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Sustainability: The quality of being able to continue over a period of time ”Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” “Sustainability is the process of living within the limits of available physical, natural an...

Sustainability: The quality of being able to continue over a period of time ”Development that meets the needs of the present without compromising the ability of future generations to meet their own needs” “Sustainability is the process of living within the limits of available physical, natural and social resources in ways that allow the living systems in which humans are embedded to thrive in perpetuity” “To maintain this planet in a condition where life as a whole can flourish” CSR — Corporate Social Responsibility: CSR means that companies are responsible for the effects of their activities on society and the environment. Corporate Social Responsibility (CSR) is commonly defined as a business model in which companies integrate social and environmental concerns in their business operations and interactions with their stakeholders instead of only considering economic profits. To be socially accountable to the stakeholders and the public. To be a force for good. To be good citizens. 1)​ Paris Accord on Climate – COP21 Limit global temperature rise to well below 2°C above pre-industrial levels, with efforts toward 1.5°C. Global surface temperature will continue to increase until at least the mid-century under all emissions scenarios considered. Global warming of 1.5°C and 2°C will be exceeded during the 21st century unless deep reductions in carbon dioxide (CO2) and other greenhouse gas emissions occur in the coming decades. 1)​ Risks with greenwashing ? Greenwashing is when a company or organization falsely promotes itself or its products as environmentally friendly or sustainable to mislead consumers and improve its public image. It involves exaggerating or lying about environmental benefits to capitalize on the growing demand for eco-conscious choices. Key features of financial reporting 1 The objective of Financial Reporting is identified “providing financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity” Financial Reporting involves the disclosure of financial information to the various stakeholders about the financial performance and financial position of the organization over a specified period of time. ​ Generally an obligation ​ Stakeholders: investors, creditors, public, debt providers, governments & government agencies. ​ Publicly available for listed companies Financial reporting – Where do we report ? Financial Reporting = ​ - Financial statements ​ - MD&A (Management discussion&analysis → the company explain the performance) ​ - Press release ​ - Investors presentations ​ - Offering circulars The first two combined = annual report Financial reporting – How do we report ? How to ensure relevance, accuracy and comparability of Financial statements ? GAAPs (Generally Accepted Accounting Principles), IFRS, FASB, Swiss GAAP, Domestics GAAPs IFRS was created, to make investors able to compares companies From 2005: everyone started using IFRS in financial reporting → it was a game changer → everyone can compare the companies between them bc they all use the same standards Financial reporting – What is material ? What is Financial Materiality? 2 “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of those financial statements make on the basis of it. Materiality is entity specific Quantitative considerations: specific percentage of net income or other major financial aggregate (5% of net income from continuing operations or 2- 3% of operating income) → It means that any individual error, misstatement, or omission in the financial statements exceeding 5% of net income from continuing operations is likely to be considered material because it could influence users' decisions. → Materiality thresholds, such as 5%, help determine what needs to be disclosed or highlighted in financial reports to avoid misleading users. Qualitative considerations: intentional misstatement (even small inaccuracies might be material if they are deliberate and affect decision-making) to achieve a specific presentation, obscuring information Safeguards: GAAP → GAAP provides a standardized framework for preparing financial statements. Promotes consistency across entities and periods, making financial data comparable. Monetary aspects Internal control system - Policies and procedures → Provide clear guidance on acceptable practices. - Controls → Designed to prevent, detect, and correct errors. - Controlling and budgeting → Monitor financial performance against planned goals - IT system & controls → Protect financial data from unauthorized access or tampering. (=falsification) - Segregation of duties → Prevents one person from having excessive control over financial processes, reducing the risk of fraud. External audit Sustainability reporting – Why reporting ? “A sustainability report is a report published by an organization on its material non-financial performance information, incorporating ESG concerns” § Comply with regulation (when regulation exist) § Manage the company’s ESG strategy and performance § Build trust and credibility internally and externally (employees, customers,...) § Respond to “market” expectations (investors, shareholders, rating agencies, proxys, banks,...) § Contribute to brand differentiation § Mitigate risks § Secure access to funding and capital Sustainability reporting – Assurance on the sustainability reporting - European Union future (starting soon): the Corporate Sustainability Reporting Directive (CSRD) introduces a systematic Assurance report on all Sustainability reportings. - Swiss companies currently have no obligation to have ESG reportings audited (or «assured»). Project ongoing to make it an obligation 3 Sustainability Reporting – Who set the reporting standards ? Financial Reporting Standard setters are mostly private institutions (IFRS, FASB), but backed by regulators, national authorities and stock exchanges Non Financial Reporting Standard setters (so far) have been private institutions, with almost no recognition by regulators or other public authorities. But things are changing… Sustainability Reporting – the EU NFRD No reporting framework or standard imposed Audit: only requires a statutory auditor or audit firm to assess the inclusion of the non-financial statement in a management report. There are nevertheless some Member States (Italy, Spain and France) that require an independent assurance provider to verify the content of the non-financial statement as well. By default, the non-financial statement forms part of the management report. However, the NFRD allows Member States to permit companies to publish the necessary non-financial information in a separate report, and most Member States have made this option available. EU Regulation: From NFRD to CSRD EU agendas (Sustainability 2030, Green deal): - Goal to reorientate capital flows towards a sustainable economy - Provide investors with quality and comparable datas - Avoid greenwashing The EU Green Deal is the European Union's strategic plan to transform the EU into a sustainable, climate-neutral, and circular economy by 2050. It is a comprehensive roadmap to address environmental, economic, and social challenges, promoting sustainable growth while reducing greenhouse gas emissions and environmental degradation. EU move from NFRD to CSRD – Corporate Sustainability Reporting Directive: - “Non financial reporting” replaced by “Sustainability Reporting”. No more opposition between “financial” and “ESG” reporting - Objective to provide investors with the information they need to consider ESG in their investment decisions - And enable civil society organizations, trade unions, and other stakeholders to assess companies impacts on society and environment EU Regulation – What is new in CSRD ? When does it apply ? 1.​ January 2024 (to report in 2025): companies already reporting under NFRD 2.​ January 2025: large entities 3.​ January 2026: SMEs listed (2 criteria: 4 to 20m balance sheet, 8 to 40m revenues, 50 to 250 employees) 4.​ January 2028: non EU companies (revenues > 150m in EU) EU Regulation – What is new in CSRD ? Improve from NFRD to CSRD 4 1. Double materiality 2. Reporting standards → Sustainability reporting standards developped by EFRAG (EFRAG = European Financial Reporting Advisory Group) 3. Third Party assurance will be mandatory 4. Sustainability information to be included into management report (not in a separate report) 5. Sustainability information to be issued in digital / machine learning format EFRAG is a European advisory body that provides technical advice on financial and sustainability reporting standards to the European Commission (EC). EU Regulation – What is new in CSRD ? EFRAG’s ESRS EFRAG has developed the first set of European Sustainability Reporting Standards (ESRS), which was approved by the European Commission in July 2023. Some aspects of these new standards: Retrospective and forward-looking information. Levels and boundaries of reporting Double materiality. 3 layers to be considered → 1) Sector agnostic 2) Sector specific 3) Entity specific The ESRS are a comprehensive set of sustainability reporting requirements developed by EFRAG to support the implementation of the CSRD. Starting in 2024, large EU companies will have to adhere to the ESRS as part of their annual reporting requirements, with the aim of ensuring more standardized, reliable data for assessing sustainable business practices. 5 Organisational impacts of sustainability Sustainability ​ Is imperative ​ Is not a one-off → means that sustainability is not a single, isolated action or a one-time initiative. Instead, it represents a continuous, ongoing commitment to integrating environmental, social, and governance (ESG) considerations into a company’s operations, strategy, and decision-making processes. ​ No greenwashing expected anymore ​ Transparency is required ​ Is not purely about communicating → A transformation of how companies operate is therefore required Sustainability agenda – the building blocks → There is no straight way to reporting → key elements or foundational actions are needed to support the development and execution of the sustainability agenda → Reporting comes at the end Building blocks: 1)​ Purpose 2)​ Strategy 3)​ Governance 4)​ Risks & Opportunities 5)​ Execute 6)​ Measure 7)​ Report Do companies need a CSO ? 3 conditions: 1. External changes more rapid than internal ones 2. Growing scrutiny and expectations 6 3. ESG risks are substantial enough (risks could significantly impact the company’s financial performance, reputation or operational continuity) The role: Chief Sustainability Orchestrator ? Yes, the term "Chief Sustainability Orchestrator" is appropriate because the CSO often: ​ Orchestrates efforts across diverse teams to ensure sustainability is integrated throughout the organization. ​ Aligns various sustainability initiatives under a coherent, strategic framework. ​ Facilitates collaboration between departments, breaking silos to embed sustainability into finance, operations, and beyond. Reporting line: This is the immediate supervisor or leader to whom an employee is accountable for their work. For example, a CSO might report directly to the CEO, meaning the CEO oversees their work and evaluates their performance. 1.​ CEO (Chief Executive Officer): ○​ Ideal for companies where sustainability is a top-level strategic priority. ○​ Ensures that sustainability is embedded into the company’s overall vision and decision-making process. Reporting on sustainability 2 important topics: 1)​ Stakeholders Engagement 2)​ Materiality Reporting on sustainability – Stakeholders engagement What is Stakeholders engagement ? It is the commitment of an organisation to be accountable to its stakeholders and to enable their participation in identifying relevant material sustainability topics and their solutions. Reporting on sustainability – Materiality: What is double materiality? The EFRAG perspective Materiality is to be understood as the approach for prioritisation and inclusion of specific information in corporate reports. It reflects (i) the needs and expectations of the stakeholders and of the reporting entity itself, as well as (ii) the needs corresponding to the public interest. Materiality (really at the heart of sustainability): It's how we define what it's important for those who read the report Materiality – How to define material topics In defining material topics, the reporting organization has taken into account the following factors: ​ Social, environmental and economic impacts (such as climate change,...) ; ​ The interests and expectations of stakeholders 7  ​ The main topics and future challenges for a sector, as identified by peers and competitors; ​ Laws, regulations, international agreements, or voluntary agreements; ​ Key organizational values, policies, strategies, operational management systems, goals, and targets; ​ The core competencies of the organization and the manner in which they can contribute to sustainable development What should be reported in materiality ? ​ Process followed to determine materiality ​ Who was involved ​ Which issues are considered material ​ Reasons for considering they are material ​ How the material topics are included into the company’s strategy ​ How actions and performance can be measured ? → first point for the sustainable report → we first have to determine if the subject is materiality and if it is then It will be part of the sustainable report Reporting standards – Global Reporting Initiative “GRI (Global Reporting Initiative) is the independent, international organization that helps businesses and other organizations take responsibility for their impacts, by providing them with the global common language to communicate those impacts. ̈We provide the world’s most widely used standards for sustainability reporting – the GRI Standards.” GRI – Overview GRI 101 Section 1 – Reporting principles 1. Principles are needed to achieve high quality reporting 2. Principles must be followed to claim the GRI signature Principles define: 1) The content of reporting 2) How to achieve quality reporting Completeness: GRI Sustainability reports must include coverage of: - Material topics - And their Boundaries A company must report on impacts it causes, but also on impacts it contributes to Timeliness: Reports should be issued regularly and in a timely manner to provide up-to-date information 8 GRI – Summary on GRI (format 2016) - Inclusive - Double materiality - Flexible / permissible - Core vs Comprehensive - Index vs Full report - Comply or explain - Partial use possible - No industry focus - Allows some comparability GRI – 2021 revisions Applicable on January 1, 2023 reportings Major changes: - Introduction of industry focus standards - No more Core vs Comprehensive - Obligation to report on all material topics - Or provide a reason for omission: - Non-applicable - Legal prohibition - Confidentiality constraints - Information unavailable - Revision of the Disclosures about the reporting organization (GRI 2 – formerly GRI 102) - Topic standards (GRI 201,...) almost unchanged (formerly GRI 200, 300 and 400) The future reporting landscape – Creation of ISSB November 3 2021 anouncement from the IFRS Foundation: 1. Formation of ISSB (International Sustainability Standards Board) to develop high quality sustainability disclosure standards to meet investor’s needs Key features of the ISSB standards International Sustainability Standards Board Main focus on Climate – No “S”, no “G” Users of the Sustainability Reporting: Investors (those who provide resources to the reporting entity) Objectives: allow the users to assess the implication of sustainability-related risks and opportunities on the entity’s enterprise value To be disclosed: material sustainability-related Financial information about all the significant sustainability-related risks and opportunities 9 The International Sustainability Standards Board (ISSB) is not intended to replace the International Accounting Standards Board (IASB); instead, the two boards will work in parallel under the umbrella of the IFRS Foundation, complementing each other within the evolving corporate reporting landscape. The ISSB (International Sustainability Standards Board) was created by the IFRS Foundation, the same organization that oversees the IASB (International Accounting Standards Board), which develops the IFRS (International Financial Reporting Standards). The business impacts of Climate change 10  1.​ Resource Efficiency: ○​ Optimizing use of water, energy, and materials reduces costs and environmental impact. ○​ Adopting circular economy practices minimizes waste and improves operational efficiency. 2.​ New Energy Resources: Transitioning to renewable energy sources (solar, wind, etc.) 3.​ New Markets: ○​ Expanding into green markets, such as renewable energy, sustainable agriculture, or eco-friendly products, opens up growth opportunities. ○​ Emerging markets are increasingly prioritizing sustainability, creating new demand. Greenhouse Gases, What it is ? Green house gases Carbon dioxide (CO2): Carbon dioxide enters the atmosphere through burning fossil fuels (coal, natural gas, and oil), solid waste, trees and other biological materials, and also as a result of certain chemical reactions. Methane(CH4): Methane is emitted during the production and transport of coal, natural gas, and oil. and other agricultural practices, land use Nitrous oxide (N2O): Nitrous oxide is emitted during agricultural, land use, industrial activities GHG – How to account for ? GHG Protocol GHG Protocol establishes comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions. The GHG Protocol (Greenhouse Gas Protocol) is not a reporting standard in itself, but it serves as the foundational framework for measuring, managing, and reporting greenhouse gas (GHG) emissions. Many widely used reporting standards and frameworks are based on or aligned with the principles of the GHG Protocol. Objectives of the Standards: help companies prepare a GHG inventory that represents a true and fair account of their emissions 11  simplify and reduce the costs of compiling a GHG inventory provide business with information that can be used to build an effective strategy to manage and reduce GHG emissions increase consistency and transparency in GHG accounting and reporting among various companies and GHG programs. The concept of Scope 3 scopes are defined for GHG accounting: SCOPE 1: Direct GHG emissions Direct GHG emissions that occur from sources that are owned or controlled by the company SCOPE 2: Electricity indirect GHG emissions Purchased electricity consumed by the company. the most significant opportunity to reduce these emissions. SCOPE 3: Other indirect GHG emissions Emissions that are a consequence of the activities of the company, but occur from sources not owned or controlled by the company ​ Transport-related activities ​ Waste disposal GHG Scope 1 Scope 1: Direct GHG emissions Generation of electricity, heat or steam. Physical or chemical processing. Most of these emissions result from manufacture or processing of chemicals and materials, Transportation of materials, products, waste, and employees. Fugitive emissions. These emissions result from intentional or unintentional releases CCU/S ? Carbon capture with permanent storage (CCS) or utilization of the captured CO2 (CCU) are tools for reducing emissions, and both are needed to combat climate change. While CCU is an integral part of the long-term vision, CCS is necessary on the way to reach large-scale reduction of CO2 emissions as quickly as possible. CCS => is a technology in which CO₂ from industrial processes or power plants is captured, transported and permanently stored in geological formations such as deep rock layers. The aim is to keep CO₂ emissions out of the atmosphere in the long term. CCU => CCU uses captured CO₂ as a raw material to convert it into products such as fuels, chemicals or building materials. This method integrates the CO₂ into the economic cycle. Climate Strategy: Are the targets approved by Science ? 12 The Science Based Targets initiative (SBTi) is a global organization that provides guidance, tools, and validation services to help companies set greenhouse gas (GHG) emissions reduction targets that align with the latest climate science. The Science Based Targets initiative (SBTi) brings, a team of experts to provide companies with independent assessment and validation of targets. Targets are considered ‘science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to well- below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C. 2 stages: Commit: the Company commits to set a Science based target – has 2 years to set it. Target set: target has been approved by SBTi (objective 2°C, well below 2° C or 1.5°C) Reporting on climate change Who reports ? TCFD Anything to report in the Financial Statements ? ESRS and ISSB Climate change consequences: The TCFD Task Force’s goal: To develop climate related disclosures That could promote more informed investment, credit and insurance underwriting decisions And that would enable stakeholders to understand better the concentration of carbon-related assets in the financial sector and the financial system’s exposure to climate-related risks TCFD – Climate related risks Physical Risks: Acute risks: event-driven (extreme weather, cyclones, hurricanes, floods...) Chronic risks: long-term shifts in climate patterns (higher temperatures causing sea level rises...) Transition Risks: Adaptation requirements to climate change Policy and Legal Risks (changes in regulation, litigation risks) Technology Risks Market risks (shift in demand and supply for commodities, products or services) Reputation risks TCFD – Climate related opportunities Resources efficiency: reducing costs with energy efficiency or improved production and distribution processes Energy source: savings linked to shifting to low emission energy sources Products and Services: development of new products or services to capitalize on shifting consumers preferences Markets: opportunities in new markets Resilience: ability to respond to physical and transition risks 13 TCFD – Recommendations and supporting recommended disclosures Recommendations for disclosures – 4 thematic areas to be reported on: 1)​ Governance: Disclose the organization’s governance around climate related risks and opportunities 2)​ Strategy: Disclose the actual and potential impacts of climate-related risks and opportunities on the organization's businesses, strategy, and financial planning where such information is material 3)​ Risk management: Disclose how the organization identifies, assesses, and manages climate-related risks 4)​ Metrics and targets: Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material Can Climate impact Financial statements ? Some of the Climate related Risks on Financial statements Risks : - Of overstating assets → Companies may overstate the value of certain assets if they fail to account for the long-term environmental or market shifts that could diminish their worth. - Of understating liabilities → Climate-related risks may lead to the underreporting of liabilities if a company does not fully account for potential future costs related to climate change. - On the Going Concern → The going concern assumption assumes that a company will continue its operations for the foreseeable future unless there is evidence to the contrary. Climate-related risks could threaten a company’s ability to continue as a going concern if the business model is no longer viable due to changing environmental conditions or regulatory shifts. Some practical examples of how Climate may affect financial statements 14 - Assets useful lives → Climate-related events and evolving regulations can shorten the useful lives of assets, requiring adjustments to depreciation schedules. A manufacturing plant located in an area prone to flooding might need to be retired earlier than initially planned due to increased risks or physical damage. - Impairment of assets → Les risques liés au climat peuvent réduire la valeur recouvrable d'un actif et entraîner des pertes de valeur. Fossil fuel reserves may become unexploitable due to stricter climate regulations or market shifts toward renewable energy. Buildings in areas affected by rising sea levels, wildfires, or other climate events may see a significant reduction in market value. - Provisions → Companies may need to recognize provisions for obligations arising from climate-related issues. Provisions are recognized when there is a present obligation, it is probable that an outflow of resources will be required, and the amount can be reliably estimated. Increases in provisions directly impact the profit and loss statement. - Loans – Financial instruments → Climate change can affect the valuation and classification of loans and financial instruments. Borrowers operating in climate-vulnerable industries may be at higher risk of default, affecting loan loss provisions. Fair value adjustments for financial instruments affected by climate-related risks. - Going concern → Climate-related factors can threaten a company’s ability to continue as a going concern if they significantly disrupt operations or the business model. If the going concern assumption no longer applies, the financial statements must be prepared on a liquidation basis. 15