FRC launches market study on sustainability assurance market
Published: 21 March 2024
6 minute read
FRC Director of Stakeholder Engagement and Corporate Affairs, Kate O’Neill sits down with the Director of Competition Policy at the FRC, Laura Warren, to discuss the launch of the Market Study on UK sustainability assurance market.
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Transcript
0:09
Hello and welcome to another FRC in conversation. My name is Kate O'Neill. I'm the Director of Stakeholder Engagement and Corporate Affairs here at the FRC and today we are joined by Laura Warren, the FRC's Director of Competition Policy. Welcome, Laura. Hi, Kate. Now Laura, today we've put out a really interesting and different document for the FRC talking about the fact that we're going to undertake our first market study. So before we jump into it, what is a market study and how does a regulator use it and how does it go about it?
0:44
Well, yes, Kate, it is new for the FRC. So market studies are a powerful regulatory tool to enable regulators such as the FRC to explore issues in a market. They can lead to a range of outcomes including richer insights about issues and potentially if you spot issues or concerns, proposals to improve how a market functions. Many regulators have the ability to do market studies, have the powers and we're really keen to develop our capacity and capability to do market studies too.
1:12
When you say the market, I mean, I guess given the FRC's remit, you're talking about the audit market here. Yes. So primarily we're obviously concerned as we know through our strategic objectives about how the audit market functions. We're keen to make sure it's resilient and it's got competition and choice. And then obviously, we also care about anything that might have an impact or have a bearing on how the audit market functions. So not just the corporate audit market, therefore, we might also be interested in the local audit market or anything to do with assurance or anything that could have an implication for delivering on our strategic objectives. So you've just talked about the word assurance. The topic that this market study is going to be focused on
1:52
is sustainability assurance and the market that is swiftly developing around that. I mean, do you want to kind of give a sense of what you mean or what we really want to find out about sustainability assurance at this time? Yeah, as you said, Kate, we think this is a rapidly changing, evolving market. We know that in 2022 84% of FTSE 100 companies reporting sustainability information received assurance and that was up from 68% of those companies in 2020. And we do think developments in this sustainability assurance market could have implications for the supply of statutory audit because we do know that audit firms provide both sustainability assurance
2:31
as well as statutory audit. So we're really interested in understanding what is happening in the assurance market. We're really keen to explore whether it's working effectively, if it's producing high quality assurance to support the production of useful and reliable reporting for investors. And we want to be really conscious and concerned that it's not creating undue burdens and costs on businesses in doing that. Yeah. And that's a lot, Laura, because I guess with many people assurance can mean different things. People may say it's got to come from the auditor, but there are other suppliers of assurance out there, not just the audit firms, right? That's absolutely correct. So there's lots of non audit firms including engineering firms,
3:10
sustainability consultants and industry specific inspections and certification bodies that are delivering this assurance. And in fact I think we know that in 2022 less than half of the FTSE 100 companies assurance was being provided by audit firms. So we do know there's a rich mix of providers at the moment and we're keen to understand more about where companies are getting their assurance from and if they've got sufficient choice and if they're getting the right kind of supplier to deliver a high-quality assurance product for them. And it's interesting I guess people say this all the time. The whole sustainability area is across international landscape and it is a bit acronym
3:49
soup. There's massive changes in the international regulatory requirement arena such as the EU Corporate Sustainability Reporting Directive, CSRD and also the developing standards from the International Sustainability Standards Board here in the UK. There's probably other things emerging in places like the United States and other jurisdictions. So you know, is that driving this kind of expanding area of sustainability insurance or is it been steadily building given that sustainability has become such a key part of any corporate agenda and its reporting. So I think it's a bit of both, Kate, but we're really,
4:27
we see very conscious about what developments are happening internationally and part of the market study is looking at that and what that means for the UK sustainability assurance market. And you mentioned CSRD, we're particularly interested in the implications of that for the market given CSRD will require large undertakings to publish specified sustainability information and certain limited assurance over this information. And we know that will have implications to some companies in the UK and for some providers of assurance. So I think it's a combination of both, but we're really keen to understand what those regulatory developments that you mentioned could do, could have a bearing on our market and how that might evolve as a result of those
5:06
developments. And yeah, I mean it's quite interesting, you mentioned the statutory audit market. Do you think that the big, let's call them six audit firms are currently dominating the sustainability assurance market or is it spread across all of those different bodies you referenced earlier across engineering firms, consultancies, et cetera? Or are you seeing a real dominance being built up in the auditing firms? So at the moment, I think we don't have sufficient information to really understand across the biggest UK companies what the situation is. So I think we know in 2022 that 42% of the assurance obtained by Footsie 100 companies was provided by
5:46
audit firms. But other than that, we don't know what the picture is for the whole of the Footsie 350 and indeed for other companies, private companies. So part of the market study will be exploring this in more detail and hopefully generating A richer, more useful set of information about what is actually happening in the market, who is providing the assurance for all of the big UK companies. And Laura, it sounds like a really wide market study and maybe all of them are always designed to be that way. How are we going to undertake the consultation process here at the FRC? Yeah, absolutely. So we launched a market study document. The launch document sets out some areas of questions that we'd be really interested to hear from stakeholders on and we're giving stakeholders
6:24
opportunity to comment, provide information in writing by the 13th of June and then now we're live. We also want to start engaging with stakeholders directly through meetings and roundtables and we're really keen to hear from anyone who might be interested, who might have views about the market for sustainability assurance to come and talk to us. So really keen to engage in whatever shape or form stakeholders would find most helpful so that we can get as many good, useful, rich views and information and insights to inform the market study.
6:53
That already sounds like a very broad stakeholder universe. So I'm guessing people can find a lot of information on our website here at the FRC. If they want to work out how to participate in those roundtables or perhaps even offer to hold some themselves using their platform for the FRC to engage in, that would be absolutely fantastic. We're super keen to hear from anyone who would be interested. And if there's an opportunity for them to host a round table for us, that would be fantastic, right. So do all this engagement. We'll probably hear a very rich wide narrative on where people are going for assurance, where the gaps are, et cetera. But what are the potential outcomes or actions that could result from the study? I mean
7:32
depending on the findings of course, yes. So absolutely depending on the findings. But we do think that this study has the potential to influence certainly the FRC's future policy work and approach in relation to assurance. And if we find implications in relations with suppliers, statutory audit, then obviously also our thinking and working in relation to the statutory audit market. And then we think we've also got the opportunity here potentially to influence and inform any decisions UK government makes in terms of policy and regulatory developments relating to sustainability assurance. And beyond that, depending on what we find, we may find there are specific actions that we think firms who are
8:10
pricing in this market, the audit firms or the non audit firm providers, the companies who are receiving the assurance and other relevant stakeholders including investors may want to take to ensure that the market is functioning well. And I mean this is the start of our first market study which is great. Are we going to use this as a tool more regularly Do you think Laura, when we're looking at impacts on markets, impacts on stakeholders where there are developing themes that the FRC thinks that within its remit to have a proper investigation of? Yeah, absolutely. So we signalled in our budget and business plan for 2025, our intention to develop our capacity and capability,
8:49
the market study. So this is our first one. It's a great opportunity to look at evolving area for us. And certainly then this is a tool market studies that can be used to explore other issues and concerns that stakeholders may have in relation to the audit market or associated markets and really gives us an opportunity to get into the detail in depth into exploring some of the things that might be of concern to our stakeholder universe, right. Well, Laura, we'll get you back once the market studies underway, maybe at one of the milestone moments to hear the type of things you're hearing, the surprises, the not so surprising news that we're hearing from stakeholders about this very rapidly developing area. So
9:28
thank you, Laura. And I guess your final request to people would be, if you're interested, go to the website to get details about how to get involved. Please do. We're really keen to hear from you. Thanks very much, Laura. Thank you.
9:42