M8: Non-financial Disclosures

Question 1

What is the relationship between Financial and non-financial reporting?

Answer 1

Financial reporting provides information about an entity that is useful to stakeholders, particularly existing and potential investors and lenders, in assessing the performance of the entity and making decisions relating to providing resources to the entity.

Non-financial reporting includes information about:
 business strategy and performance
 environmental and social issues
 the governance of the organisation and the relationships between the organisation and its stakeholders
 additional information about the resources and commitments of a business, especially those which are difficult to value objectively and so would not be adequately captured in the primary financial statements

Question 2

What are the different frameworks and standards used in non-financial reporting?

Answer 2

 IFRS Sustainability Disclosure Standards
 Global Reporting Initiative Standards
 European Sustainability Reporting Standards

Question 3

State which frameworks and standards align with the following:
- Financial materiality
- Impact materiality
- Double materiality

Answer 3

IFRS Sustainability Disclosure Standards are based on financial
materiality.

The Global Reporting Initiative (GRI) standards are based on impact
materiality

European Sustainability Reporting Standards (ESRS) are based on
double materiality

Question 4

What is financial materiality & which global standards align with this?

Answer 4

Financial materiality considers the importance of information which affects the financial position or performance of the reporting entity.

IFRS Sustainability Disclosure Standards are based on financial
materiality.

Question 5

What is impact materiality & what global standards align with this?

Answer 5

Impact materiality considers the importance of information about the reporting entity’s impact on the economy, environment and society for the benefit of multiple stakeholders.

The Global Reporting Initiative (GRI) standards are based on impact materiality

Question 6

What is Double materiality & what global standards align with this?

Answer 6

Double materiality considers both the impact of, and the impact on, the organisation of environmental and social issues. Information meets the criteria of double materiality if it is material from the impact perspective or from the financial perspective or from both of these two perspectives.

European Sustainability Reporting Standards (ESRS) are based on double materiality. ICAS supports the double materiality approach.

Question 7

For financial and impact materiality, which of these is assessing the impact ON THE BUSINESS of environmental and social issues and which of these is assessing the impact OF THE BUSINESS on the environment and society?

Answer 7

ON THE BUSINESS = Financial materiality

OF THE BUSINESS = Impact materiality

Question 8

What is the strategic Report?

Answer 8

Strategic Report is a report that all UK companies other than small companies have to produce under the Companies Act 2006.

The report has the following headings:
 Strategic management
 Business environment
 Business position and performance

Question 9

What type of companies must include climate related disclosures?

Answer 9

Publicly quoted companies
Private companies
LLP’s

with more than 500 employees and Turnover greater than £500million.

Question 10

What climate related disclosures do businesses need to include within the Strategic report?

Answer 10

 a description of the entity’s governance arrangements in relation to assessing and managing climate-related risks and opportunities

 a description of how the entity identifies, assesses, and manages climate-related risks and opportunities and a description of how this is integrated into the entity’s overall risk
management process

 a description of the principal climate-related risks and opportunities and their actual and
potential impact on the entity’s business model and strategy

 an analysis of the resilience of the entity’s business model and strategy, including
consideration of different climate-related scenarios

 a description of the targets used by the entity to manage climate-related risks and
opportunities and of performance against those targets

 the key performance indicators used to assess progress against targets used to manage
climate-related risks and opportunities and a description of the calculations on which those key performance indicators are based.

Question 11

What are the UK Sustainability Disclosure Standards?

Answer 11

Future requirements for sustainability reporting will be known as UK Sustainability Disclosure Standards (UK SDS).

It is expected that UK SDS will be closely based on IFRS Sustainability Disclosure Standards.

Question 12

What are the two sections within the IFRS Sustainability Disclosure Standards?

Answer 12

IFRS S1 General Requirements for Disclosure of Sustainability- related Financial Information. Requires disclosures on the following topics:

 GOVERNANCE PROCESSES - controls and procedures used to monitor and manage sustainability- related risks and opportunities
 STRATEGY - approach used to manage sustainability- related risks and opportunities
 RISK MANAGEMENT - the processes used to identify, assess, prioritise and monitor
sustainability-related risks and opportunities
 METRICS AND TARGETS - performance in relation to sustainability-related risks and opportunities, including progress towards any set targets

IFRS S2 Climate Related Disclosures - climate-related risks and opportunities.

Question 13

What detailed disclosures does IFRS S2 require for CLIMATE-RELATED METRICS?

Answer 13

1. Absolute gross greenhouse gas (GHG) emissions generated during the reporting period,
   expressed as metric tonnes of CO2 equivalent:
    Scope 1 emissions: direct GHG emissions from owned or controlled sources
    Scope 2 emissions: indirect GHG emissions from the generation of purchased energy
    Scope 3 emissions: other indirect GHG emissions that occur in the value chain of the
   reporting company, including both upstream and downstream emissions, as well as
   indirect emissions arising from an entity’s business’s travel, consumption of resources or
   goods and services.
2. Vulnerability to climate-related risks
   The amount and percentage of assets or business activities vulnerable to each of:
    climate-related transition risks
    climate-related physical risks
    climate-related opportunities
3. Investment in climate-related risks
   The amount of capital expenditure, financing or investment deployed towards climate-related risks and opportunities.
4. Internal carbon pricing
   The entity should disclose whether it applies a carbon price in decision-making and if so, the price it uses to assess the costs of its greenhouse gas emissions.
5. Executive decisions
   How and to what extent climate-related considerations are factored into executive
   remuneration.

Question 13

Explain how RISK MANAGEMENT under IFRS S1 helps users understand the FS

Answer 13

Users should be able to assess the entity’s overall risk profile and understand how an entity manages risks and the extent to which processes for managing sustainability-related risks and opportunities are integrated into the entity’s overall risk management process.

Question 14

Explain how governance under IFRS S1 helps users understand the FS and the required disclosures:

Answer 14

Governance allows users to evaluate how well the business is being run and to make predictions about future performance.

Required disclosures include information about the following:
 Which individuals, boards and committees are responsible for oversight of sustainability- related risks and opportunities.

 How the entity determines that the appropriate skills and competencies of these individuals and board and committee members

 How these risks and opportunities are considered when overseeing the entity’s strategy and key decisions.

 How target-setting and progress monitoring is governed - are targets translated into
performance metrics and used to determine remuneration

 Management’s role in the governance processes; who has responsibility for oversight of
sustainability-related risks and opportunities; controls used

Question 15

Explain how STRATEGY under IFRS S1 helps users understand the FS and the required disclosures:

Answer 15

Allow users to understand elements of the entity’s strategy for managing sustainability-related risks and opportunities and the link to financial position and performance.

This will include:
 Sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects, together with an analysis of the time frame.

 Current and anticipated effects of sustainability-related risks and opportunities on the entity’s business model and value chain.

 How the entity has responded to, and plans to respond to, sustainability-related risks and opportunities in its strategy and decision-making

 The effects of sustainability-related risks and opportunities on the entity’s prospects being its current and future financial position and performance

Question 16

What detailed disclosures does IFRS S2 require for CLIMATE-RELATED TARGETS?

Answer 16

IFRS S2 also requires disclosure of climate-related targets:
 The quantitative and qualitative climate-related targets that it uses to monitor progress
towards achieving its strategic goals.
 The targets it is required to meet by law or regulation.
 Detailed information such as the metric used to set the target, time frames, milestones etc.

Question 17

Explain the 3 different standard within the GRI Standards system

Answer 17

1) Universal Standards - set out basic principles and apply to all organisations.

2) Sector Standards - help to identify a business sector’s most significant impacts and stakeholder expectations for sustainability reporting. They describe the sustainability context for a sector, outline material sustainability topics and list disclosures relevant for entities in that sector to report on.

3) Topic standards - cover economic, social and environmental impacts grouped into topics.

Question 18

What are the 9 requirements that an entity must comply with to report in accordance with the GRI Standards?

Answer 18

1) Apply the reporting principles
2) Report the disclosures in GRI 2: General Disclosures 2021
3) Determine material topics
4) Report the disclosures in GRI 3: Material Topics 2021
5) Report disclosures from the GRI Topic Standards for each material topic
6) Provide reasons for omission for disclosures and requirements that the organisation cannot comply with
7) Publish a GRI content index
8) Provide a statement of use
9) Notify GRI

Question 19

What can entities choose between when reporting within the GRI framework?

Answer 19

Entities can choose between:
 reporting in accordance with the GRI Standards - reports on all material topics and related impacts and how the impacts are managed

 reporting with reference to the GRI Standards - reports specific information (for example to comply with specific regulatory requirements) using some parts of the standards

Question 20

What is GRI1?

Answer 20

GRI 1 Foundation is an overarching standard which includes:
 the objectives and the structure of GRI Standards
 the key concepts underpinning the standards
 how an entity goes about reporting in accordance with or with reference to the GRI
Standards
 the reporting principles

Question 21

What is GRI3 and what’s the process?

Answer 21

GRI 3 explains the process by which an entity determines its material topics. It also contains disclosures for reporting the process by which the entity has determined its material topics the list of material topics and how it manages each topic.

Process:
1 - Understand the organisations context
2 - Identify actual and potential impacts
3 - Assess the significance of the impact
4 - Prioritise the most significant impacts for reporting

Question 21

What is GRI2?

Answer 21

GRI 2: General Disclosures contains disclosures relating to details about:
 an entity’s structure and reporting practices
 activities and workers
 governance
 strategy
 policies
 practices
 stakeholder engagement.

This information provides a context for understanding the actual or potential effect of an entity’s operations on the economy, environment, and people.

Question 22

What are sector standards within GRI?

Answer 22

Sector standards help identify a business sector’s most significant impacts and stakeholder expectations for sustainability reporting. They describe the sustainability context for a sector, outline material sustainability topics and list disclosures relevant for entities in that sector to report on.

Question 23

What are topic standards within GRI?

Answer 23

Topic standards cover economic, social and environmental impacts grouped into topics. Each standard includes:  Requirements which is the information an entity must report in accordance with the GRI Standards.  Recommendations which is information that is encouraged to be reported but is not compulsory.  Guidance can include background information, explanations, and examples

Question 24

What are the advantages and disadvantages of using GRI Standards?

Answer 24

The advantages of GRI standards include:  They require entities to present comprehensive information which is relevant to all stakeholders, not just investors and lenders.  By providing standards, GRI helps entities to produce information, which is comparable, and therefore, arguably more useful. The main criticisms of GRI standards include:  They are voluntary  Obtaining and presenting comprehensive information is likely to be time-consuming and expensive.  It is unclear whether all the information is valuable to providers of finance, IFRS Sustainability Disclosure Standards may be preferred

Question 25

What are the Advantages and disadvantages of using ESRS?

Answer 25

Entities that report in accordance with ESRS are likely to comply with IFRS Sustainability Disclosure Standards, thus eliminating any need to prepare reports with reference to multiple standards or frameworks. The main criticism of ESRS is that the reporting requirements are extensive and therefore entities need to devote considerable resources to reporting which may be onerous for smaller companies.

Question 26

What is ESRS1?

Answer 26

ESRS 1 General Requirements ESR1 General Requirements includes:  The overall structure and objectives of ESRS  Qualitative characteristics of information which reflect the widely accepted qualitative characteristics of information included within the IFRS Conceptual Framework for Financial Reporting and reflected in IFRS Sustainability Disclosure Standards. Note that ESRS does not include timeliness in the qualitative characteristics.  Explanation of materiality and stakeholders. Stakeholders are those who can affect or be affected by the undertaking. Sector-agnostic and in future, sector-specific information must be disclosed by all entities, irrespective of how important the entity considers it to be. Some information is only disclosed if the directors of the entity consider it to be material. Where information is material, it must be disclosed even if it is not specifically mentioned in a standard.  Value chain. Information on sustainability will include material information on the impacts, risks and opportunities connected to the reporting entity throughout its value chain, including its direct and indirect business relationships.  Overall structure and presentation includes detailed requirements for presenting sustainability information and for linking the information in the sustainability disclosures with the information in the financial statements.

Question 27

What is the Corporate Sustainability Reporting Directive and how does this link to ESRS?

Answer 27

The Corporate Sustainability Reporting Directive (CSRD) sets out which companies need to report sustainability-related information. The CSRD requires companies to  report under the EU Taxonomy regulation and  report in accordance with ESRS The CSRD applies to:  all large companies in the EU  most listed companies in the EU, including SMEs,  companies from outside the EU with listed securities on an EU regulated market. There is a phased introduction of ESRS by 2026.  All companies that meet the reporting criteria will, by default, be required to report on a standalone basis.  However, EU-based parent companies of a large group will report for their group on a consolidated basis and therefore many EU subsidiary companies will be able to rely on this consolidated report.

Question 28

What is ESRS2?

Answer 28

ESRS 2 General Disclosures The content applies the architecture that was developed by TCFD and requires disclosures on:  Governance processes, controls and procedures used to monitor and manage sustainability- related impacts, risks and opportunities  Strategy approach used to manage sustainability-related impacts, risks and opportunities  Risk management the processes used to identify, assess, prioritise and manage sustainability-related impacts, risks and opportunities  Metrics and targets performance in relation to sustainability-related risks and opportunities, including progress towards any set targets