A combined solution to compliance and risk management for sustainability reporting

A combined solution to compliance and risk management for sustainability reporting

What’s the proposition?

• Practical, cost efficient risk diagnostics and advice– Definition of material social and environmental

risks by reference to financial impact– Identification and implications of regulation

• Practical and cost efficient due diligence process

• Integration of risk and strategy

What’s happening? • New Regulations for companies on how to

report: in force from 1st October• Strategic report required• Companies Act 2006 (Strategic Report and

Director’s Report) Regulations 2013 • Financial Reporting Council issued draft

guidance• Affects ALL companies

Why is it happening?

• Government commitment to reinstate the Operating and Financial Review to ensure director’s social and environmental duties have been covered in company reporting

• Aims to promote cohesiveness• Putting the focus on the information being

strategic

What companies do the regulations apply to?

• Differing requirements according to whether the company is:o listedo large omedium sized companies

What’s required?

• Section 414c requires:o description of principle risks and uncertainties (all

sizes of companies)o analysis of Key Performance indicators (large and

quoted companies for non-financial KPIs) o description of the entities objectives, strategy and

business model (quoted companies)o explanation of main trends and factors affecting

the company (quoted companies)

What about disclosures?

• For quoted companies, disclosures required around: o environmento employeeso social, community and human rights issues o diversity

• If not disclosed, the company must state which of these disclosures are missing

What should the report do? • Provide information and insight into the

companies main objectives, strategies and principle risks

• Complement, supplement and provide context of related financial statements

• Provide an analysis of past performance• Signpost the location of supporting material

What does this mean?

• Information needed on past and future performance

• Information to be relevant to shareholders• Explain how the information shaped the

report

Materiality is key

• Organisations will have to understand what the key economic, environmental and social issues they face as a business

• ‘Materiality’ is key as is the process of determining what is material– Financial and reputationally material– Direct operations, up-stream and down stream

risks– All stakeholders

What is ‘material’?

• Definition taken from International Financial Reporting Standard:

“Omissions or misstatements of items are material if they could, individually or collectively, influence the economic decisions that users make on the basis of the financial statements. Materiality depends on the size and nature of the omission or misstatement judged in the surrounding circumstances”

But how do I understand what’s material ?

• Analyse your business and its value chain impact and determine risk exposure its materiality (by reference to current and future financial performance impact)

• Getting help on legislative issues • Understanding stakeholders views

Diagnosing sustainability risk

• Flexible to maturity of organisation’s sustainability data – possible to start with basic financial and non-financial data

• Thematic approach to risk diagnostic facilitating internal and external communication

• Materiality by reference to financial performance impacts aids business case development and supports objective materiality assessments

• Diagnostic outputs align to GRI G4 reporting and other voluntary disclosure standards

Sustainability risk themes

• Risk themes supported by risk primers to support internal understanding and external communication

• Alignment to GRI G4 ‘material aspects’ to support disclosure

• Flexible approach allows screening of some to most to all themes as required

E.g., Full value chain environmental profiles determine risk exposure

E.g., Operating model and geographic and sector participation drive different people risk exposure

People risk exposures within a supermarket’s direct and indirect operations:HC1 (Social Disparity)HC5 (Employees Rights)HC6 (Employees Financial Conditions / Living Wage)

E.g., Plotting material sustainability risksIn

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Increasing exposure to natural capital risks(Right of 0% is more exposed than the average player within the economy)

Material environmental risks within a supermarket’s supply chain:NC3 (Water Scarcity)NC10 (Renewable Resources)NC1 (Climate Change)

E.g., Summarising sustainability risks

How does it relate to integrated reporting?

• Both International Integrated Reporting Council and FRC want to improve the quality of reporting, with shareholders as the main focus.

• Strategic report, in contrast to Integrated report, is governed by legislation

• Strategic report is required as part of the annual report

• Draft Integrated Reporting Framework provides more in-depth information about how non-financial issues might feed into a companies strategy

Are there consequences for directors getting it wrong?

• Section 463 of the Companies Act allows for directors to be held liable to compensate their company if it suffers any loss as a result of any untrue or misleading statement (or any omission) arising from the director’s report, the director’s remuneration report or the strategic report

• Directors knew that the statements were untrue or misleading, or if they knew that the omission was a dishonest concealment of a material fact

Getting the strategic report wrong

• Financial Reporting Council Conduct Committee enforces

• Has the power to :o enquire into cases where it appears relevant

disclosures not providedo persuade directors to fix the issues o apply to court for an order requiring directors to

prepare a revised report

Getting it right

• Good reporting will lead to: o less exposure to penalties o greater transparency for investors or shareholders o better understanding and management of risks o improved governance

Solutions

• Find out what is ‘material’ to the company’s operations and strategy.

• Understand key risks through proper risk management. Has your company reviewed its risk register taking into account non-financial information?

• Have these been considered against both reputational and financial risk?

• What company engagement takes place? • Review supply chain management: do you know the

risks down your supply chain? E.g. working standards.

A new model

Legislation

Emerging issues and

key contracts

Best Practice

- Tick-box - Compliance - Risk-lead

- Strategy - Reputation - Opportunity-lead

How do you do this?

• Understand what the law requires • Determine your material risks using R2S risk

diagnostics• Integrate findings into report and company

procedures• Training on strategic risk management

including diagnostics and performance management

www.clt-envirolaw.com