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.

1. A combined solution to compliance and
risk management for sustainability
reporting

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. 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• Financial Reporting Council issued draft
guidance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. 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. What companies do the regulations
apply to?
• Differing requirements according to whether
the company is:
o listed
o large
o medium sized companies

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

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. 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. E.g., Summarising sustainability risks

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. 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. 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. 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. 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. A new model
- Tick-box
- Compliance
- Risk-lead
Legislation
Emerging
issues and
key contracts
Best Practice
- Strategy
- Reputation
- Opportunitylead

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. www.clt-envirolaw.com