By Matt Armstrong, Sustainability Advisor
Spoiler alert: sustainability assurance not only provides monetary value for agribusinesses, it builds trust for shareholders and investors, and eases business decisions.
According to an academic study published in the Journal of Accountancy, “there are significant benefits in having sustainability reporting assured, including the reduced cost of capital and lower analyst forecast errors and dispersion.” In addition, research has found that the cost of capital reduction exceeded the sustainability assurance fee for more than half of the U.S. companies that obtained sustainability assurance.
“While there has been a lag by the U.S. to adopt the practice of independent assurance of sustainability reports, we are definitely seeing a sharp increase in sustainability assurance amongst agribusinesses,” says Emily Johannes, Sustainability Lead at K·Coe Isom. “The rise can be attributed to the cumulative results and benefits that are being obtained by ag operations.”
In fact, the Journal of Accountancy study reveals that sustainability report benefits are amplified for first-time assurance reports, and then amplified again when the first-time assurance is from an accounting provider.
Sustainability – A Risk Management Practice You Can’t Afford to Miss
Sustainability often gets lumped in with environmental impacts, but by definition it is “the ability to be maintained at a certain rate or level.” It’s also good business to know you aren’t overspending on wasteful production, have access to a healthy workforce, and are free from undue influences in your business practices as you answer to customers, partners, and owners.
In today’s environment, sustainability plays an important external role as well. A recent survey revealed that 39% of investors stated that reporting financials + sustainability (also called integrated reporting) was very useful, while 18% stated it was essential to decision making.
Sustainability Assurance 101
Much like financial results, companies can have their sustainability performance assured. Assurance provides the opportunity for a company to reinforce current practices or build confidence in its investment decisions. By having their performance reviewed by an independent, highly skilled, and trustworthy third party, the sometimes intangible benefits of sustainable decision-making are realized.
Sustainability assurance improves reporting by having material topics reviewed by an assurance firm or CPA firm to provide agreement with the stated standard of quality and independence.
Assurance not only confirms high-quality data, it provides confidence to report to investors and stakeholders and make assertive decisions.
Assuring sustainable operations can increase value and reduce risk:
- Avoid risks – assurance verifies independence: In February, Kraft Heinz (KHC) stock wrote down $15 billion in assets, cut its dividend, and cast doubt on its accounting practices. One asset manager, Nuveen, had avoided KHC primarily because of their weak performance in Environmental, Social, and Governance (ESG) matters. Specifically, Nuveen did not perceive that KHC’s board was truly independent. Nuveen’s decision making was supported by assigning an ESG score to potential investments, a practice that can be strengthened with assurance from a reputable examiner.
- Enhance reputation – assurance helps investment decisions: The Global Reporting Institute (GRI) strongly suggests that companies report their sustainability performance, and have it assured by an independent third party. In their words, “it reflects the seriousness with which the reporter approaches sustainability reporting. Investors, rating agencies, and other analysist increasingly look for assurance when making investment and rating decisions.”
- Save money – assurance benefits increase with accounting firm reviews: a survey of 4,164 sustainability reports* found that companies that had sustainability performance reviewed by accounting firms saw enhanced benefits over consultant groups:
- 7% lower cost of capital
- 8% rise in analyst coverage
- Fewer forecast errors
- Lower forecast dispersion
- Paying for itself: When sustainability assurance fees equaled 5% of the firm’s financial statement audit fee, financial benefits outweighed the service fee in 70% of cases.
- Increase efficiency – assured data is trustworthy: In a study of sustainability reporters from around the world, 88% stated that assurance made their decision making processes more efficient.
- Improve internal reporting and management – assurance improves efficiencies: The effectiveness of reporting systems and controls can be examined, leading to a cycle of lowered costs and reduced time on repetitive processes.
Reporting on your sustainability efforts can be beneficial for many reasons, but enhancing your story by having information assured can add value to your business and save money – an investment that pays off.
*Journal of Accountancy academic study: “Auditing: A Journal of Practice & Theory”
For more information on sustainability reporting and assurance implementation, contact a K·Coe Isom sustainability advisor.