In April of 2024, the SEC’s climate disclosure rule is expected to come into effect. This landmark rule would mandate climate risk reporting for publicly traded companies while standardizing and enhancing existing disclosure rules.
Once this rule does become the law of the land, the companies it applies to will be given a grace period to comply. To that end, they must obtain a minimum level of “limited” assurance for fiscal years two and three following the scopes 1 and 2 emissions compliance date. Then for fiscal years four and beyond, the level of assurance must improve to “reasonable.”
But what is the difference between limited assurance vs. reasonable assurance?
Here’s what you need to know.
Validation, verification, and assurance
Companies regularly fail to report their GHG emissions accurately and comprehensively. Why? Well, the complexity of inventories and the hundreds, if not thousands, of data points that all need to be converted accurately—that means there’s lots of room for human error. As such, regulators, investors, and the public at large can’t know whether a business has aligned itself with disclosure regulations. Assurance helps with that: it provides companies reporting on their emissions confidence that the numbers are accurate to the best of their ability.
Here, third-party emissions auditing of a GHG inventory can provide evidence that a business has, in fact, taken the necessary sustainability steps. Unlike the negative connotations of, say, a tax audit, the emissions auditing process isn’t meant to be a “gotcha.” It’s a service the emissions reporting company pays for to ensure its emissions numbers are as accurate as possible. This process is typically divided into three components:
Validation – An independent assessment of organizational emissions that gauges underlying assumptions, methodologies, processes, and limitations, with a focus on mitigation plans to ensure the goals of an emissions reduction program are achievable. In short, validation is a forward-looking process to evaluate a sustainability strategy and how effective it will be at achieving its stated goals.
Verification – A retrospective, third-party assessment that confirms an organization’s emissions figures, calculations, factors, and activity for the reporting year are accurate.
Assurance – This is the end result of validation or verification. It’s a letter or report stating the third party has a degree of confidence in the results. After the third party verifies the GHG reporting, they will evaluate the audit procedures and evidence collected to assign a level of assurance, with “limited” assurance being the fundamental level and “reasonable” assurance being the more comprehensive and reliable level.
Understanding limited assurance: Limited vs. reasonable assurance
Limited assurance is the baseline level of assurance, wherein the independent auditor obtains “sufficient and appropriate evidence,” limiting assurance to specific aspects of the sustainability report. To that end, the assurer may interview management, review analytical procedures, and evaluate internal controls for data collection.
As Thomson Reuters notes, “Limited assurance provides a lower level of assurance than reasonable assurance. But limited assurance is less costly, and this is the most common type of assurance that large companies voluntarily get for ESG data, including climate-related information.”
Limited assurance is most appropriate in situations where the risk of a material misstatement would be low and the cost of obtaining reasonable assurance too high. For instance, a small business with a limited sustainability program and few emissions sources would likely be adequate.
Understanding reasonable assurance: Limited vs. reasonable assurance
Reasonable assurance is the highest level of assurance currently since absolute assurance is impossible. Essentially, site visits are the key differentiator. With this type of GHG audit, the assurer will provide more evidence to demonstrate that the sustainability report is free of material misstatement. This may include:
- Control testing
- Assessing then responding to risks
- Evidence gathering
- Data verification
- Evaluation of assumptions and methods used to calculate emissions
Reasonable assurance is appropriate in situations where the risk of material misstatement is higher and the cost of obtaining reasonable assurance worthwhile. Typically, this more rigorous and intensive assessment is applicable to massive companies with many sources of scope 1 emissions or certain sectors like manufacturing.
Limited assurance vs. reasonable assurance
These two terms can be further developed by looking at four key areas: depth of testing, the level of evidence, the cost of assurance, and the perception of credibility.
Depth of testing
- Limited assurance – Involves fewer tests of control, focused on the GHG inventory and underlying data, with testing procedures more limited in scope. Can involve the evaluation of data management processes.
- Reasonable assurance – More extensive testing, including tests of controls, data verification, and evaluation of underlying assumptions and methods. Includes site visits to test data management processes and equipment.
Level of evidence
- Limited assurance – Sufficient appropriate evidence is gathered, though it’s deliberately limited, meaning no site visits to verify emissions sources and data. (They won’t call the utility company to verify if the invoice is accurate or read meters, but they will follow the paper trail.)
- Reasonable assurance – Sufficient appropriate evidence is gathered as a part of a systematic review that includes reviewing risks, responding to said risks, gathering more evidence, and evaluating obtained evidence.
Cost of assurance
- Limited assurance – Less time and resource intensive, so it costs less compared to reasonable assurance.
- Reasonable assurance – More expensive because it requires a higher level of scrutiny and travel costs, and it is conducted less frequently, making it harder to find qualified assessors.
Perception of credibility
- Limited assurance – Assessor can form a reasonable conclusion but with limited certainty due to available information.
- Reasonable assurance – Assessor is confident that their audit was sufficiently thorough to form a conclusion with a high level of certainty. Reasonable assurance is generally perceived to be more credible than limited assurance, thanks to a higher level of testing and evidence provided by the auditor.
Assurance engagement simplified
Seeing as ESG reporting and sustainability disclosures are still relatively new, the vast majority of reports by third-party auditors have been ISAE 3000 limited assurance engagement opinions. Although, some of the larger and more sophisticated companies have begun to engage more comprehensive—reasonable assurance engagement—opinions under ISAE 3000 or ISO 14064.
As the regulatory landscape continues to evolve, companies, especially larger companies with more substantial carbon footprints, must be ready to engage in both limited and reasonable assurance audits. Taking these steps will empower businesses to provide stakeholders with reliable and accurate sustainability reports, which is essential for building institutional trust and credibility.
Are you preparing for a third-party carbon audit? Sustain.Life helps you take advantage of the benefits of sustainability software. Our carbon accounting platform and sustainability management software is designed for reasonable assurance testing support. It facilitates the audit and assurance process, enabling businesses to highlight and package the data you wish your auditor to review.
Learn how Sustain.Life can assist with your next GHG audit.
1. Federal Registrar, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” https://www.federalregister.gov/documents/2022/05/12/2022-10194/the-enhancement-and-standardization-of-climate-related-disclosures-for-investors Accessed on March 21, 2023
2. Thomson Reuters, “SEC Getting Lots of Questions on Assurance Part of Climate Proposal, Senior Official Says,” https://tax.thomsonreuters.com/news/sec-getting-lots-of-questions-on-assurance-part-of-climate-proposal-senior-official-says/#:~:text=Limited%20assurance%20provides%20a%20lower,information%2C%20the%20market%20regulator%20said Accessed on March 21, 2023
3. Australian Government, “Levels of assurance explained,” https://www.cleanenergyregulator.gov.au/Infohub/Audits/Pages/Forms%20and%20resources/Audit%20determination%20handbook/Levels-of-assurance-explained.aspx Accessed on March 21, 2023