Concerns have emerged that the nascent market for sustainability assurance could consolidate around the largest audit firms, mirroring complaints about restricted competition that have dogged the main audit market for years.

The worries emerge in a report from regulators at the Financial Reporting Council (FRC) looking at the sustainability audit market among FTSE 350 companies.

A study by the FRC concluded companies currently have sufficient choice but they “raised concerns” that the market may begin to consolidate around the largest audit firms, limiting choice and “effective competition”.

Mark Babington , the FRC’s executive director in charge of regulatory standards, said the new report underlines that sustainability reporting has become “increasingly prevalent” in investment decisions, and the importance of assurance of these new disclosures.

There is, therefore, increasing demand for sustainability assurance. “While the UK’s approach to sustainability assurance is yet to be defined, this market study plays an important role in establishing a clear picture of the markets and the challenges it faces.”

The growing dominance of the Big Four among FTSE 100 companies is illustrated by a statistic showing that, in 2019, 25% of members took sustainability assurance from their auditors (the Big Four dominate the audit market for the largest 100 companies), but in 2022 it was 33%.

European influence

The FRC says the increasing use of the largest audit firms may be driven by regulatory developments abroad such as the EU’s Corporate Sustainability Reporting Directive (CSRD), which has recently overhauled European sustainability reporting.

Some observers warn regulators to avoid indicating that only statutory auditors undertake sustainability assurance.

Melanie O’Brien, head of research at the consultancy AccountAbility, says the Big Four audit firms are centred on financial reporting and do not have the resources alone to handle the demand for sustainability assurance.

“ESG covers an extensive remit of information that is much wider than financial information and assurance of this information requires a deeper level of sustainability knowledge,” says O’Brien.

“We believe the market should incorporate a wider range of perspectives from professionals providing assurance and apply a variety of standards, so the information is more valuable for future sustainability reporting and impact measurement.”

The FRC also finds companies in some cases are concerned about the quality of the sustainability assurance they receive.

Lack of certainty

The FRC report also uncovered concerns that the lack of certainty about the UK’s sustainability reporting regime may be a block to further investment by assurance providers.

Currently, large listed and private companies in the UK are expected to report using the Taskforce for Climate-related Financial Disclosures (TCFD) standard, which is mainly focused on the environment and carbon emissions.

The UK is currently considering whether to use two new standards from the International Sustainability Standards Board (ISSB), which would be broader in scope, touching on not only climate but also social and governance topics.

The EU’s CSRD, which companies on the continent begin complying with this year, is broader still but also introduces a double materiality principle not present in TCFD and ISSB standards. This requires companies to report not only the impact of climate change on their businesses, but also their own impact on the environment and society.

According to the FRC, 203 FTSE 350 companies now disclose sustainability metrics, compared with 138 in 2019.

Though there are 64 providers of sustainability assurance operating, PwC dominated, with a little more than 14% of the market. The other Big Four firms—EY, KPMG and Deloitte—are the next largest.

The rest of the top ten providers are non-audit firms: ERM Certification and Verification Services has the largest market share of these, with around 5%.

Of the FTSE 350, 38% use audit firms for sustainability assurance.