Environmental, social governance issues have financial implications on how companies recognise, diagnose, manage and disclose their information. The legal and investor angle is discussed, together with how to diagnose the financial risk

1. Today’s webinar
29th October 2013
Strategic report
YOUR HEADING
regulations: guidance
HERE
for companies and
10.05.2011
investors
Presenters:
Colleen Theron, Director of CLT envirolaw
Tim Barker, Director of Route 2 Sustainability

2. Expertise

3. Agenda
• Strategic report regulations: what, when, how and noncompliance
• Practical guidance on:
1.
2.
3.
4.
5.
How to determine whether a non-financial risk is ‘material’ and
should therefore be disclosed?
Why are investors interested?
What kind of process do you need?
How does the strategic report overlap with voluntary reporting
standards such as Integrated Reporting and the Global Reporting
Initiative?
What steps should you take next?
• Q&A

4. Poll question
• What is your key interest in the subject today?
1) Compliance
2) Practical steps
3) Or both

5. What’s happening?
• UK government: renewed focus on ensuring that
directors’ social and environmental duties have been
covered in company reports
• The Companies Act 2006 (Strategic Report and
Directors’ Report) Regulations 2013 came into force
on 1st October 2013
• duty to produce a strategic report
• Financial Reporting Council (FRC) issued Exposure
Draft: Guidance on the Strategic Report in August
2013

6. What is a strategic report?
• ‘business review’ replaced
•
•
•
•
not to be confused with the Director’s report
be approved by the board of directors
includes more strategic information
forms part of the narrative report

7. What companies do the regulations
apply to?
• ALL companies that:
o are UK-incorporated and
o are not exempted by the small companies regime
• must disclose:
o a fair review of the company’s business;
o a description of principle risks and uncertainties ;
o an analysis of the development and performance of
the company's business, including environmental
and employee matters;
o using financial Key Performance Indicators (KPIs)
and, if large, non-financial KPIs

8. What’s required?
• quoted companies:
o description of the strategy and business model
o main trends and factors affecting the company
o comply or explain - information about and policies for
- each of the following:
o environment
o employees
o social, community and human rights issues
o diversity statistics at different organisational levels
• assurance required under the Companies Act and
International Standards on Auditing (ISA) 720 and 250

9. Human rights
• new requirement
• driven by adoption on UN Guiding principles for
business and human rights
• indicators can include employee training on human
rights policies and practices
• supply chain risk

10. Communication principles
• complement, supplement and provide the
context of related financial statements
• signpost the location of supporting
material
• be fair, balanced, understandable, concise,
forward-looking, entity-specific and link
reports
• cover trends and factors that could
influence performance
• disclosure in the process
• summary of key non financial metrics to
inform the process

11. Strategic reporting requirements:
when?
• Requirement comes into place for company reporting years
ending on or after 30th September 2013
Your usual financial year
Your first reporting year under
the regulations
1 January to 31 December
1 January 2013 to 31 December 2013
1 April to 30 March
1 April 2013 to 30 March 2014
1 October to 30 September
1 October 2012 to 30 September 2013

12. What are the regulatory
implications of non-compliance?
•
•
•
•
3 Companies Act offences
penalties
negligent misstatement
Financial Reporting Council Conduct Committee
enforcement: voluntary first and then through the courts
• third party complaints: eg. Investors
• reputational impact from committee references and
public notices

13. What is required for compliance
on the non-financial side?
•
•
•
•
only material information
‘to the extent necessary’
excluded if it will seriously prejudice the company
definitions:
– Companies Act 2006
– International Financial Reporting Standard

14. When can an ESG risk have material
financial implications?
ESG CATEGORIES:
ENVIRONMENTAL,
EMPLOYEE,
SOCIAL,
COMMUNITY AND
HUMAN RIGHTS
RISKS WITH
FINANCIAL
IMPLICATIONS:
REPUTATIONAL,
CONTRACTUAL,
REGULATORY,
RESOURCE COSTS,
OPERATIONAL
DISCLOSURE RQUIREMENTS: INFORMATION ABOUT
ESG CATEGORIES THAT COULD AFFECT THE DECISION
TO INVEST IN THE COMPANY

15. Not getting it right
• are you confident that you
have an informed
disclosure?
• do you have a procedure in
place to gather and
evaluate all the necessary
information?



16. What are the elements of a robust ESG
risk process?
Stakeholder Engagement: Throughout The Process
1st stage: workshop with
senior management to
understand activities,
processes, and views on
ESG themes.
Identification and
evaluation of key
stakeholders.
2nd stage: engagement
with other key
stakeholders on ESG
themes
Material Issues: Identification
With regard to business
strategy, full value chain
business footprint and
stakeholder input
Covering a
comprehensive list of
relevant ESG themes
Material Issues: Prioritisation & Impact
Exposure to ESG risks /
opportunities
Significance of business’
full value chain economic,
environmental and social
impact
Influence of the business’
value chain impacts on
relevant stakeholders
Risk Mitigation
Coverage of ESG risks on
existing company risk
register
Disclosure
Identification and
prioritization of
management procedures
KPIs linked to material
issues
Development of an action
plan, budget and program
Strategic information
in strategic report.
Supplementary
information in
sustainability report.
Development of KPIs and
reporting procedure

17. ESG risk themes
SUSTAINABILITY RISK THEMES
FOCUS THEMES
NATURAL CAPITAL
HUMAN CAPITAL
BUILT CAPITAL
SOCIAL CAPITAL
NC1
Climate
change
NC2
Environmental
Accidents
HC1
Transformation
(Employment)
Employee Profile
Wellness
SC1
Reputation
SC2
Regulatory Exposure
BC1
Energy
Management
NC3
Water Usage
NC4
Water
Pollution
HC3
Employee Profile
Employee Profile
HC4
(Juvenile
(War for Talent)
Employment)
SC3
Corporate
Governance
(Structures &
Processes)
SC4
Corporate
Governance
(Performance)
BC3
Environmental
Mitigation
Expenditure
NC5
Ozone
Depletion
NC6
Air Pollution
HC5
SC5
Stakeholder
Engagement
SC6
Transformation
(Enterprise
Development/Procur
ement)
NC7
Solid Waste
Generation
NC8
Non Renewable
Resources
HC7
SC7
Product Use
(Defects)
SC8
Product Use
(Harmful)
FC1
Economic
Impact
NC9
Renewable
Resources
NC10
Land use –
Land Cover Change
HC9
SC9
Product Use
(Environmental
Impacts)
Product Use
(Material Intensity
FC3
Financial Services
(Access to
Product Use
FC4
Financial
(Material Intensity)
Services &
Capital)
SC11
Product Use
(Energy Intensity)
HC11
HC2
Employment
Employment
Terms &
Terms &
HC6 Conditions
Conditions
(Financial
(Employee Rights)
Conditions)
Employment
Employment
Terms &
Terms & Conditions
HC8
Conditions
(Working Hours &
(Working
Location)
Environment)
Equal
Opportunity
R&D/Innovation
HC10
Employee Training
& Development
SC10
BC2
BC4
Material Intensity
& Source
Crime Mitigation
Costs
FINANCIAL CAPITAL
FC2
Government
Transfers
(Incl. Taxation)
• 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

18. Risk diagnostic: identifying value
chain exposure
• Overall Risk
Score indicate
weighted
exposure to all
relevant risk
themes
• Participation Risk
indicates
whether risk
exposure driven
by the country
(of operation or
procurement)or
the sector (of
operation or
procurement)
• Value Chain Risk
indicates
whether
exposure risk is
attached to the
direct operations
or sits within the
supply chain

19. Which themes are relevant?
Benchmark /
Peer Set
Company

20. Risk diagnostic: risk prioritisation
The risk matrix helps
communicate an
organization's material
risks and opportunities
- risks in the top right
hand quadrant
represent the most
material risks based on
exposure to that risk
and the estimated
financial impact of that
risk / opportunity.
Subject to testing with
relevant stakeholders
– these risks /
opportunities should
be prioritized for risk
mitigation actions and
consideration when
reviewing an
organization's
strategy and
operations

21. Risk register

22. Can compliance be converted into
a competitive advantage?
•
•
•
•
•
•
•
•
•
objective process for disclosure
robust ESG process
clear understanding of risk themes
enhanced reputation from
stakeholders
attract new business and investment
enhanced stakeholder relationships
reduce resource costs
enhanced procedures (e.g. risk
register to manage risks)
benchmark against best practice
standards
Ready for take-off?

23. Poll questions
1. Do you have a material ESG risk identification
and management process in place?
2. Does it quantify potential financial impacts and
cover your supply chain?
3. Does it include any form of stakeholder
engagement (internal or external)?
4. Do you have a risk register that covers ESG risk?
5. Will you be taking any action after today’s
webinar?

24. Q&A

25. Recorded version available
• http://clt-envirolaw.com/ghangout/strategicreport-regulations-guidance-for-companiesand-investors/

26. Who to call?
For more information or advice call:
• Colleen Theron
Mobile: +44 (0) 7714 979 936
E-mail: colleen.theron@clt-envirolaw.com
• Tim Barker
Mobile: +44 (0) 7867 473 983
E-mail: timb@route2sustainability.com

27. www.clt-envirolaw.com