a wide variety of people, and the extent to which the assessor can render the public conclusions will also vary. The approaches used by an evaluator will depend on the discussions between the evaluator and the scoper. Competency requirements for the appraiser will also be set by whoever is paying and although there are professional standards and qualifications, possessing them is not a legal requirement for those involved in an appraisal.
I don’t understand why anyone interested in social impact would object to ensuring social impact reporting
In insurance, there is a predefined perimeter, fixed by reference to the interests of a group which has not prepared the information, and generally not paid for it and which follows international standards of preparation and publication. The work to be performed meets international insurance standards. The organizations providing the insurance must be approved and the staff must meet standards of competence; there will be an external review to ensure compliance with all of these requirements.
Given that social impact is primarily felt by those with less influence, who generally cannot hold organizations to account, I don’t understand why anyone with an interest in social impact would oppose assurance of social impact reporting – assurance that the information is useful and that the organization is using it effectively.
Coming soon: why insurance is important in our current economic system and in financial auditing.
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