Watchdogs have warned of concerns that Big Four audit firms’ success in the market for sustainability assurance “could limit future choice” for clients.

The comment comes in a review of the market for sustainability assurance by the Financial Reporting Council, which also concludes that “a lack of clarity” over the UK’s regulatory landscape could “hinder” investment in capacity by assurance providers of all kinds.

Statistics produced for the review show that the Big Four firms have increased their share of the FTSE 350 sustainability assurance market to 40%, up from 33% in 2019.

The FRC warns: “There is a growing preference amongst companies to use the Big Four audit firms (Deloitte, EY, KPMG and PwC ) to carry out sustainability assurance in the UK market, which could have implications for future choice.”

The warning echoes a long debate about the Big Four’s domination of the financial audit market for listed companies. So seriously is the issue taken that the previous government looked set to reform the market to mandate “managed shared audits” — a process in which large audits would be shared by a Big Four player and a so-called “challenger” firm.

The rest of the sustainability market is held by non-audit firms, such as ERM Certification Services or Bureau Veritas UK, though, as a group, they have been losing market share among big clients.

According to the study, the reason for Big Four success in sustainability assurance could be down to existing relationships and reputation of the firms; the firms’ perceived quality and capability; and perceived efficiencies from using a single provider for both financial and sustainability assurance.

Complexity across borders

It’s also believed that regulatory developments elsewhere, such as the introduction of the EU’s disputed Corporate Sustainability Reporting Directive (CSRD) has driven large companies to the Big Four because of their ability to deal with the complexity and work across borders.

In fact, FRC reports many companies believe CSRD will drive higher demand for assurance in the UK among companies with European operations.

However, providers worry that they will hold back on investment in services because of uncertainty about “future regulatory requirements”.

EY told the FRC: “It is important that UK companies have clarity and certainty on future UK regulatory requirements… Most companies are likely to need to make investments in resources (including people and technology) to not only meet new reporting requirements but, more importantly, to ensure data quality and consistency.”

Forvis Mazars told regulators: “There are significant barriers to entry/expansion for challenger firms in the sustainability assurance market. Investment in a new service is, to a degree, a gamble, and firms need a degree of certainty in order to encourage them.”

The FRC has now set out recommendations for the sustainability assurance sector, including the development of a “policy framework” to create certainty for providers; a regulatory regime that brings together standard setting, oversight and enforcement and market monitoring (much like financial reporting); and improvements in data gathering on the quality of sustainability assurance.

Mark Babington, executive director of regulatory standards at the FRC, says watchdogs will continue to develop their understanding of sustainability assurance.

“This report provides us with a clearer picture of the UK’s rapidly developing sustainability assurance market which companies, assurance providers and investors are currently navigating, as reporting expectation continue to develop in this important space.”

The sustainability reporting landscape is about to undergo significant change. The EU CSRD is coming into force (though it may yet be watered down) while ministers are now considering the introduction of new standards from the International Sustainability Standards Board, a sister body to the organisation that writes international accounting standards.

CSRD has become increasingly controversial and in particular since former European Central Bank president Mario Draghi said that, taken together with other reporting requirements, they were a “major source of regulatory burden”.

Republicans in the US have speculated that the extra-territorial nature of CSRD could become a point of conflict and even a bargaining chip in future trade negotiations.

However, any new reporting system will eventually need an assurance programme to maintain investor confidence. The FRC’s report shows that this element of climate transition is still a work in progress.