February 24, 2020

The Importance of Sustainability Assurance: A Proposal for a Lawyer-Consultant Partnership

Michael R. (Mike) Korzelius and Anne Marie Kempf

Most law firms and attorneys are familiar with sustainability reporting as a business practice sharing information on environmental, social, and economic impacts of a company with shareholders and the wider public. Although there are very limited regulatory requirements under U.S. securities laws (for disclosure of “material” climate-related risks, SEC Rule 12b-20; a fact is “material” if there is a “substantial likelihood” that a reasonable shareholder would find its omission significantly alters the total mix of available information, Basic, Inc. v. Levinson, 485 U.S. 224 (1988)), sustainability reporting (aka Environmental, Social, and Governance, or ESG, reporting) is a fast-growing industry. In the United States, sustainability reporting is primarily designed to attract socially and environmentally minded investors. Indeed, Fidelity Research indicates that 72 percent of retail customers under 40 years of age report that social impact is key to their investing decisions. 

As sustainability reporting grows, investors are demanding greater transparency and verification of these reports, and organizations are becoming increasingly aware of the potential liability arising from inaccurate or exaggerated sustainability reporting. Sustainability Assurance––the independent, third-party verification of a sustainability report––addresses these issues. Assurance of sustainability reports provides consumers and investors, indeed all stakeholders in a corporate entity, with confidence that the sustainability measures reported by corporations are accurate, transparent, and truthful. Assurance reduces corporate clients’ liability by identifying gaps between sustainability reporting and actual internal performance, thus addressing weaknesses in corporate sustainability programs.

A 2018 Ceres report stated that “some 58 percent [of reporting organizations] provide no evidence of formal assurance of sustainability disclosures, and less than 10 percent provide third-party verified disclosures with some recommendations for improvements.” This indicates that while the demand for third-party Sustainability Assurance is growing, many organizations are not yet aware of the importance of having their sustainability reporting assured. To enhance consumers and investors trust in an entity’s sustainability report––and to minimize potential liability––it is increasingly essential that all companies issuing sustainability reports explore the option of third-party assurance.

Attorneys have an important role to play in offering Sustainability Assurance services to entities issuing sustainability (or ESG) reports. Ceres and other advisory agencies mandate that Sustainability Assurances be conducted by independent third-party organizations. At present, Sustainability Assurance is being conducted primarily by the Big Four accounting firms. However, this arrangement presents issues surrounding the independence requirement, as these are the very same organizations which are preparing most entities’ sustainability reports.

This creates an opportunity for attorneys and subject-matter consultants to partner with each other to offer truly independent third-party assurances, and to offer the added service of assessing the legal liabilities inherent in Sustainability Reports, while providing a method for alleviating a large portion of that risk..

Legal Implications of Sustainability Reporting and Why Assurance Is Necessary

It is tempting, and relatively easy for corporations to exaggerate their positive economic, environmental, and social impacts on society, while omitting or distorting their negative impacts. In the world of socially responsible investing, this is called “Green Washing.” With socially and environmentally responsible investing accounting for $30 trillion annually, Green Washing becomes a serious temptation for many.

The problem is there is not, as yet, a universally accepted standard for sustainability reporting. The Global Reporting Initiative (GRI) provides the most widely used standards for sustainability reporting. But there are still over 500 different voluntary sustainability reporting standards with no common points of convergence. Thirty-eight nations outside of the United States require sustainability reporting based on the GRI standards, but in the United States, legal frameworks and liability for sustainability reporting are covered by an assortment of different federal, state, and municipal securities laws, consumer protections, and anti-fraud statutes and regulations.

A 2018 report for the Society for Corporate Governance explored the most well-known cases of legal liability arising from inaccurate public disclosures contained in corporate ESG statements, including Massey Energy in 2006 and the 2012 BP Deepwater Horizons oil spill decision. The report states that ESG and sustainability reports “create significant litigation and liability risks for companies unless appropriate care and diligence are exercised.” For example, sections 11 and 12(a)(2) of the Securities Act of 1933, hold companies liable for inaccurate statements related to securities offerings (15 U.S.C. § 77k). Additionally, section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j) and SEC Rule 10b-5 apply anti-fraud provisions more broadly, creating liability for fraudulent statements made to investors, even those made outside of SEC filings.

Without oversight, an unsuspecting company could find itself facing costly discovery and potential liability for statements that it thought were sufficiently ambiguous, but that an enforcement agency, or the judiciary, found concrete and falsifiable. Sustainability Assurance helps to protect companies from legal liability by ensuring that their ESG and sustainability reports are accurate, and all aspects of reported operations are fully disclosed.

The Assurance Process and the Role of Attorneys

The International Auditing and Assurance Standards Board has set the standard for Sustainability Assurance via the ISAE 3000 guidance, and for AccountAbility via the AA1000AS guidance. The ethical standards written in each of these documents require that an assurer meet the following requirements:

  1. To obtain either limited or reasonable assurance that the information is free from material misstatement;
  2. To state a conclusion about the outcome of the evaluation of the underlying subject matter through a written report and describe the evidence for the conclusion; and
  3. To include any further statements as required by the relevant governing bodies.

Assurance reports must be created by professionals who are demonstrably competent in the subject matter and have an evaluation framework for assurance issuance. This typically means they must be written by experts in auditing environmental, social, and economic impact statements, but attorneys may also play an important role in assessing the material risks of ESG/sustainability reports for their clients.

Depending on the scope of services a client wishes to employ, a standard Sustainability Assurance Report will typically consist of a Publicly-Issued Assurance Statement and a confidential Management Report. The Publicly-Issued Assurance Statement is a Statement Letter outlining the scope overview, reporting methodology, statement of independent evaluation, evaluation methodology, and the conclusions reached by the assurer. The Management Report consists of a privileged (if prepared by an attorney) in-depth report, provided for a client’s internal use. The confidential Management Report details the assurer’s research methodology, the organization's management approach, the materially significant impacts of the organization’s disclosed topics, and the assurer’s conclusions.

Attorneys can play an important role in this process. While Subject Matter Experts (SMEs) will focus on assuring the operational components of assurance statements, attorneys could minimize an organization’s liability exposure and reduce the probability of substantiated complaints from stakeholders arising from the reviewed Sustainability Report by adding important legal advisory information and recommending areas of improvement related to the evaluated disclosures, the language included in the report, and the liability exposure included in the report’s disclosure.

In a world where barriers are removed by sustainable business practices, Sustainability Assurance may be the catalyst to removing the barriers between legal advisement and auditing protocols through a true partnership between attorneys and SMEs in offering a new service line of liability mitigation and Sustainability Assurance. The benefits of this partnership would be to provide a cost-effective way of increasing a law firm’s deep bench of services, and to provide clients with a service that delivers verification assurance of an organization's practice regarding sustainability measuring matrices.

The importance of independent third-party assurance is growing both on a global scale and within the United States. SMEs and attorneys should work together to ensure accuracy, transparency, and legal compliance in sustainability reporting for future generations.


    Michael R. (Mike) Korzelius and Anne Marie Kempf

    Mike Korzelius is an environmental sustainability, auditing, and assurance specialist with over 20 years in the field.

    Anne Marie Kempf is a senior shareholder at Baker, Donelson, Bearman, Caldwell, and Berkowitz, PC, a former judge, trial and appellate advocate, and municipal counsel, who handles real estate and environmental matters as outside counsel for large wireless telecommunications carriers and infrastructure providers.