ARP Module 8 - Non-Financial Reporting PDF

Have you completed the assessment practice questions? Have you used the discussion board to ask questions on areas you are unsure about? Module 8 – Non-financial Reporting: Sustainability Disclosures Introduction Welcome to the study guide for Module 8 of the Advanced Reporting and Performance cou...

Have you completed the assessment practice questions? Have you used the discussion board to ask questions on areas you are unsure about? Module 8 – Non-financial Reporting: Sustainability Disclosures Introduction Welcome to the study guide for Module 8 of the Advanced Reporting and Performance course. This study guide will help you prepare for the assessment. Syllabus Learning Outcomes By completing this module, you will have worked towards the following syllabus learning outcomes: SLO 2 Advise on the requirements for non-financial reporting and performance in accordance with relevant standards Module Learning Outcomes By completing this module, you will have worked towards the following module learning outcomes: 2.1 Advise on the effective communication of statutory and non-statutory information in corporate reporting 3.1 Illustrate ethical dilemmas arising in a financial and a non-financial reporting context. 3.2 Recommend a course of action to address ethical dilemmas in line with the ICAS Code of Ethics. This will be achieved by working towards the following performance indicators: 2.1.1 Evaluate the quality and sufficiency of the non-financial information disclosed. 2.1.2 Advise whether the non-financial information disclosed meets the requirements under various frameworks (ISSB, ESRS GRI). 2.1.4 Recommend improvements to non-financial information and disclosures. You will be ‘assessment ready’ for questions in Module 8 when you can confidently complete each of the learning outcomes above. Reporting concepts and principles What do the standards expect the non-financial disclosures to achieve overall? The GRI, IFRS Sustainability Disclosure Standards and ESRS standards all establish frameworks which, if followed, require reporting entities to disclose high quality information that aims to: satisfy the information needs of stakeholders meet the intended objective of the standard by addressing its conceptual foundations and principles align with recognised frameworks such as the United Nations Sustainable Development Goals (UN SDGs) meet applicable regulatory requirements (i.e. modern slavery disclosure requirements) for listed entities, comply with relevant listing requirements of local stock exchanges. 65 Whilst each of the standards share these common aims, they each take a different approach to important matters such as the stakeholder groups that they intended to provide information to and how materiality is determined. What are the different approaches to materiality taken by the standards? Financial Materiality Impact Materiality Double Materiality Financial materiality considers Impact materiality considers Double materiality considers the importance of information the importance of information both the impact of the which affects the financial about the reporting entity’s organisation on environmental position or performance of the impact on the economy, and social issues, and the reporting entity. IFRS environment and society for the impact on the organisation of Sustainability Disclosure benefit of multiple environmental and social Standards refer to “risks and stakeholders. issues. Information meets the opportunities that could GRI Standards apply impact criteria of double materiality if it reasonably be expected to materiality. is material from the impact affect the entity’s prospects”. perspective or from the IFRS Sustainability financial perspective, or from Disclosure Standards apply both of these two perspectives. financial materiality. ESRS Standards apply double materiality Cause-effect The impact on The impact of The impact on relationship the business the business the business and/or the impact of the business Users of information Existing and potential All stakeholders All stakeholders investors and lenders Approach Financial materiality Impact materiality Double materiality Example of IFRS Sustainability GRI Standards European standards taking this Disclosure Standards Sustainability approach Reporting Standards Materiality concepts material, most significant sustainability and criteria for the sustainability impacts on the matters that are standards related risks and economy, material from an opportunities environment, and impact and financial (SROs) that could people, including perspective Material reasonably be impacts on their sustainability matters expected to affect human rights are environmental, the entity’s Impacts arise as a social or governance prospects over the result of the entity’s short, medium and matters that have an activities or business long term. actual or potential relationships along the Material SROs are positive or negative value chain, those that would be material impact on contributing positively considered relevant people or the or negatively, to by primary users environment, or sustainable when making financial prospects, development. decisions related to over the short- providing capital to the medium- or long-term. entity. 66 Tutor tip: In the assessment, you may be expected to make recommendations for improvements to draft disclosures that have been prepared by the reporting entity. The materiality concept relevant to the standard being applied will be an important part of making such recommendations as referring to materiality will help you to focus on what the entity was aiming to achieve. Reference to materiality will also help you to provide advice on what additional information or changes to information might needed if an entity was reporting under different standards. What are the conceptual foundations and reporting concepts of the different standards? GRI Entities are to disclose information on their material topics that cause the most significant impacts on the economy, environment and people, including impacts on their human rights. Due diligence and stakeholder engagement are to be conducted to help entities identify their most significant impacts. Entities are to apply GRI’s eight reporting principles when preparing reports: Accuracy Balance Clarity Comparability Completeness Sustainability context Timeliness Verifiability To report in accordance with the GRI Standards, entities must comply with nine ‘in accordance’ requirements related to applying the reporting principles, determining material topics, addressing disclosure requirements, preparing a content index etc. If an entity does not comply with the nine requirements, it can report in reference to the standards if it complies with the specific requirements, including publishing a GRI content index, providing a statement of use and notifying GRI. The IFRS Sustainability Disclosure Standards The aim of IFRS S1 is for the entity to disclose information about its sustainability-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions about providing resources to the entity. To ensure disclosures are useful to the primary users of the information, entities are to apply the conceptual foundations of IFRS S1: Fair presentation Materiality Reporting entity Connecting disclosures Where there is a specific IFRS Sustainability Disclosure Standard that applies to a particular risk or opportunity, then the entity must use that standard. At present, the only specific standard is IFRS S2 Climate-related Financial Disclosure. Where there is not a specific standard that applies to a particular risk or opportunity, then the entity can use other guidance. IFRS S1 refers to the Sustainability Accounting Standards Board (SASB) Standards as a source of guidance for entities. Entities must refer to the disclosure topics and metrics identified in the SASB Standard(s) relevant to their business and consider whether those metrics are applicable to the entity’s reporting. ESRS 67 ESRS’ goal is for entities to disclose information in a “sustainability statement” on its material impacts risks and opportunities in relation to environmental social and governance sustainability matters so that users can understand the entity’s material impacts on people and environment and the material effects of sustainability matters on the entity’s development, performance and position. Qualitative characteristics: Relevance Faithful representation Comparability Verifiability Understandability Companies need to link retrospective and forward-looking information in their sustainability statement, to demonstrate how historical information relates to future-oriented information. How can you assess whether an entity’s disclosures meet the conceptual foundations and reporting principles of the relevant standard? The extent to which a report adheres to the standard that it claims to meet can be assessed in several ways: Disclosures can be identified by the reporting entity as meeting particular requirements. Content indices can be provided to either direct the reader to locations where the relevant information to meet requirements can be found or include the relevant information in the index. Disclosures may be assessed as part of an external assurance process. An assurance provider will prepare an assurance statement that determines the extent of conformance/compliance with the entity’s disclosures and stated claims, including an assessment of the quality and sufficiency of the disclosures, as well as identifying the data that was verified as part of the process. Tutor tip: In your assessment, you could be asked whether information prepared under one set of standards is more useful, or provides better quality information, to stakeholders. The ability to assess whether information meets the reporting principles of the standard, including through the requirement/ lack of requirement for external assurance, is an important consideration when considering the usefulness and quality of information. Is there a requirement for external assurance? GRI The GRI Standards encourage organisations to seek external assurance for their sustainability reporting and require organisations to describe their policies and practices for seeking external assurance for their sustainability reporting. Assurance may extend beyond the disclosures and cover an assessment of organisations’ systems or processes to prepare the information. 68  IFRS Sustainability The ISSB does not get involved in assurance and has made it clear that it Disclosure Standards regards it as up to governments and regulators to determine whether assurance is required. However, IFRS Sustainability Disclosure Standards have been designed to make the reported information verifiable, since the ISSB has already anticipated that regulators will require sustainability reporting to be subject to at least some level of assurance. Information prepared in accordance with IFRS Sustainability Disclosure Standards is include in the annual report and will therefore be reviewed by the company’s statutory auditors in order to ensure it is consistent with their understanding (this will be covered in detail in the Advanced Assurance course). Entities using IFRS Sustainability Disclosure Standards can decide to request assurance of their sustainability information in order for it to be credible and indeed many already do so. ESRS Entities using ESRS will be required to seek assurance. The current requirement is for entities to seek limited assurance over their sustainability reporting. This assurance may be provided by an entity’s statutory auditor, who will present an assurance report containing a conclusion about whether the entity has disclosed its sustainability information in accordance with ESRS. The European Commission (EC) will perform an assessment to determine whether increasing requirements from limited to reasonable assurance is feasible for both auditors and companies. Targeted Stakeholders and Method of Engagement What are the requirements of the different standards related to defining, engaging and meeting the needs of stakeholders? GRI An entity is expected to engage its stakeholders: 1. In the process of determining its material topics, which are those topics where its activities along the value chain have the most significant impacts on the economy, environment and people, including impacts on their human rights (refer to Lesson 3 for detail on criteria for determining material topics). 2. On a separate basis to address any negative impacts and facilitate meaningful, ongoing engagement. IFRS Sustainability The primary users of information prepared in accordance with IFRS Disclosure Standards Sustainability Disclosure Standards are actual and potential investors and lenders: the same as the primary users of general-purpose financial reports. An entity is required to determine what its sustainability-related risks and opportunities (SROs) are and disclose how they are managed as this can impact an entity’s ability to generate cash flows over the short, medium and long term. How an entity addresses its SROs is inextricably linked to how its operations and activities along the value chain interact with its stakeholders, society, the economy and the natural environment. IFRS S1 does not include prescriptive requirements related to stakeholder engagement, as the stakeholders (primary users) are clearly defined in the IFRS Sustainability Disclosure Standards and are consistent with the primary users of financial statements as defined by the Conceptual Framework for Financial Reporting. Engaging stakeholders is therefore NOT required under the IFRS Sustainability Disclosure Standards. 69  ESRS ESRS classifies stakeholders into the following two groups (although others may belong to other groups): Affected stakeholders: individuals or groups whose interests are affected or could be affected – positively or negatively – by the entity’s activities and its direct and indirect business relationships across its value chain; and Users of sustainability statements: primary users of general-purpose financial reporting (existing and potential investors, lenders and other creditors, including asset managers, credit institutions, insurance undertakings), as well as other users, including the entity’s business partners, trade unions and social partners, civil society and nongovernmental organisations, governments, analysts and academics. Engaging affected stakeholders should be central to the entity’s ongoing due diligence process to assess its material, actual and potential, positive and/or negative impacts, the results of which then then inform the assessment process to identify the material impacts for the purposes of sustainability reporting. Why is engaging stakeholders an important part of meeting the requirements of the standards and how does it benefit an entity’s disclosures and overall sustainability strategy? Stakeholders have a key role to play in reporting because: they are affected by an entity’s actions they can also provide the entity with information on what topics or impacts they consider to be most important. While there is no single correct way to engage stakeholders, ESRS 1 includes a process for entities to follow when assessing materiality. Engagement with stakeholders is required as part of this process and can take place all the way through the process. Describe the value chain and business activities  Identify stakeholders  Identify impacts, risks and opportunities  Assess financial materiality and impact materiality  Consider validating the findings with stakeholders Stakeholders can provide the reporting entity with valuable feedback on what they consider to be the most significant issues and impacts. The diagram below shows a typical reporting process with stakeholder engagement: 70  Identify relevant stakeholders  Dialogue with stakeholders  Identify stakeholder concerns  Analyse stakeholder concerns  Strategy development  Strategy implementation  Evaluation What are effective channels for engaging stakeholders as part of a materiality process? It is good practice to adopt several engagement methods and involve a variety of internal and/or external stakeholders to gather differing perspectives. Key channels, in order of the depth of engagement (from least in-depth to most in-depth), include: 1. Online surveys 2. Facilitated focus groups or workshops 3. Meetings with targeted stakeholders 4. One-on-on interviews 5. Meetings or workshops with management/functional representatives and of a corporate sustainability committee. How can you assess whether an entity has met the standards’ requirements for defining, engaging and meeting the needs of its stakeholders? For entities to prepare reports that present the information that readers want and in ways that communicate effectively, they must know who their stakeholders are and meaningfully engage with them to understand their views and expectations. Maintaining stakeholder trust requires not only effectively engaging with them but also responding meaningfully to their views and concerns, and providing balanced, credible and accurate disclosures. To enable the quality and sufficiency in the stakeholder engagement process to be assessed, entities should disclose: the criteria for determining their stakeholder groups and who those groups are the method and frequency of engagement, on an ongoing basis and for determining material topics the views and concerns of stakeholders by group how stakeholder feedback influenced the selection, review and updating of material topics. GRI focuses on stakeholder input to determine material topics from an impact perspective along the value chain IFRS S1 requires that disclosures are sufficient for primary users to understand how the entity addresses its SROs along the value chain ESRS expects stakeholders, who are either affected by the entity’s operations along the value chain or users of information in sustainability statements, to be engaged in the determination of the entity’s impacts, risks and opportunities from an impact and financial materiality perspective Materiality approach and expectations 71 Which criteria need to be applied to address the standards’ requirements for assessing materiality? Materiality process: GRI Understand the organisation’s context Step 1 Identify actual and potential impacts Step 2 Assess the significance of the impacts Step 3 Prioritise the most significant impacts for reporting Step 4 IFRS S1 IFRS S1 refers to Sustainability Accounting Standards Board (SASB) standards for industryspecific issues. SASB provides a materiality finder which allows reporting entities and users of reports to search by company name or industry to identify material subjects – organised as general issues and disclosure topics. ESRS ESRS adopts double materiality as the basis for reporting on “sustainability matters”. This approach considers both impact materiality and financial materiality and ESRS notes that both are interrelated and have interdependencies that should be considered. A sustainability matter is material from an impact perspective when it pertains to the entity’s material actual or potential positive or negative impacts on people or the environment over the short medium or long term, which include impacts in relation to environmental, social and governance matters. For negative impacts, materiality is based on the:: If the impact is actual, materiality is based on the severity of the impact If the impact is potential, materiality is based on the severity and likelihood of the impact, with Severity being determined based on the scale, scope and irremediable character of the impact For positive impacts, materiality is based on the: Scale and scope of the impact for actual impacts, and Scale, scope and likelihood of the impact for potential impacts As with IFRS S1, the financial materiality assessment determines if information is considered material for primary users in making decisions relating to providing resources to the entity. Tutor tip: You should have a general understanding of the approach to materiality taken by each of the standards. You are not required to memorise, for example, the steps in the GRI process. In the assessment, you will be given short extracts from the relevant standards if you are expected to discuss a specific point in your answer. 72 How can you assess the extent to which an entity has met the GRI, IFRS Sustainability Disclosure Standardsor ESRS standards’ requirements for defining, determining and disclosing material topics? For disclosures to be material, they should reflect the following information: What does the entity do? The entity’s nature (from activities and products to stakeholder relationships along the value chain) What are the relevant requirements? From disclosure standards through to regulations What is the entity’s sustainability context? For example, the sustainability issues and trends relevant to its operations and sector What materiality approach has been taken? What are the disclosure standards’ requirements for determining material sustainability matters? What do stakeholders think? The entity’s stakeholder input and views What are the priority impacts, risks and opportunities? Including where they arise and their significance along the value chain To determine the quality and sufficiency of the material sustainability matters disclosed ask which of the following have been addressed: definition of materiality criteria for determining material topics (GRI), SROs (IFRS S1) or sustainability matters (ESRS) process for determining materiality topics, including stakeholder engagement information disclosed on the material topics/SROs/sustainability matters and materiality process. Methods to assess quality and sufficiency include reviewing: disclosed information against the standards’ requirements as noted above content indices that identify how these requirements are met and/or where the relevant content is located findings from an assurance process against the applied standard(s). Climate-related disclosures How are climate-related issues covered in reporting standards? Climate-related issues are covered by the standards in two ways: Material topics When entities identify material topics for sustainability reporting, they will consider and prioritise different environmental, social and governance factors. Entities will identify climate-related risks and opportunities (CROs) within these factors. For some entities, climate-related risks and opportunities will be very significant to their operations. Disclosures specific There are also specific standards, or parts of standards, that require to climate-related entities to make climate-related disclosures (CRDs). This reflects the way issues in which climate-change and societal responses affect all entities and their stakeholders. 73 GRI standards GRI 101: Biodiversity 2024 – If material, entities must make specific climate-related disclosures about their impact on biodiversity disclosures have GRI 201: Economic Performance 2016 – Entities have to disclose always been part of financial implications and other risks and opportunities due to climate the GRI guidelines and change standards. GRI 301: Energy 2016 – Entities disclose details of Energy consumption within the entity, including the entity’s energy mix and consumption that gives rise to its Scope 1 and 2 GHG inventory and emissions, and is directly linked to management of CROs Energy consumption outside of the entity, including its energy mix and consumption for related upstream and downstream activities that are part the entity’s Scope 3 emissions and contributes to climate changerelated risks Energy intensity, reduction of energy consumption and reductions in energy requirements of products and services GRI 305: Emissions 2016 – Entities disclose details of: Direct (Scope 1) GHG emissions Energy indirect (Scope 2) GHG emissions Other indirect (Scope 3) GHG emissions GHG emissions intensity Reduction of GHG emissions Emissions of ozone-depleting substances (ODS) Nitrogen oxides (NOx), sulphur oxides (SOx), and other significant air emissions (i.e. those that have global warming potential [GWP] and are direct or indirect GHGs) GRI 306: Waste 2020 – Entities disclose details of their approach to waste management, including diversion and disposal methods. IFRS Sustainability IFRS S2 Climate-related Disclosures is the first subject-specific IFRS Disclosure standards Sustainability Disclosure standard. Entities disclose information about IFRS Sustainability climate-related risks and opportunities that could reasonably be expected Disclosure Standards to affect the entity’s financial prospects. and ESRS are highly The structure of both IFRS S1 and IFRS S2 follows the familiar structure aligned around of: disclosures that Governance provide information for Strategy the primary users of financial statements Risk management about the impact of Metrics and targets risks and opportunities We consider each of these areas in turn in the remaining lessons in this on an entity’s financial module. performance and Remember: IFRS Sustainability Disclosure standards include prospects. industrybased guidance on application: entities should refer to, and consider the applicability of, the SASB standards. Metrics relevant to CROs include: GHG emissions Energy management − (1) Total energy consumed, (2) percentage grid electricity and (3) percentage renewable Climate change adaption − Description of climate change risk exposure analysis, degree of systematic portfolio exposure, and strategies for mitigating risks 74  ESRS ESRS has ten Topical Standards for reporting on key ESG matters, ESRS contain including one specifically on climate change and another four that cover additional requirements content that interacts directly with climate-related matters (see E2, E3, E4 for information relevant and E5 below). to ESRS E1 Climate change has topical disclosure requirements, including: stakeholders interested Transition plan for climate change mitigation in the impact of an Policies related to climate change mitigation and adaptation entity’s activities. Actions and resources in relation to climate change policies Energy consumption and mix Gross Scopes 1, 2, 3 and Total GHG emissions GHG removals and GHG mitigation projects financed through carbon credits Internal carbon pricing Anticipated financial effects from material physical and transition risks and potential climate-related opportunities ESRS E1 Climate change also has a subset of ESRS 2’s general disclosure requirements related to CROs, following the structure of Governance – Strategy - Risk management - Metrics and targets. ESRS E2 Pollution – Entities disclose emissions of GHGs connected to air pollution and their approach to managing them. ESRS E3 Water and marine resources – Entities disclose how their energy consumption, GHG emissions and approach to CROs impact on water and marine resources. ESRS E4 Biodiversity and ecosystems – Entities disclose how GHG emissions and energy resources (i.e. energy mix and consumption) affect the entity’s material impacts on biodiversity and ecosystems. ESRS E5 Resource use and circular economy – Entities disclose initiatives to reduce resource use and energy consumption and adopt circular economy models could positively or negatively impact the generation of GHG emissions along the value chain. The standards refer to Scope 1, 2 and 3 GHG emissions. Scope 1 emissions are the direct emissions from owned or controlled sources – for example, all the emissions directly caused by the operations involved in producing and selling goods or services. Scope 2 and 3 emissions are indirect emissions. Scope 2 relate to emissions from the energy consumed by a business and Scope 3 to emissions generated throughout the value chain by suppliers, customers and staff. Tutor tip: In the assessment, you are expected to have a high-level understanding of the requirements of the IFRS Sustainability Disclosure Standards, GRI and ESRS standards relating to climate-related issues, but you not expected to be able to list the specific standards nor recall the disclosures required under the specific standards. You may be provided with a short extract from a specific standard in the assessment which you need to apply to the scenario given. What are some examples of climate-related risks and opportunities and what is their financial impact? Climate-related risks The potential negative effects of climate change on an entity Physical risks Risks resulting from climate change that can be event-driven or from longer-term shifts in climatic patterns Transition risks Risks that arise from efforts to transition to a lower-carbon economy Climate-related opportunities The potential positive effects arising from climate change for an entity 75  Transition risks Policy and Legal Risks Governments can adopt policies that constrain actions that contribute to the climate change (e.g. carbon pricing) and policies that promote adaptation to climate change (e.g. sustainable land use practices). In addition, the risk of litigation relating to business activities – e.g. the failure of the entity to mitigate the impacts of climate change – is increasing. Technology Risk Technological improvements or innovations can have a significant impact on entities. Market Risk Changes in supply or demand for particular goods or services can have a direct effect on costs and revenues. Reputation Risk Customers may prefer or avoid entities in reaction to the perception of the entity’s position on climate change and its activities that may contribute to or mitigate the effects of climate change. Physical risks Acute Acute physical risks are event-driven risks such as those arise from fires, floods, storms, droughts and heatwaves. They are weather-related events. Chronic Chronic physical risks arise from longer-term shifts in climate patterns such as changing sea levels, changes in soil fertility, changes in water availability and bio-diversity loss. Opportunities Resource Efficiency Improving energy efficiency and waste management can reduce overall use of resources and operating costs. Energy Source Using low emission energy sources, particularly ones that are subsidized, could deliver cost savings. Products and Services As consumer preferences change, businesses that can offer new, low emission products and services may enjoy a competitive advantage, increasing market share and/or charging a premium price. Markets New markets may develop in response to a shift to a low carbon economy, and opportunities could include activities such as financing green infrastructure. Resilience Organisations that develop the capacity to respond to climate change better maybe, overall, more resilient and in a better position to exploit other opportunities. What are the disclosure requirements relating to climate-related issues? 76 GRI The GRI Standards do not provide specific guidance on CROs but they would be Standards identified and assessed as part of the GRI prescribed process for determining and assessing climate-related material topics. For each climate-related issue that could be a potential CRO, the significance of its impact on the economy, environment and people, including impacts on their human rights, would be assessed Those that meet a threshold determined by the entity are considered material topics for reporting. IFRS S2 IFRS S2 – Appendix B Application Guidance provides the definitions for CROs that we used above. In assessing the CROs to determine if they are material to be included in CRDs, the ISSB approach to materiality is used: information is material if omitting, misstating or obscuring that information could reasonably be expected to influence decisions that primary users of general-purpose financial reports make on the basis of those reports. CROs are those that could reasonably be expected to affect the entity’s prospects, and CRDs should identify: whether the risks are physical or transition risks time horizons over which effects of risks and opportunities are reasonably expected to occur Entities should consider the current and anticipated effects of those CROs on their business model and value chain, including where the risks and opportunities are located (e.g. geography, facilities, asset type). Assessing the significance of a CRO’s impact on financial performance, is based on the following criteria: what is relevant to primary users of the information; metrics specified in the SASB Standards; and/or relevant guidance from CDSB or other standard-setting bodies. 77  ESRS ESRS follows a double materiality process for determining material sustainability impacts, risks and opportunities. ESRS E1 Impact, risk and opportunity management has three disclosure requirements: Disclosure Requirement related to ESRS 2 IRO-1 – Description of the processes to identify and assess material climate-related impacts, risks and opportunities (refer to the detail below) Disclosure Requirement E1-2 – Policies related to climate change mitigation and adaptation (refer to Lesson 4 on Risk and opportunity management) Disclosure Requirement E1-3 – Actions and resources in relation to climate change policies (refer to Lesson 4 on Risk and opportunity management) For the requirements related to Impact, risk and opportunity management in ESRS E1, there is a disclosure requirement that is related to ESRS 2 IRO-1 – Description of the processes to identify and assess material climate-related impacts, risks and opportunities. For the relevant requirement in ESRS E1, entities are to describe their process for identifying and assessing climate-related impacts, risks and opportunities, including: “impacts on climate change, in particular, the undertaking’s GHG emissions climate-related physical risks in own operations and along the upstream and downstream value chain, in particular: − the identification of climate-related hazards, considering at least high emission climate scenarios; and − the assessment of how its assets and business activities may be exposed and are sensitive to these climate-related hazards, creating gross physical risks for the undertaking; climate-related transition risks and opportunities in own operations and along the upstream and downstream value chain, in particular: − the identification of climate-related transition events, considering at least a climate scenario in line with limiting global warming to 1.5°C with no or limited overshoot; and − the assessment of how its assets and business activities may be exposed to these climate-related transition events, creating gross transition risks or opportunities for the undertaking.” Governance – approach and requirements How do governance structures further accountability for entities SROs? Robust governance policies, structures and systems are essential accountability mechanisms for: Providing guidance, oversight, review and recommendations on an entity’s management of its business, including its sustainability-related risks and opportunities and resulting impacts along the value chain Ensuring that an entity’s reporting transparently reflects its impacts and is accurate, robust and meeting applicable reporting principles Disclosing material information to users of the disclosures, in alignment with applicable standards and requirements, and stakeholder expectations What are the standards’ requirements for disclosures relating to governance and SROs? All three reporting frameworks have a similar intent, GRI and ESRS are more prescriptive. Governance processes, controls and procedures 78  For overseeing and managing the entity’s impacts and/or sustainability-related risks and opportunities Assignment and delegation of roles and responsibilities For those overseeing and managing the entity’s impacts and/or sustainability-related risks and opportunities Composition of the responsible bodies Including skill sets and competencies relevant to sustainability impacts, risks and opportunities How information is communicated To the governing bodies and how frequently it is communicated Integration of sustainability impacts, risks and opportunities into strategy and operations Including target setting and performance metrics GRI GRI has specific disclosure requirements on the entity’s governance structure, composition, knowledge, roles and remuneration. These aspects shed light on how the entity manages its impacts on the economy, environment and people, including impacts on their human rights, and how this is addressed in its strategy and operations. They cover: how the governance bodies are set up; how well equipped they are to oversee the management of the organisation’s impacts; and the role and the responsibilities of the governance bodies related to the oversight and/or management of these impacts. GRI also has disclosure requirements around including a statement on the entity's sustainable development strategy, and its due diligence process for identifying and accounting for how it addresses/remediates its actual and positive negative impacts. IFRS S1 The objective of sustainability-related financial disclosures on governance is to enable users of general-purpose financial reports to understand the governance processes, controls and procedures an entity uses to monitor, manage and oversee sustainabilityrelated risks and opportunities (SROs). Requirements for disclosures relate to the role of the governance body(s) in overseeing SROs, include: responsibilities for SROs skills and competencies for overseeing strategies designed to respond to SROs frequency of information sharing on SROs how SROs are accounted for in strategy and operations and target setting management’s role in the governance processes, controls and procedures used to monitor, manage and oversee SROs and how they are integrated into internal functions ESRS ESRS 2 General Disclosures has requirements related to governance relating to: The role of the administrative, management and supervisory bodies and access to expertise and skills with regard to sustainability matters How the entity’s administrative, management and supervisory bodies are informed about sustainability matters and how these matters were addressed during the reporting period Integration of sustainability-related performance in incentive schemes Statement on due diligence - disclose a mapping of the information provided in the entity’s sustainability statement about the due diligence process Risk management and internal controls over sustainability reporting, including: − scope, main features and components of the risk management and internal control processes and systems in relation to sustainability reporting − the risk assessment approach followed, including the risk prioritisation methodology − the main risks identified and their mitigation strategies including related controls 79  − a description of how the entity integrates the findings of its risk assessment and internal controls as regards the sustainability reporting process into relevant internal functions and processes. Tutor tip: You should have a general understanding of what is meant by governance and a high-level understanding of the disclosure requirements under each of the standards. You will be given a short extract from the relevant standard if you are expected to apply any specific requirements relating to governance in the Advanced Reporting and Performance assessment. How can you assess the extent to which an entity has met the standards’ requirements relating to governance/SROs Governance structure and composition Competency Active oversight Integration Alignment of compensation to sustainability performance Strategy – approach and requirements Why is an entity’s strategy an important element of sustainability reporting? The entity’s strategy and overall approach to business will reflect its assessment of sustainabilityrelated risks and opportunities and will also reflect the importance it attaches to sustainability. The importance of sustainability in business strategy will depend on: The attitude towards sustainability of investors and directors The nature of the business – some industries are more directly affected than others The influence of external factors such as regulation What are the standards’ requirements for disclosures about strategy? GRI GRI 2 General Disclosures 2021 has specific and detailed disclosure requirements related to an entity’s strategy for managing its impacts on the economy, environment and people, including impacts on their human rights. Key elements from the GRI Standards relating to the entity’s strategy are as follows: Statement on sustainable development strategy – the entity is to report a statement from the highest governance body or most senior executive of the entity about the relevance of sustainable development to the organisation and its strategy for contributing to sustainable development. Policy commitments – the entity is to disclose its policy commitments for responsible business conduct and how the policy commitments for responsible business conduct, including human rights specifically, throughout its activities and business relationships are embedded Processes to remediate negative impacts, including those related to human rights specifically Mechanisms for seeking advice and raising concerns including those related to human rights specifically Compliance and non-compliance with laws and regulations Participation in industry associations, other membership associations, and national or international advocacy organisations. 80  IFRS S1 A conceptual foundation of IFRS S1 is Core Content, which requires an entity to disclose information about its strategy. Strategy is defined as the approach the entity uses to manage sustainability-related risks and opportunities (SROs). The disclosures are to enable users of general-purpose financial reports to understand an entity’s strategy and decision-making processes for managing SROs. The information should therefore address those SROs that could reasonably be expected to affect the entity’s: prospects; business model and value chain (location, facilities, assets); financial position, performance and cash flows for the reporting period and for the short, medium and long term based on how they are factored into the entity's financial planning; and resilience of the entity’s strategy and business model to the SRO. ESRS ESRS 2 requires disclosure of all material sustainability matters in the sustainability statement. Disclosures will cover the reporting areas of governance, strategy, impact, risk and opportunity management and metrics and targets. For the requirements related to strategy, entities are required to address the following disclosure items, including as they pertain to and are required by the Topical ESRS standards: Disclosure Requirement SBM-1 – Strategy, business model and value chain Disclosure Requirement SBM-2 – Interests and views of stakeholders Disclosure Requirement SBM-3 - Material impacts, risks and opportunities and their interaction with strategy and business model How can you assess whether disclosures meet the standards’ requirements relating to strategy? To ensure the quality and sufficiency of the strategy-related disclosures, entities should identify their sustainability-related impacts and risks and opportunities (SROs) and demonstrate how they are: credibly aligned with what the entity’s purpose/values/mission are focussed on achieving prioritised in statements by top governance bodies/senior leadership articulated in a strategic framework that is structured into pillars, focus areas or elements that provide the foundation for its overarching strategy with alignment to the business model embedded in policies and systems to manage them over the short, medium and long terms; and assessed and considered, including trade-offs between the impacts/SROs, reviewed and updated by internal and external stakeholders in iterative processes. Entities that disclose information to meet the GRI, IFRS S1 and/or ESRS standards should identify where and how their disclosures sufficiently meet the requirements of the applicable standard(s), throughout the report or in the form of a content index. If external assurance is provided, such statements can also be reviewed to determine if the quality and sufficiency of the disclosures meet the applicable standards Risk, Impact and Opportunity Management – Approach and Requirements What do the standards expect entities to disclose related to impacts, risks and opportunities? GRI, IFRS S1 and ESRS all have disclosure requirements for: Sustainability-related impacts, risks and opportunities along the value chain How they affect an entity’s strategy and business model The approach to determining and managing them 81  GRI Entities are required to disclose how they address, manage or respond to the risks and opportunities that affect the significance of the impacts on the economy, environment and people, including on their human rights. An entity’s material topics are those where the entity can have significant positive or negative impacts on the economy, the environment or people, including on their human rights. The impacts can pose risks to, or create opportunities for, the economy, the environment or people. How an entity proactively addresses, manages or responds to the risks and opportunities will affect the impact it has outwardly but also inwardly on its own performance, which could be: financial (e.g. increase/decrease revenue, stock price); reputational (e.g. harm or enhance perception); and/or operational (e.g. licence to operate, ability to attract or retain talent, maintain relationships with suppliers or business partners, deliver on business commitments). Risk and opportunity identification, assessment, management and review should be part of an entity’s governance structure. Disclosures on risks and opportunities should convey how well they are addressed by the entity and provide useful information for users of the information, including customers, investors, current and future employees, affected communities and other stakeholders. IFRS S1 The sustainability-related risks and opportunities (SROs) that could impact the entity’s financial prospects are the priority. Risks and opportunities are the backbone of IFRS S1; an entity should disclose information about how it identifies, assesses, prioritises and monitors sustainability-related risks and opportunities so that primary users can make informed decisions based on its management of those risks and opportunities. ESRS The emphasis is on sustainability matters that give rise to the entity’s material impacts, risks and opportunities, including those that currently affect or could be anticipated to affect its financial performance. ESRS 1 requires entities to disclose a sustainability statement that includes information on its “material impacts, risks and opportunities connected to the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (“value chain information”).” The material impacts, risks and opportunities connected with its value chain(s) should be identified through: 1. a sustainability due diligence process(es) 2. materiality assessment; and 3. alongside the most relevant sector-agnostic and sector-specific disclosures. How can you assess whether disclosures meet requirements for risks and opportunities? To assess the quality and sufficiency of disclosures related to sustainability-related risks and opportunities (SROs), entities should comprehensively: Identify their approach to, and/or due diligence steps for, identifying and assessing impacts along the value chain Demonstrate how they determine and are managing their material impacts and SROs Integrate the identification, assessment and management of impacts and SROs in their overall risk management and strategy processes Identify what the actual and potential impacts and/or effects are for the material SROs on the economy, environment, people, including human rights, and/or financial performance Disclose the alignment/interplay between the impacts and SROs and their business model, strategy, policies and systems and allocation of resources, and resulting actions and outcomes Metrics and targets – approach and requirements Why are metrics and targets important parts of sustainability reporting? 82 Credible and transparent reporting on metrics and targets holds companies accountable and, importantly, demonstrates to key stakeholders how material impacts, risks and opportunities are managed. What are the requirements of the standards regarding sustainability metrics and targets? GRI GRI standards require entities to provide information about: processes used to track the effectiveness of the entity’s actions; goals, targets, and indicators used to evaluate progress; and, the effectiveness of the actions, including progress toward the goals and targets for each material topic. When reporting on its metrics and targets the entity must disclose: how the goals and targets are set; whether and how the goals and targets take into account the sustainability context in which the impacts take place; whether the goals and targets are informed by external standards or regulations or scientific consensus; whether goals and targets are mandatory or voluntary, and if mandatory, the relevant regulation; the activities to which the goals and targets apply; the baseline for the goals and targets; and, the timeline for achieving the goals and targets. Entities must also report provide reasons for omission of any disclosures and requirements (e.g. lack of available information). IFRS S1 The IFRS S1 disclosure requirements for Metrics and Targets, state that for each SRO the following should be disclosed if it could be reasonably expected to affect the entity’s prospects: the metric used to set the target and to monitor progress towards reaching the target the specific quantitative or qualitative target the entity has set or is required to meet the period over which the target applies the base period from which progress is measured any milestones and interim targets performance against each target and an analysis of trends or changes in the entity’s performance any revisions to the target and an explanation for those revisions The entity will refer to the metrics in the SASB Standard(s) and decide whether those metrics are appropriate. The entity can use all or some or none of the metrics in the SASB standard(s) as well as other metrics. ESRS When disclosing information on metrics and targets, the entity is to meet the relevant minimum disclosure requirements: on … targets … and if it cannot (e.g. doesn’t meet the minimum disclosure requirements or have the datapoints in the topical and sector-specific ESRS, or not set the respective target), it should state that and report a timeframe in which it aims to have these in place; on metrics for a material sustainability matter according to the Metrics and Targets section of the relevant topical ESRS the entity if material; and it may omit the information prescribed by a datapoint of a Disclosure Requirement if it assesses such information to be not material and concludes that such information is not needed to meet the objective of the Disclosure Requirement. How can you assess whether disclosures meet the standards’ requirements for metrics and targets? 83 Credible and transparent reporting on metrics and targets holds companies accountable and, importantly, demonstrates to key stakeholders how material impacts, risks and opportunities are managed. To assess the quality and sufficiency of disclosures on metrics and targets, it is helpful to determine if they are: Identified for each material topic/SRO Aligned with strategy and disclosed content Overseen by an effective governance structure Quantitative and qualitative where relevant and appropriate Set over the short, medium and long term Tracked and disclosed over multi-year periods so progress can be compared and assessed Monitored, recorded, reported, reviewed and updated on an appropriately frequent basis Verified through internal mechanisms and external parties Tutor tip: The challenging aspects of this module can be the application of the different standards and assessing whether the disclosure requirements have been met. You will often be given short extracts from the relevant standards and asked how they should be applied to a particular scenario. Study guide checklist Have you completed reading module 8? Have you completed the skills checkers and skills builders? Can you confidently complete the module learning outcomes listed on this module? Can you confidently answer the guiding questions? Have you completed the assessment practice questions? Have you used the discussion board to ask questions on areas you are unsure about? Module 9 – The Relationship between financial and non-financial reporting Introduction Welcome to the study guide for Module 9 of the Advanced Reporting and Performance course. This study guide will help you prepare for the assessment. Syllabus Learning Outcomes By completing this module, you will have worked towards the following syllabus learning outcomes: 84