New environmental regulations are being discussed in the European Union and there are broader moves towards integrating non-financial with financial reporting for investors and other stakeholders. CDP is working closely with climate data and non-financial reporting experts the Climate Disclosure Standards Board (CDSB), as well as industry experts, to support companies in preparing for these developments. We invite you to join us for a webinar to show how companies can place their climate change information into their annual financial reports – using CDSB’s Reporting Framework. You will hear perspectives from regulators, business, advisers, investors and non-financial reporting experts, as well as CDSB technical staff. Chair: Lois Guthrie – Executive Director, CDSB Regulatory Context: Ilaria Miller – Head of Corporate Governance, UK Department of Business, Innovation and Skills CDSB Framework: Patrick Crawford - Corporate Engagement, CDSB Corporate perspective: Jane Thostrup Jagd – Director, Control Compliance officer, A.P. Moller-Maersk Group Preparation: Aissata Touré – PwC (Germany) Presentation: Jonny McCaig – Radley Yeldar Investor perspective: Francois Passant – Executive Director, Eurosif
@CDSBGlobal Patrick Crawford Corporate Engagement CDSB Lois Guthrie Execu3ve Director CDSB Jane Thostrup8Jagd Director, Control Compliance officer A.P. Moller=Maersk Group Aissata Touré PwC (Germany) Thursday 17 th October 2013 Ilaria Miller Head of Corporate Governance UK Dept. of Business, Innova3on and Skills Jonny McCaig Senior Consultant, Sustainability Radley Yeldar Francois Passant Execu3ve Director Eurosif Integra3ng Climate Change Informa3on into Mainstream Corporate Reports
EU Proposals on Non-financial and on Country by Country Reporting
ILARIA MILLER
CORPORATE GOVERNANCE
3
The Action Plan • Published December 2012, following of 18 months of
consultation, and is the latest comprehensive review of this policy area.
• Seeks to modernise and enhance the current company law framework to today�s society and changing economic environment.
• The Plan�s intention is not to set out a long-term agenda; instead to put forward a series of initiatives that can be completed within 2 years.
• One of the main areas of action identified: Enhancing transparency between companies and investors: around board diversity and risk management and improving corporate governance reporting
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Non-Financial Reporting (NFR) Proposal • The EU Commission defines Corporate and Social
Responsibility (CSR) as: �the responsibility of enterprises for their impact on society�
• Aim: ensure a higher level of transparency around social and environmental issues.
• The proposal has two main aims: – improve consistency and comparability of non-financial
information; and – increase the diversity of boards.
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EU NFR: New Requirements • All large companies would be required to report on:
– Environmental – Social and employee-related – Respect for human rights and – Anti-corruption and bribery matters
• And describe the company�s policies on these issues, results of these policies and management of related risks.
• Large (listed only) companies would also be required to describe their diversity policy, objectives and results of this policy, implementation
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EU NFR: �Comply or Explain� approach • In an effort to harmonise member states� existing
approaches, the proposal has adopted a �comply or explain� model.
• When not providing required information or policies, companies must explain why.
• Rationale is to ensure a flexible, non-intrusive approach, by leaving companies the choice on whether or not to adopt a specific policy.
• The draft implicitly �mandates� an action however the potential burden may be minimum.
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Country-by-Country Reporting on Tax
• The EU have just tabled a proposal to extend CBCR on tax to all sectors
• Application of CBCR reporting model has already been agreed at EU level in extractive and banking sectors.
• Further work on CBCR is being carried out under the G8, in an effort to globalise the solution: no publication, but reporting directly to tax authorities.
• The OECD will produce a framework: a standardised template will reduce administrative burdens on business.
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Next steps • The Proposals is currently being discussed at European
Council level. The additional CBCR proposal has generated controversy which could hinder a smooth process
• The EP JURI Committee will provide a report in early November
• Should the Directive be adopted within the current EP term, we do not envisage implementation in the UK before Spring 2016
How to ensure the quality of non-financial data in a group?
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• Reuse the financial logic and tools
• Datatypes – and demands for documentation locally
• Demands for the HQ
• How to make financial and non-financial people co-work?
Slide no. 19 Group Accounting October 2013
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Advantages of using financial logic, when working with non-financial data
• Re-use IFRS as far as possible – both on boundaries and consolidation – that provides comparable data between financial and non-financial data
• Re-use the financial consolidation system – it is as good as free - and there is no implementation time – at worst a bit of training to new users. No Excel!!!
• Re-use the reporting process – it is already known by the organisation
• Better cooperation between financial and non-financial staff • In all fairness, non-financial staff are not very accustomed to dealing with
concepts such as: evidence, controls, monitoring, SOPs, consolidation-trees etc. • Financial employees are not so good at telling the story behind the numbers.
October 2013
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Re-using financial toolbox means?
• Sustainability GAAP – define reporting responsibilities, boundaries, consolidation methodology, choice of submission-system, indicators/KPIs, conversion standards, deadlines etc.
• Remember – collect data in its purest form, with the least amount of local calculation-demands; e.g. CO2e-source consumptions/combustions – not in CO2e-units. This way you eliminate a big local error-risk of wrong conversion-calculations
• Upload sheets
• Explanation sheets
• Quality assurance tools on Business Unit and Group level
• EuroSox control inventories, which are presented to the Audit Committee
• Demands for sign off on data, explanations, and control environment from reporting units
October 2013
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Data types and demands for the documentation locally
October 2013
2 data types: Documentable and probable data Please ensure to define the data types in the accounting policies in the report – courtesy of the reader, who are to use these data in his analysis
Definitions and examples: Documentable data: For example: CO2e, energy, FTEs segregated by genders and management-layers, employee turnover, LTIs, exposure hours own employees, fatalities, donations and all governance data Probable data: For example: water, waste, exposure hours contracted staff
Requirements for documentation: Documentable data: ISA 500 The documentation is from external sources, effectively controlled, it is direct evidence - no inferences, in writing, and original Probable data: To the extent ISA 500 evidences exist - use that Data must always be defendable, so assumptions of the probable data must be made in writing and shall be verified by the reviewer.
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Demands for the HQ
• Software Selection - NOTE: Excel is NOT a consolidation tool. It is no-go • Maintain GAAP – no local rules are allowed in group-reporting • HQ must on top of the local control environments make sanity-check of data. To a
large extent comparison of financial and non-financial notes is very useful, e.g.: • FTEs from financial reporting can be re-used. If there are FTEs in an entity, then there must be
at least electricity, water and waste. There may also be heating of a kind - but it depends on geography
• Cost data for CO2 sources (diesel, electricity , oil etc.) should be compared with consumption volumes per entity per activity – this can also ensure units are right
• Electricity and district heating should be obtained per country. If the country-choice deviates strongly from the home country of the entity – get an explanation
• If the entity owns/leases machines and/or transportation equipment etc., then there must also be CO2 source consumption.
• The reporting unit must explain themselves if reporting deviates, when making these simple logical tests
• Make sure all line-by-line consolidated entities, that report financially, also report non-financially (subsidiaries and joint operations – also non-operated entities) – if not, you will get non-financial data with no financial context => then the non-financial data explains nothing about anything
• Make sure all submit explanation sheets => much easier and more robust explanations can be developed at Group
• Make sure the reporting unit get sign off from local CEO and CFO on data and explanations.
October 2013
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How to make non-financial and financial people co-work?
• Apart from the obvious ”tone at the top”
• For instance consider the following: • Establish teams in each reporting unit consisting of both financial and non-financial
people.
• Highlight and praise the different abilities – together we become better • Non-financial people find and document the data – and the financial people control
and submit the data in the consolidation system to Group • They could co-work to establish sound explanations for development in data • They could co-work to define and implement controls
• Establish workshops where both financial and non-financial people participate • Discuss defintions, appropriate controls & evidences, tools, and developments in
new requirements for new reporting etc. – and not the least share best practice
October 2013
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Challenges on the way towards integrated reporting 17 October 2013
www.pwc.de
PwC
The <IR> Consultation Draft Definition
<IR> is a process that results in communication by an organization, most visibly a periodic integrated report, about value creation over time. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term
Source: Consultation Draft of the International <IR> Framework (16 April 2013), p.8
Slide 27 October 2013 Integrated Reporting
PwC
Integrated reporting and the integrated report Alternative pathways and what we see in practice
Annual Report CR Report
Limited inclusion
CR-Chapter
Ann
ual R
epor
t CR
Report
Combination
Primary Report
CR C
ompl
ianc
e
Integrated Report
Integration in Annual Report
Integrated Report
Fin. Statem
ents and N
otes A
nnua
l and
Inte
grat
ed
Rep
ort
Fin. Statem
ents and N
otes
Embedding
Web
site
MI
Integrated Reporting
Investors Integrated
Report
Online
Sust
aina
bilit
y O
ther
key
st
akeh
olde
rs
Slide 28 October 2013 Integrated Reporting
PwC
Number of pieces=40
Big picture Close-up pictures
(partial connectivity) without big picture
Pieces of information without connectivity
Number of pieces=40
Number of pieces=40
Joining the dots: Connectivity and moving away from silo reporting are key – Same volume, different insight
Slide 29 October 2013 Integrated Reporting
Observation on status quo: Many companies are taking their first steps towards integrated reporting. Stand-alone sections of reporting often provide excellent communication, but opportunities to connect this information to other areas in the report, in particular segment reporting, are often missed.
PwC
Challenge: Getting the systems right to gather the right information in the right quality
Challenges from the perspective of the IIRC Pilot Programme Participants • on-going need to enhance systems • synchronising and integrating systems BENEFITS • data quality, rigor applied to non-financial data
Source: IIRC survey of pilot companies – year one
Slide 30 October 2013 Integrated Reporting
PwC
How can companies get there?
Strategic alignment of financial and non-financial
reporting
Fully integrated reporting with integrated external
assurance
Reporting maturity
Time
Identify material
issues
Obtain integrated external assurance
Develop and embed integrated strategy
Implement integrated business
reporting Assess baseline and determine ambition
Current state
Future vision
1
2
3
4
5
Develop data collection, management-level reporting systems and processes as well as external communications
blueprints
Assess controls and information gaps and obtain assurance over
all material disclosures
Slide 31 October 2013 Integrated Reporting
PwC
Implement integrated business reporting – Illustrative example how to integrate non-financials into standard reporting
Reduction of CO2 emissions in
production and products
Energy efficiency Social standards in
the supply chain
Analysis of external factors
Analysis of stakeholder expectations
Analysis of internal factors
KPIs Measure Relevance Reporting cycle Processes/Systems Responsible Financial KPIs Revenue per supplier € … Non-financial KPIs Share of suppliers with eco-certification CO2 per m2 freight t/m2
Total CO2 emissions t Energy use per m2 storage kWh/m2
Energy from renewables kWh
32 22. April 2013 Entwicklungen im Controlling von Non-Financials
PwC
PwC
Obtain integrated external assurance – How to establish an appropriate control environment for non-financial data
Effectiveness and Efficiency of Operations
Reliability of Reporting
Compliance with Laws and Regulations
Idea: Extension of the COSO-model, which is widely used for documentation, analysis and design of the internal control systems, to material non-financial reporting information and systems:
Seite 33 15. Mai 2012 „Integrated Reporting“ in der Praxis
PwC
Key steps and challenges on the way towards integrated reporting in line with the <IR> framework
Key for integration of non-financials into mainstream corporate reporting: Improvement of quality ! Alignment with financial reporting processes /systems for monitoring, steering
and timely reporting of material non-financials over all organisational levels ! Implementation of robust processes and controls and/or integration of material
non-financial information into existing internal control framework
Key challenges on the way to <IR>: • Complexity of many non-financial aspects, lack of measurability, etc. • Much broader scope of the <IR> framework:
! Reporting on all material capitals (inputs, outputs, outcomes) ! Reporting beyond organisational boundaries (i.e. beyond scope of
Contact details: Jonny McCaig [email protected] Radley Yeldar Ltd 24 Charlotte Road London EC2A 3PB T 020 7033 0700 F 020 7033 0800 www.ry.com
CDSB Webinar
Investor Perspectives on Extra-Financial Information
Eurosif October 17, 2013
Demand for Extra-Financial Information Is Growing
- Growth since 2009: 14% - UN-backed Principles for Resp. Invest. (PRI) - Top markets: France, UK, Netherlands
Source: Eurosif
- Growth since 2009: +17% Top countries: UK, Netherlands, Denmark - Spreading to other markets (eg. Southern Europe)
ESG Integration ESG Engagement / Voting
Why Does It Matter To Investors #1 Extra-Financial Information Can Be Material
More and more evidence around the materiality of extra-financial factors o Some academic and empirical evidence of link betw. “CSR”
performance, corporate financial performance and cost of capital o Reputational risks
Why Does It Matter To Investors #2 Resource Constraints Need To Be Modelled
A healthy defined benefit pension scheme could become insolvent within 35 years solely as a result of the limitations to growth as modelled, and in the absence of other detrimental influences (such as those experienced over the last 15 years in some western countries). Source: Institute of Actuaries UK, Resource constraints: sharing a finite world, January 2013
Some LT Investors Are Starting To Realise That Climate Change Will Impact Their Investment Policies
“Investors should understand their exposure to climate change risks. And their climate-sensitivity in order to improve the resilience of the portfolio.” Source: Mercer, though the looking glass, January 2012”
