To: International Auditing and Assurance Standards Board (IAASB)

We appreciate the opportunity to submit public comments on ISSA 5000, General Requirements for Sustainability Assurance Engagements (hereinafter, the "ED-5000").

Our responses to the individual questions are as follows:

Question 1 : Overall Questions

< Agree, with comments below >

• The system for sustainability disclosure is still under development and, while some sustainability information such as greenhouse gas emissions data can be based on the Greenhouse Gas Protocol and other relatively well-established criteria, there is also a large amount of sustainability information for which criteria are not yet available. Where sustainability disclosures are concerned, factors such as the availability of criteria to provide a basis for judgment can cause the objectivity and reliability of assurance engagements to vary greatly, and we therefore believe that the appropriate approach for assurance engagements should change accordingly. If obtaining assurance came to be regarded as essential for all sustainability information, including information for which criteria are not available, the reliability and understandability of disclosures could be compromised as a result of assurances provided without sufficient evidence, or significant increase in assurances for explanatory notes regarding the assumptions made. Moreover, if preparers of sustainability information prioritize the obtaining assurance, this could have the effect of discouraging them from disclosing proactively.

• We believe that steps should be taken to improve understanding of sustainability assurance among stakeholders, not least to ensure the effectiveness of assurance standards developed by the IAASB. For example, it would be helpful if the IAASB could provide information on situations in which assurance works effectively or not, and on the recommended assurance approaches in such cases.

• Keidanren considers the following three points in connection with ED-5000 to be of particular importance:

  1. (1) The assurance system should not be designed in such a way that entities cannot obtain assurance unless they develop a sophisticated internal control system (Question 13).
  2. (2) Sustainability information often involves longer-term projections than is the case for financial information, and the discrepancies between estimates and actual results therefore tend to be larger. This should be clearly stated in the standards and elsewhere (Question 16).
  3. (3) As the discrepancies between estimates and actual results tend to be larger, the guidelines for distinguishing between error and fraud should be presented more clearly (Question 19).

Detailed comments on these points are provided in the responses to the relevant questions.

Question 4 : Relevant Ethical Requirements and Quality Management Standards

< No, with comments below >

• ED-5000's ethical and quality management-related requirements for assurance engagements are clear. However, having been developed based on auditing standards and regulations, the requirements appear demanding to be applied from the very beginning, and are difficult for assurance engagement providers other than auditing firms to meet. We are therefore concerned about a potential lack of providers capable of meeting these requirements. For providers other than auditing firms, there seem to be few standards developed at a level comparable to the IESBA Code or the IAASB ISQM 1; we therefore believe that the IAASB should explore requirements at a level that is practicable not only for auditing firms, but also for other assurance engagement providers.

Question 5 : Definitions of Sustainability Information and Sustainability Matters

< Neither yes/no, but see comments below >

• Regarding interpretations of "sustainability information" and "sustainability matters," we would like the IAASB to take care to prevent confusion arising in practice due to differing interpretations among assurance engagement providers. We hope the IAASB will conduct an information campaign including distribution of educational materials, guidance, and other references to explain both concepts through specific examples illustrating sustainability information or sustainability matters.

Question 7 : Differentiation of Limited Assurance and Reasonable Assurance

< Neither yes/no, but see comments below >

• With regard to limited assurance and reasonable assurance, given that the approaches are largely based on those used for auditing of financial statements, we are concerned about whether the various procedures listed in ED-5000 would work as effectively in practice during sustainability assurance engagements as they do when auditing financial statements. In particular, if one compares sustainability information with financial information, the range of information handled and departments involved is broader for sustainability information, and assurance engagement providers are not limited to auditing firms. It will be crucial for the IAASB to conduct an information campaign relating to the key ISSA 5000 concepts of limited assurance and reasonable assurance, not least to ensure that the system is designed in such a way that it will also be acceptable to stakeholders who remain unfamiliar with auditing of financial statements. First of all, we would like the IAASB to address limited assurance to start off with, aiming to design a system that is practicable and does not impose an excessive burden on entities in practice.

Question 9 : Preliminary Knowledge of the Engagement Circumstances

< Neither yes/no, but see comments below >

• In ED-5000 and its Explanatory Memorandum, it is difficult to understand the difference between the concepts of management's "materiality process" and the assurance engagement provider's "materiality." In October, FAQ on this issue was released, but we are concerned that confusion could still arise in practice as a result of mixing up the provisions regarding materiality for assurance engagement providers and the provisions that preparers of sustainability information must comply with during their materiality process. We hope the IAASB will conduct another information campaign including distribution of an additional explanatory memorandum, guidance, and other references to explain both concepts through specific examples illustrating materiality and the materiality process.

Question 10 : Sustainability and Availability of Criteria

< Yes, with comments below >

• It is necessary to bear in mind that in the sustainability field a variety of approaches and value systems exist according to individual circumstances. If approaches and value systems differ, therefore, it stands to reason that the criteria adopted may differ among entities with regard to the same sustainability matter.

• In cases where laws or regulations do not mandate the use of certain criteria when obtaining assurance, the IAASB should prevent entities from being forced to choose the same uniform criteria by making it clear that they may choose a variety of criteria, provided the criteria in question are appropriate.

Question 12 : Materiality

< Neither agree/disagree, but see comments below >

• In a situation where disclosure standards relating to sustainability information are still under development and it can be assumed that a wide variety of sustainability information will continue to be disclosed, it is doubtful whether practitioners will in practice be able to determine materiality for all quantitative sustainability information. Suppose, that "determine materiality for quantitative disclosures" as stipulated in paragraph 91 of ED-5000 required practitioners to determine quantitative materiality thresholds as is the case for accounting auditing; surely there would be quantitative sustainability information for which it would not necessarily be appropriate to determine materiality. We therefore suggest that paragraph 91 of ED-5000 ought to specify that quantitative disclosures should be "considered" rather than "determined," as is the case for qualitative disclosures.

Question 13 : Understanding the Entity's System of Internal Control

< Neither agree/disagree, but see comments below >

• Even for limited assurance engagements, practitioners are required to understand the components of internal control to some degree. However, compared to financial information, the departments that handle sustainability information are more wide-ranging and the information itself covers a broader range of topics. Therefore, we are not sure whether this would actually work in practice.

• Paragraphs 102L and 102R require the practitioner to obtain an understanding of components of the entity's system of internal control, but the assurance system should not be designed in such a way that entities cannot obtain assurance unless they develop a sophisticated internal control system. Likewise, if information can be gathered as a corporate group, individual entities should not be required to establish a sophisticated internal control system. ED-5000 presents related Application and Other Explanatory Material in the second bullet point of paragraph A155, paragraph A313, and elsewhere, but the current wording taken on its own could be misunderstood to imply that entities are required to establish internal control systems exceeding a certain level of sophistication (including IT). It should be clearly stated in the guidance and elsewhere that the intention is not to require entities to establish sophisticated internal control systems.

• Amid a conflicting jumble of national regulations and various initiatives relating to disclosure of sustainability information, it is difficult for entities now to develop an overarching internal control system that anticipates future developments. Disclosure practice is still developing, and the reality is that many companies are responding flexibly, including through manual processes, given the potential for changes to definitions or additional regulations after disclosure has taken place.

• Although it is desirable that entities have already developed a sophisticated internal control system when obtaining assurance, if change due to legislative amendments or the like is anticipated in the near future, it may be rational from a long-term perspective for an entity to develop its internal control system incrementally. The key prerequisite is that an entity can ensure the accuracy and completeness of disclosures, but given that the establishment of an internal control system is to some extent dependent on external circumstances, we recommend that paragraphs 70(a) and A162, as well as paragraphs 102L and 102R (i.e., the provisions relating to obtaining an understanding at the engagement acceptance stage) be supplemented to urge practitioners to assess an entity's initiatives over the long term.

Question 14 : Using the Work of Practitioner's Experts or Other Practitioners

< Neither yes/no, but see comments below >

• With regard to practitioners' experts, the IAASB should coordinate with the IESBA and take care to ensure that the use of experts is kept to the level that is necessary and sufficient so that such use does not lead to leakage of confidential information or excessive increases in costs.

Question 16 : Estimates and Forward-Looking Information

< Agree, with comments below >

• Estimates and forward-looking information relating to sustainability disclosure often involve long-term projections that are subject to greater uncertainty than is the case for financial information, and the forward-looking information currently disclosed in practice often comprises targets. We are concerned that requiring excessively rigid assurance could mean that the incentive to disclose forward-looking information on sustainability would be lost.

• As the process of establishing a system for sustainability-related disclosure proceeds, the bodies that set disclosure and assurance standards need to bear in mind the distinction between objective forward-looking information and entities' target-related information as they develop their standards. Depending on whether the information required by disclosure standards is objective forward-looking information or entities' target-related information, the disclosure outcomes will differ, and this will influence the investment decision-making of information users. Moreover, the appropriate approach for the assurance standards will differ accordingly.

• The fact that sustainability information differs fundamentally from financial information limits the extent to which it is possible to require the same level of disclosure and assurance as for financial information. Sustainability information often involves longer-term projections than is the case for financial information, and the discrepancies between estimates and actual results therefore tend to be larger. These differences in characteristics should be mentioned in paragraphs A390, A391, and elsewhere, and the differences compared with the International Standard on Auditing (ISA 540) should be clearly stated.

Question 18 : Groups and "Consolidated" Sustainability Information

< Neither agree/disagree, but see comments below >

• We are aware that the appropriate scope of consolidation for disclosure of sustainability information may not necessarily be the same as the scope of consolidation for auditing of financial statements, and in future there will be more situations in practice that require previously unnecessary judgments to be made in this regard. We would like the IAASB to take care to prevent confusion arising in the course of actual assurance engagements by providing practice notes and guidance, among other measures.

Question 19 : Fraud

< Agree, with comments below >

• The characteristics of sustainability information subject to disclosure mean that it includes more estimates and forward-looking information than financial information and the potential for differences between disclosed information and actual results is greater. It is therefore essential to further clarify the guidelines for distinguishing between error and fraud when interpreting the causes of material misstatement. Judgments as to whether misstatement relates to fraud or error can also involve assessment of management bias—that is to say, management's good or bad faith—necessitating careful consideration of the criteria guiding such judgments. If there is some risk that a practitioner's judgment of management bias regarding sustainability disclosure could result in an actual error being treated as fraud, entities will be forced to take a conservative approach to sustainability disclosure, and as a result the incentive to make proactive disclosures could be reduced.

• It would be inappropriate to make separate, specific reference to "greenwashing," which is just one form of fraud, in the main text of the overarching assurance standard ISSA 5000.

Question 22 : Reporting Requirements and the Assurance Report

< Agree, with comments below >

• We strongly agree. Given that discussion regarding the disclosure of sustainability information is still ongoing, it would be inappropriate to require a concept equivalent to key audit matters (e.g., "key sustainability assurance matters") to be addressed from the very beginning.

Question 25 : Other Matters

< Yes, as further explained below >

• In the sustainability field, careful consideration is required with regard to new approaches to assurance, primarily because—unlike disclosure of financial statements, for which the process is already established—disclosure of sustainability information involves a wide range of business units and stakeholders within entities; no customary practices have yet been established with regard to the definition of relevant information, or its materiality and granularity; and assurance by practitioners other than auditing firms is allowed. Furthermore, given the unpredictability of regulatory trends in individual countries, it is undesirable for detailed sustainability assurance standards to be drawn up too far ahead, as this will only lead to confusion. First, the IAASB should prioritize identifying the fundamental approach and principles governing the minimum level of sustainability assurance and building a consensus on these prior to introducing them incrementally.

• With regard to "other information," we wonder whether efforts to check consistency between such information and disclosures subject to assurance would actually work in practice, considering factors such as the broad scope of such information to be checked and the difficulties arising from the different characteristics of financial information and sustainability information. Measures such as limiting and clarifying the scope of other information to be checked, and preparing guidance relating to the tasks involved in assurance are necessary.