Corporate sustainability reporting, initially a voluntary practice, has evolved into a fundamental component of responsible business conduct. As global challenges such as climate change, resource depletion, and social inequality intensify, stakeholders—including investors, regulators, and consumers—demand greater transparency and accountability from organisations. Sustainability reporting enables companies to disclose their environmental, social, and governance (ESG) performance, fostering trust and demonstrating their commitment to long-term value creation.
This transition highlights the necessity for reliable and standardised reporting to mitigate greenwashing and ensure that stakeholders can make informed decisions based on credible information. The role of auditors is crucial in enhancing the credibility of sustainability disclosures, aligning them with rigorous standards comparable to financial reporting.
In this article:
- Evolution of Auditor's Role in ESG Reporting
- Assurance and the CSRD
- Overview of CSRD and Its Assurance Requirements
- The Transition to Reasonable Assurance
- CSRD Challenges Faced by Auditors
- Role of Technology in Enhancing Audit Efficiency
Evolution of Auditor's Role in ESG Reporting
The role of auditors in corporate sustainability reporting has expanded significantly in response to regulatory developments and evolving stakeholder expectations. Historically, auditors primarily focused on financial reporting, but the integration of ESG factors into business strategies has necessitated a broader scope of assurance.
The transition to sustainability reporting brings unique challenges, requiring auditors to develop expertise in far more diverse non-financial data and address issues such as the lack of standardisation and the qualitative nature of ESG information.
The Corporate Sustainability Reporting Directive (CSRD), introduced by the European Union, marks a pivotal shift in the regulatory landscape for corporate reporting. Enacted in 2022 and effective from 2023, the CSRD aims to address shortcomings in the previous Non-Financial Reporting Directive (NFRD).
In addition to an expansion of scope to include approximately 50,000 companies, the CSRD seeks to standardise ESG data by providing a framework that ensures disclosures are reliable, comparable, and credible. One of the ways the directive aims to achieve this is through the introduction of external assurance from the first year of reporting.
Under the CSRD, auditors are entrusted with providing assurance on ESG data, ensuring compliance with the double materiality principle, and mitigating risks such as greenwashing. The shift from limited to reasonable assurance further underscores the need for auditors to refine their methodologies and competencies, blending traditional financial auditing skills with a deeper understanding of sustainability.
The evolution of the auditor’s role represents a significant milestone in corporate accountability, as it ensures that sustainability reporting serves as a reliable foundation for decision-making in the pursuit of a sustainable future.
Assurance and the CSRD
Limited Assurance in the CSRD
Limited assurance provides a moderate level of confidence in the accuracy of sustainability disclosures. It primarily involves inquiry and analytical procedures, allowing auditors to assess whether any material misstatements have been identified.
The conclusion of a limited assurance engagement is expressed in a negative form, indicating that no evidence has been found to suggest inaccuracies. Additionally, limited assurance requires less extensive testing and evaluation compared to reasonable assurance.
Reasonable Assurance in the CSRD
Reasonable assurance, on the other hand, provides a high level of confidence in the accuracy and reliability of sustainability disclosures. This level of assurance involves substantive testing, in-depth analysis, and third-party confirmations to ensure the validity of reported information.
The conclusion in a reasonable assurance engagement is expressed in a positive form, affirming that the disclosures present a fair and accurate representation of sustainability performance. Furthermore, reasonable assurance necessitates a comprehensive evaluation of internal controls and reporting systems to meet higher scrutiny standards.
Key Differences Between Limited and Reasonable Assurance
Limited assurance provides moderate confidence with limited testing, while reasonable assurance offers higher confidence with more rigorous procedures. The transition to reasonable assurance under the CSRD demands enhanced auditor competencies, more sophisticated tools for data analysis, and a deeper integration of ESG and financial auditing practices to meet the rigorous expectations of stakeholders and regulators.
See our dedicated article on Limited and Reasonable Assurance in the CSRD for more information
Overview of CSRD and Its Assurance Requirements
Double Materiality and Its Impact on Assurance
The concept of double materiality is the first formality required for CSRD compliance. Unlike traditional materiality frameworks which focus on financial implications for the company, double materiality requires organisations to evaluate both the financial impact of ESG issues on the company and the company’s broader environmental and social impacts.
The Double Materiality Assessment (DMA) is the exercise companies conduct to identify which ESG issues are material from both perspectives. The results of the DMA determine the specific ESRS disclosures that companies are required to report on.
Double materiality introduces unique challenges for assurance providers, as auditors must ensure that companies adequately capture both inward and outward-facing sustainability impacts.
Example
A fashion retailer sourcing raw materials from regions prone to extreme weather events faces an outward impact due to its contribution to environmental degradation. At the same time, from a financial materiality perspective, climate change-induced disruptions—such as floods or droughts—could increase material costs, disrupt supply chains, and affect the company's financial performance.
To support the implementation of double materiality, companies must develop clear methodologies for evaluating ESG risks and opportunities, ensuring that materiality assessments reflect both external and financial considerations. Auditors play a key role in verifying that these assessments are robust and aligned with regulatory expectations, fostering trust in sustainability reporting.
CSRD Requirements for Disclosures
The CSRD introduces mandatory assurance requirements for sustainability disclosures to enhance reliability, comparability, and transparency. Under the directive, companies must ensure that their sustainability reports undergo external assurance, beginning with limited assurance and possibly transitioning to reasonable assurance in the medium term. This represents a major shift from the previously voluntary practices under the NFRD.
Assurance engagements assess disclosures against the ESRS, which outline specific ESG reporting requirements. The standards integrate the double materiality principle, requiring auditors to evaluate both the financial materiality (impact of sustainability issues on the company) and impact materiality (the company's impact on society and the environment).
Assurance must be conducted by certified auditors or independent assurance providers with expertise in both financial and non-financial reporting.
The Transition to Reasonable Assurance
Importance of Assurance for Credibility and Reliability
Assurance plays a pivotal role in building trust among stakeholders by enhancing the credibility and reliability of sustainability disclosures. Without independent verification, there is a risk of greenwashing, where organisations misrepresent their ESG performance to appear more sustainable than they truly are. By implementing assurance practices, companies can demonstrate their commitment to transparency, which is critical in attracting investors, complying with regulations, and addressing societal expectations.
The transition to reasonable assurance under the CSRD signals a commitment to providing stakeholders with high-quality, verified data that aligns with regulatory requirements and promotes informed decision-making. However, this transition will depend on a feasibility study which will take place before 2028.
From Limited Assurance to Reasonable Assurance
The CSRD introduces a phased approach to assurance, beginning with limited assurance and transitioning toward reasonable assurance in the medium term. This transition is designed to provide companies with the necessary time to refine their reporting processes and enhance data reliability.
While limited assurance focuses on verifying that no material misstatements have been identified, reasonable assurance involves a more rigorous examination, offering a higher degree of confidence to stakeholders. The shift is driven by increasing demands for transparency and accountability in sustainability disclosures, as investors and regulators require more robust information to guide their decisions.
CSRD Challenges Faced by Auditors
As companies prepare for CSRD compliance, auditors face several challenges that stem from the evolving nature of ESG reporting standards and the complexity of non-financial data. These challenges span from standardisation issues to technological needs, requiring auditors to adapt their methodologies and competencies to meet the growing demands of sustainability assurance.
Developing Competencies for ESG-Specific Auditing
ESG factors are highly complex and interconnected, making it difficult for auditors to conduct a holistic assessment of a company's sustainability performance. ESG auditing requires a deeper evaluation of qualitative and sector-specific disclosures, such as climate-related risks, biodiversity impacts, and human rights initiatives.
This shift necessitates that auditors develop specialised expertise in areas like environmental science, data analytics, and the EU Taxonomy. To meet these demands, auditors must engage in continuous professional development, foster cross-disciplinary collaboration, and integrate ESG risk assessment methodologies into traditional audit practices.
Lack of Standardisation in Sustainability Reporting
Another significant challenge auditors face under the CSRD is the lack of standardisation across sustainability reporting frameworks. While the ESRS seek to harmonise reporting practices, many organisations continue to rely on a mix of frameworks such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the International Sustainability Standards Board (ISSB). This fragmentation complicates assurance engagements, requiring auditors to navigate a patchwork of methodologies, metrics, and definitions. Additionally, the qualitative nature of ESG data and the varying interpretations of key concepts like double materiality further increase the complexity of delivering accurate and reliable assurance.
Data Quality and Availability
The availability and reliability of ESG data poses another significant challenge for auditors. Unlike financial data, which benefits from well-established accounting systems and controls, ESG data often lacks consistency in collection methods, clear verification processes, and standardised audit trails.
Many organisations still rely on outdated spreadsheets and manual processes, leading to data gaps and reduced auditability. This makes it difficult for auditors to assess the accuracy of reported ESG performance, verify the legitimacy of sustainability claims, and ensure compliance with evolving regulatory expectations.
Integration of Financial and Non-Financial Data
Ensuring the seamless integration of financial and non-financial data presents another layer of complexity for auditors. Sustainability reporting demands that organisations combine traditional financial metrics with ESG indicators such as greenhouse gas emissions, diversity and inclusion initiatives, and governance practices.
Auditors must evaluate how organisations link ESG performance with financial outcomes, whether internal controls are robust enough to ensure data integrity and the long-term impact of ESG initiatives on business performance and risk exposure.
Role of Technology in Enhancing Audit Efficiency
Technology is playing a transformative role in enhancing the efficiency and effectiveness of sustainability assurance. Advanced tools, such as data analytics and AI, are enabling auditors to handle the complexities of ESG data more effectively.
For instance, data analytics allows auditors to process vast amounts of structured and unstructured data, identifying anomalies and trends that might otherwise go unnoticed. AI-powered tools can automate the collection, categorisation, and analysis of sustainability metrics, improving the speed and accuracy of audits while reducing human error.
Additionally, technology facilitates real-time monitoring and reporting, enabling organisations and auditors to address compliance issues proactively. As the demands of the CSRD push assurance providers to deliver high-quality results efficiently, the adoption of cutting-edge technologies is becoming indispensable in bridging the gap between traditional auditing practices and the complex requirements of sustainability assurance.
How Can Greenomy Help?
The CSRD elevates the role of auditors in ensuring transparency and accountability in sustainability reporting. Auditors must refine their methodologies and adopt advanced technologies as organisations transition from limited to reasonable assurance. While challenges remain, regulatory harmonisation and technological advancements will play a pivotal role in shaping the future of sustainability assurance, fostering trust among stakeholders, and supporting sustainable business practices.
At Greenomy, we support companies and auditors throughout their CSRD journey by enhancing audit readiness and facilitating alignment with regulatory requirements. Our methodology enables companies to streamline their DMA, ensuring that the results are well-structured, traceable, and aligned with ESRS standards—making the audit process more efficient. Additionally, our advisory services collaborate directly with auditors throughout the end-to-end CSRD reporting process, providing clear documentation, methodologies, and results that reduce the time spent on clarifications and rework.
Greenomy also offers tools that assist organisations in tracking their ESG data quality, identifying gaps, and preparing for assurance from the first reporting year. By bridging the gap between preparers and assurance providers, Greenomy fosters a smoother, more transparent audit process, ultimately supporting organisations in meeting CSRD requirements and achieving credible, high-quality ESG reporting.
This collaborative approach not only simplifies compliance but also strengthens relationships between organisations, auditors, and regulators—driving more sustainable business practices and enhancing stakeholder trust. For more information, get in touch today.
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