Why ESG reporting in the financial statements may risk ‘audit creep’

Indeed, many stock transfers originally included the title ‘community’ in their name. But it has always seemed to be up to each individual housing association to prioritise whether to respond to local need, or national themes.

 

The need for social provision from the social housing sector led by registered providers grew as public sector austerity cuts removed many of the services that local authorities had been providing.

 

Many housing associations have for a long time reported on their wider impact in their communities, but there has been a lack of consistency.

 

We are very good at reporting numbers. We can identify them, put systems in place to collect them, record them and publish them internally and externally. These can be financial performance, housing statistics, new build, repairs or stock turnover.

 

Value for money reporting has largely also concentrated on the numbers, with cost per unit becoming a key performance indicator at the heart of performance.

 

But reporting environmental, social and governance impact is much more difficult; it’s less tangible and more subjective, which makes it less auditable.

 

However, many housing associations are committed to making a difference through environmental, social and governance objectives and want to include them in the financial reports, both to be transparent and to add credibility to their ESG data.

 

The direction of travel with recent sector pronouncements are positive, but each one has sidestepped how we are going to develop consistent standards of reporting. But, with a growing focus on this area, ESG reporting will come under scrutiny.

 

A lot of what is being reported at the moment is at the fairly straightforward end of reporting, for example long-term unemployed residents helped into employment, empty properties brought back into use and people who have not had a home being rehomed. But even here we need systems to demonstrate the record and apply a degree of recording rigour to support the claims.

 

At one end of reporting we have the financial statements, at the other we have the PR-orientated annual performance reports, and in between we have social media. Despite some high-profile corporate failures, published financial statements are held in the highest standards of credibility.

 

However, the whole narrative and numbers in the financial statements are covered by financial reporting standards and by international standards of auditing.

 

We are now seeing an increase in corporate reporting relating to communities – Section 172 of the Companies Act, and environmental and carbon reporting, but it is still relatively low-key. Full reporting of ESG in the financial statements would bring the embryonic ESG social housing reporting into the full scope of external statement audit – an audit creep that may not be universally welcome.

 

To support and give credibility to ESG reporting, and to support reductions on interest costs and narrative reporting in the financial statements, there needs to be a universal measurement system in place capable of capturing subjective as well as quantifiable data that is covered by internal assurance processes and reported to audit and assurance committees.

 

If you want to report on the impact that you are making in your communities, ask these questions in a structured and comparable way, so you can benchmark effectively across the sector.

 

We started to get close to this when the Public Services (Social Value) Act came out in 2013 and the European Commission launched the Groupe d’Experts de la Commission sur L’entrepreneuriat Social (GECES) report on bringing in a standard proposed approach to social impact measurement and reporting.

 

Creating meaningful comparable social impact reporting to showcase the ESG progress that is being made, while applying a robust process to audit the data, is a key challenge for the social housing sector.

 

But for this year, it is probably best to do enough to ensure all aspects of reporting laws and regulations are covered in your financial statements, but not so much as to cause audit creep.

 

Keith Ward, head of social housing, RSM