A combined solution to compliance and risk management for sustainability reporting

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The UK has introduced new regulations for business on how to report. Integration of risk and strategy is key. Diagnostics to help define material social and environmental risk will save costs. Compliance with legal obligations will also be key.

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A combined solution to compliance and risk management for sustainability reporting

  1. 1. A combined solution to compliance and risk management for sustainability reporting
  2. 2. 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
  3. 3. 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• Companies Act 2006 (Strategic Report and Director’s Report) Regulations 2013 • Financial Reporting Council issued draft guidance • Affects ALL companies
  4. 4. 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
  5. 5. What companies do the regulations apply to? • Differing requirements according to whether the company is: o listed o large o medium sized companies
  6. 6. 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)
  7. 7. What about disclosures? • For quoted companies, disclosures required around: o environment o employees o social, community and human rights issues o diversity • If not disclosed, the company must state which of these disclosures are missing
  8. 8. 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
  9. 9. What does this mean? • Information needed on past and future performance • Information to be relevant to shareholders • Explain how the information shaped the report
  10. 10. 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
  11. 11. 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”
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. E.g., Full value chain environmental profiles determine risk exposure
  16. 16. E.g., Operating model and geographic and sector participation drive different people risk exposure Human Capital PIK (select constituent) 10,00 HC1 HC2 HC3 HC4 HC5 HC6 HC7 HC8 HC9 HC10 9,00 PIK PIK Direct 6,14 4,22 5,15 2,90 7,10 7,64 3,78 4,81 3,87 ## PIK 8,00 PIK Indirect 5,54 4,34 2,87 3,06 4,02 3,70 2,57 4,81 4,13 ## PIK PIK Total 5,84 4,28 4,01 2,98 5,56 5,67 3,17 4,81 4,00 ## 2 3 4 5 6 7 8 9 10 11 7,00 6,00 Direct 5,00 Indirect 4,00 Total 3,00 2,00 1,00 HC1 HC2 HC3 HC4 HC5 HC6 HC7 HC8 HC9 HC10 People risk exposures within a supermarket’s direct and indirect operations: HC1 (Social Disparity) HC5 (Employees Rights) HC6 (Employees Financial Conditions / Living Wage)
  17. 17. E.g., Plotting material sustainability risks Material environmental risks within a supermarket’s supply chain: NC3 (Water Scarcity) NC10 (Renewable Resources) NC1 (Climate Change) Select Constituent PIK Value Chain Risk Exposure: Natural Capital Indirect 15,00% NC3, 1,85 13,00% 12,00% 11,00% 10,00% 9,00% 8,00% 7,00% 6,00% 5,00% Total Financial Impact Increasing estimated financial impact (% of Company Revenue) 14,00% NC8, 1,45 NC10, 1,30 NC1, 3,24 4,00% 3,00% 2,00% 1,00% 0,00% -1,00%-50% 0% NC9, 1,55 50% NC7, 1,58 NC6, NC2, 2,80 2,38 100% NC4, 1,85 150% Indirect Risk Exposure 200% 250% Increasing exposure to natural capital risks (Right of 0% is more exposed than the average player within the economy) 300% 350%
  18. 18. E.g., Summarising sustainability risks
  19. 19. 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 nonfinancial issues might feed into a companies strategy
  20. 20. 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
  21. 21. 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 provided o persuade directors to fix the issues o apply to court for an order requiring directors to prepare a revised report
  22. 22. 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
  23. 23. 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.
  24. 24. A new model - Tick-box - Compliance - Risk-lead Legislation Emerging issues and key contracts Best Practice - Strategy - Reputation - Opportunitylead
  25. 25. 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
  26. 26. www.clt-envirolaw.com

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