Reporting on non-financial issues, including Corporate responsibility

Question 1

King and Roberts (2013) argue that there are a number of problems with traditional corporate reporting. Name 5

Answer 1

1. too heavy for postman = so detailed and extensive that annual reports are inaccessible to the average reader
2. Yesterday’s story = annual reports present historic performance of the previous financial year
3. Some intangibles and costs are excluded = e.g. good CG and environmental costs
4. Different reports are prepared for different users = the ‘silo effect’ = end up showing each stakeholder group a different aspect of the organisation
5. By focusing on financial reporting only, organisations have been pushed into short-termism as they strive to meet the requirements on a quarterly or six-monthly basis of the markets

Question 2

What does narrative reporting describe?

Name 4 major players who demanding that organisations report on the economic, social and environmental impact of their organisations.

Answer 2

• = describes the additional non-financial information which is included in companies’ annual reports, providing a wider and more meaningful picture of the company’s business, its strategy and future prospects
e.g. chair’s statement and directors’ report, directors’ remuneration report, and corporate governance report

1. shareholders/investors, to assist in their investment decision making;
2. consumers, who are looking to buy products from sustainable resources;
3. employees, who want to work for companies that have good reputations based on their corporate responsibility practices;
4. banks, who are looking to lend money to organisations with good corporate responsibility practices

Question 3

What is the corporate governance statement?

What should the contents of the CG report be consistent with?

Answer 3

• Listing Rules 9.8.6R = requires listed companies to make a statement in their annual report and accounts on how they have Applied’ the Principles within the 2018 Code and ‘Complied’ with the Provisions within the 2018 Code
• Where a company is unable to comply with the provision, an explanation should be provided

• The contents of CG report should be consistent with and complement the strategic report, and any other information provided on governance related issues in the annual report and accounts

Question 4

Which regulation introduced new narrative reporting legislation requiring companies to annually produce a strategic report (which should be separate from the directors’ report)?

What is the purpose of the strategic report?

What 6 things should the report do?

In doing this, what else should the strategic report be? (4)

Answer 4

• CA2006 (Strategic and Directors’ Reports) Regulations 2013

• Purpose = to provide information for shareholders and help them to assess how directors have performed their duty, under section 172 of the CA2006, to promote the success of the company

1. describe the company’s strategy, objectives and business model
2. provide an explanation of the main trends and factors affecting the company
3. describe the company’s principal risks and uncertainties
4. include an analysis of the development and performance of the business
5. include information on material environment, social, community, human rights, anti-corruption and anti-bribery matters
6. include information on gender diversity
7. be fair, balanced and understandable
8. be concise
9. include company-specific information
10. link related information in different parts of the annual report

Question 5

What are the consequences of a director approving the strategic report knowing that it does not comply with CA2006 requirements?

What is a safe harbour?

What does this mean?

What does the safe harbour address?

Who is the director’s liability limited to?

Answer 5

They commit a criminal offence

• S.463 CA2006 = introduces a safe harbour for directors’ liability for the directors’ report, strategic report, and remuneration report

• = Directors only liable to compensate the company for any loss it suffers as a result of any untrue or misleading statement in, or omission from, one of these reports if:
1. the untrue or misleading statement is made deliberately or recklessly
2. the omission amounts to dishonest concealment of a material fact

addresses the concern of directors over liability for negligence when making forward-looking statements in the reports

Limited to the company rather than 3rd parties

Question 6

What is ESG reporting?

What are the 3 sets of regulations which have introduced this?

Answer 6

• ESG reporting = the requirements for mandatory annual CSR reporting

1. CA2006 (Strategic and Directors’ Reports) Regulations 2013
2. The Companies, Partnerships and Group (Accounts and Non-Financial Reporting) Regulations 2016
3. Companies (Miscellaneous Reporting) Regulations 2018

Question 7

What does the CA2006 (Strategic and Directors’ Reports) Regulations 2013 require listed companies to report on in regards to CSR reporting?

What should the Directors’ report include on this? (2)

Where else could this information be disclosed and when?

Answer 7

• report on their greenhouse gas (GHG) emissions as part of their directors’ reports

• Directors’ report should contain the annual quantity of emissions in tonnes of carbon dioxide produced by activities the company is responsible for and resulting from the purchase of electricity, heat, and steam cooling.

GHG information can be disclosed as part of the company’s strategic report, instead of the directors’ report, if the company deems the information to be strategic in nature

Question 8

Which companies does The Companies, Partnerships and Group (Accounts and Non-Financial Reporting) Regulations 2016 apply to?

What 5 things are companies required to give a description of in the strategic report?

Under the DTRs, what 5 things are listed companies required to disclose in their corporate governance statement in relation to diversity?

Answer 8

• With 500+ employees which are banking companies, traded companies, and insurance companies

1. the company’s business model
2. Non-financial key performance indicators
3. the outcome of policies
4. principal risks
5. how the company manages these risks
6. the diversity policy of the company
7. the objectives of the diversity policy
8. how the diversity policy has been implemented
9. progress towards achieving the objectives during the financial year
10. If no diversity policy, an explanation as to why

Question 9

Which companies does the Companies (Miscellaneous Reporting) Regulations 2018 apply to and what are they required to do in their strategic report?

What are these companies required to put in their directors’ report? (2)

What are companies with 250+ employees required to put in their directors’ report? (3)

Answer 9

• Large companies are required to include a statement as part of their strategic report describing how the directors have had regard to the matters in s.172(1)(a)-(f) CA2006
• Provision 5 UK CG Code

• required to include a statement as part of their directors’ report summarising:
1. how the directors have had regard to the need to foster the company’s business relationships with suppliers, customers and others
2. the effect of that regard, including on the principal decisions

• companies with 250+ employees required to include a statement summarising:
1. how the directors have engaged with employees
2. how they have had regard to employee interests
3. the effect of that regard, including on principle decisions

Question 10

KPMG has been surveying sustainability reporting since 1993.
Name 6 drivers for voluntary CSR reporting

Answer 10

1. reputation of brand
2. employee motivation
3. risk management or reduction
4. access to capital/increased shareholder value
5. strengthened supplier relationships
6. cost savings

Question 11

What do companies need to do to be able to report on their CSR activities?

Why is it important to set CSR targets and link them to executive pay?

What have boards retained the right to do in the absence of CSR metrics?

Answer 11

need to set non-financial targets and measure their progress against targets.

= ensures that CSR needs within companies are taken seriously and that targets are actively worked towards.

retained the right to reduce incentive awards in cases of substantial damage to the company’s business or reputation resulting from an event that has had a negative effect on the environment, society or the organisation’s long-term sustainability.

For example, an oil spill where inadequate precautions tied to the activities of senior executives can be shown

Question 12

What is Triple Bottom Line reporting?

Which 3 elements does it take into account?

Why (advantages)? (2)

What are the 4 challenges with TBL reporting?

Answer 12

= an accounting framework which includes information about a company’s social, and environmental, and financial performance when evaluating the overall performance of an organisation

• Take into account 3 elements = profit, people, and planet

1. organisation can calculate the full cost of doing business
2. boards and management are more likely to pay attention to them = create more socially and environmentally responsible organisations

• Challenges:
1. You cannot add up the three separate disclosures of financial, social and environmental information = Difficult to quantify S&E in monetary terms

2. No widely accepted set of standards for TBL reporting or measuring S& E impacts = difficult to compare companies
3. No requirements to independently audit S&E measures (IKEA do)
4. Lack of trust in the image presented by companies through TBL reporting as many companies present good news whilst withholding the bad news
   ○ e.g. Argued tobacco companies carry out CSR initiatives as a marketing exercise

Question 13

How does Kind IV define integrated reporting?

What is an integrated report?

What are the 9 elements found in an integrated report / what 9 things does the economic value of a company include?

Answer 13

= ‘a process founded on integrated thinking that results in a periodic integrated report by an organisation about value creation over time.

• Integrated report = concise communication about how an organisation’s strategy, governance, performance and prospects lead to the creation of value in the short, medium and long-term

1. Balance sheet
2. Profit and loss statement
3. An assessment of future earnings
4. Brand
5. Goodwill
6. The quality of its board and management
7. Reputation
8. Strategy
9. Other sustainability aspects

Question 14

Why is integrated reporting seen as essential to stakeholders?

What should the integrated report record? (2)

Answer 14

• to enable all stakeholders to make informed assessments of the economic value of a company

• The integrated report should record:
1. how the company has impacted (both positively and negatively) the economic life of the community in which it operated during the year
2. how in the coming year it can improve the positive and eradicate or reduce the negative
(Principle 5 of King IV)

Question 15

What is the importance of integrated thinking for an organisation?

What should integrated thinking take into account? (5)

What should an integrated report enhance and by disclosing what? (2)

Answer 15

enables an organisation to better understand the relationships between its various operating and functional units and the capitals the organisation uses and affects

1. the capitals the organisation uses and affects
2. the external context in which the organisation operates
3. the opportunities and risks faced
4. activities, results and performance – past, present and future
5. financial and non-financial information

integrated report should enhance transparency and accountability, which are essential in building trust, by disclosing:
1. the nature and quality of the organisation’s relationships with key stakeholders
2. How their issues are understood, taken into account and responded to

Question 16

What should an integrated report show in relation to stakeholders?

Why had Phillips’ Annual Report 2008 combined all the financial, social and environmental information into a single report? (2)

What are 5 major benefits to an organisation that has adopted integrated reporting according to Eccles and Krzus (2010)?

Answer 16

• should show how an organisation is responding to stakeholder issues

1. It is a key element of taking sustainability seriously = establish a truly sustainable strategy
2. One report can give a single simplified message to an organisation’s stakeholders = helps improve transparency in corporate reporting
3. Greater clarity about relationships and commitments.
4. Better decisions = help management strengthen or develop better metrics = better measurement leads to better decisions
5. Deeper engagement with all stakeholders
6. Helps eliminate the artificial distinction between shareholders and stakeholders
7. Lower reputational risk = helps monitor trends, social attitudes and the media to improve awareness of how social norms and values are changing.

Question 17

What is the difference between sustainability reports and integrated reports?

Answer 17

• Sustainability reports (TBL reporting) = describe the organisation’s non-financial performance, both positive and negative, in areas such as the environment, society and governance. Reports are targeted at stakeholders

• Integrated reports = combine financial and non-financial information and are usually targeted at investors

Question 18

What is the Global Reporting Initiative (GRI)?

Why are the GRI Sustainability Reporting Standards important? (2)

How can the standards be applied? (2)

What do GRI Standards consist of? (2)

Answer 18

• = independent international organisation to help ‘businesses and governments worldwide understand and communicate their impact on critical sustainability issues such as climate change, human rights, governance and social well-being’

1. the first and most widely adopted global standards for sustainability reporting
2. designed to enhance the global comparability and quality of information, creating greater transparency and accountability of organisations.

used in one of two ways:
1. To prepare a sustainability report in accordance with the GRI Standards
2. to report specific sustainability information, where selected standards are used to produce this information

1. 3 universal standards to be used by every organisation that prepares a sustainability report
2. series of topic-specific standards, which an organisation can select from depending on the ESG factors that are applicable for their type of organisation

Question 19

What are the 3 GRI Universal Standards?

What does each topic-specific GRI Standard include? (3)

Name 3 Topic-specific GRI Standards.

Answer 19

Universal Standards:
• GRI 101: Foundation
• GRI 102: General Disclosures
• GRI 103: Management Approach

• Each standard includes:
1. Requirements = shall
2. Recommendations = should
3. Guidance = background information, explanations, and examples

• Series 200 = Economic
• Series 300 = Environmental
• Series 400 = Social

Question 20

What is the Sustainability Accounting Standards Board (SASB)?

Who uses their Standards and what for?

Answer 20

• SASB = an independent organisation that develops and maintains global reporting standards for companies wishing ‘to identify, manage, and communicate financially material sustainability information to their investors

• SASB standards are used by companies and investors to implement principles-based frameworks, including integrated reporting

Question 21

What has the International Integrated Reporting Council (IIRC) developed?

What does integrated reporting aim to do? (3)

Name 5 of IIRC’s 8 content elements for an integrated report.

Answer 21

• IIRC has developed an international integrated reporting framework and issued 7 guiding principles on integrated reporting

• Integrated reporting aims to:
1. Improve quality of information
2. Enhance accountability and stewardship
3. Support integrated thinking and decision making

• The IIRC’s 8 content elements for an integrated report are:
1. governance;
2. business model;
3. risks and opportunities;
4. performance;
5. outlook;

Question 22

Why was The Corporate Reporting Dialogue convened by the International Integrated Reporting Council?

What is its Better Alignment Project aimed at doing? (3)

Answer 22

• to create dialogue and alignment between the key sustainability standard setters and framework developers

• 2018 = established a Better Alignment Project aimed at:
1. aligning all current sustainability standards with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations

2. identifying the similarities and differences between the current standards and frameworks to create even greater alignment
3. continuing dialogue with financial reporting standard setters towards integrating financial and non-financial reporting

Question 23

In Dec 2020 what did the FCA publish in relation to climate change?

What did this say?

What does the compliance statement state?

Answer 23

• PS20/17: ‘Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations’.

• Said FCA were introducing a new rule and guidance requiring companies with a UK premium listing to include a compliance statement in their annual financial report

states whether company has made disclosures consistent with the recommendations of the TCFD or providing an explanation if they have not done so

Question 24

What have been the 2 recent moves towards a single reporting standard?

Answer 24

1. Sept 2020 = a ‘Statement of Intent to Work Together Towards Comprehensive Corporate Reporting ‘ was issued by 5 organisations (CDP, CDSB, GRI, IIRC, and SASB)
   = Committed to work together by providing joint market guidance on how their frameworks and standards can be applied in a complementary and additive way
2. Nov 2020 = IIRC and SASB announced it would be merging and setting up the Value Reporting Foundation
   = Expected that the VRF will work with the IFRS Foundations to create 1 comprehensive sustainability reporting systems aimed at simplifying sustainability disclosure

Question 25

Why are many companies obtaining external assurance for their CSR initiatives and sustainability reports?

Name an example of external assurance.

Answer 25

• These assurances provide a measure of credibility as they are performed by 3rd parties.

• The International Organisation for Standardisation (ISO) has established standards against which organisations can receive certification
e.g. ISO 14001 for Environmental Management Systems and ISO 26000 for social responsibility

Question 26

Which company created the Environmental Profit and Loss Accounts (EP&L)?

What does an EP&L allow companies to do?

Which other company has released an EP&L?

Answer 26

• EP&L was created by Puma (sports lifestyle company) in 2011

• Kering (Puma’s parent) have stated that ‘an EP&L allows a company to measure in euro value the costs and benefits it generates for the environment, and in turn make more sustainable business decisions

• 2015 Stella McCartney (fashion house) released its first EP&L

Question 27

Name 4 things the Cosecs’ role in CSR reporting may include.

Answer 27

1. Ensuring that the board has ownership of the reporting process = board’s agenda should explain the reporting framework to be adopted (e.g. GRI Standards or UN Global Impact), how the information is to be presented, and how the report will meet different audience
2. Cosec should make a presentation regarding director’s duty under s.172 and how this will be reported within the company’s documents
3. Ensuring that KPIs for non-financial matters are developed and approved by the board
4. Advising on the contents of strategic, directors’ and ESG reporting requirements