M9: Financial & Non-financial Relationship

Question 1

What are the differences and similarities between financial and sustainability reporting disclosures?

Answer 1

Differences:
- FS do not generally show how directors have performed their duty towards entity’s long-term success and stakeholder interests
- Financial reporting is governed by specific detailed rules, sustainability is not
- Sustainability is often voluntary, financial is legally required and audited.
- Financial is short-med term whereas sustainability is about long-term risk and value creation.

Similarities:
- Both use standardised frameworks e.g. IFRS for financial and GRI/ESRS for Sustainability
- Both aim to inform stakeholders about organisational performance

Question 2

What is the importance of having consistency between the sustainability disclosures and the financial statements?

Answer 2

• Alignment between both allows users of the FS to make decisions based on high quality and comprehensive information
• Consistency ensures that reported ESG risks, assumptions, and metrics align with financial data (e.g., climate risks affecting asset valuations).
• Helps prevent contradictions between financial performance and sustainability claims—boosting trust with stakeholders. (Greenwashing)
• Investors seek a holistic view of a company’s risks and opportunities; alignment builds confidence in both ESG and financial data.

Question 3

What type of materiality does financial reporting focus on, and how does it differ from non-financial reporting?

Answer 3

Financial Reporting:
- Focuses on financial materiality.
- Reports on financial position and performance affecting investors.

Non-Financial Reporting:
- Focuses on impact materiality (effects on environment, society).
- May apply double materiality (financial + impact), e.g., ESRS.

Question 4

How do financial and non-financial reporting differ in defining the reporting entity and scope?

Answer 4

Financial Reporting:
- Follows formal rules for defining a consolidated entity or investment.
- Based on ownership/control criteria.

Non-Financial Reporting:
- Starts with reporting entity, but may include the value chain.
- Broader scope based on stakeholder impact and disclosure framework.

Question 5

What is the difference in time horizon focus between financial and non-financial reporting?

Answer 5

Financial Reporting:
- Focused on the present and past financial results.
- Typically retrospective.

Non-Financial Reporting:
- More forward-looking.
- Sustainability goals and impacts take time to materialise.

Question 6

How are monetary values used differently in financial reporting compared to non-financial reporting?

Answer 6

Financial Reporting:
- All information is expressed in monetary terms.
- Based on clear accounting standards.

Non-Financial Reporting:
- Often non-monetary (e.g., emissions, diversity metrics).
- Qualitative and quantitative measures.

Question 7

Why is financial reporting generally considered more reliable than non-financial reporting?

Answer 7

Financial Reporting:
- High reliability due to established methods for measurement and recognition.
- Often audited.

Non-Financial Reporting:
- Higher uncertainty due to evolving metrics, forward-looking nature, and limited standardization.
- Less precise comparability.

Question 8

What are the criticisms of financial statements?

Answer 8

 they are primarily a record of past transactions, they do not adequately capture the value of all the resources available to a business or indeed the true cost, to parties external to the
business, of all the operations of the business.

 intangible assets (such as consumer brands) are often measured at historic cost, which prevents the user of financial statements from understanding the economic value of the resource.

 some resources cannot be recognised as assets, because they do not meet the definition of an asset in the Conceptual Framework for Financial Reporting

 they do not report the true cost of, for example, environmental pollution, apart from the obvious direct financial costs such as a fine or obligatory clean-up operations. Long-term risks
may be likely but unquantifiable and similarly excluded from financial statements.

Question 9

How do you apply the knowledge of ethical considerations (such as greenwashing) in reporting and performance and how could they be mitigated?

Answer 9

We use mitigation strategies such as the following below to mitigate ethical issues that can arise within sustainability reporting:

🧾 Use Recognized Reporting Standards: Apply GRI, ESRS, or ISSB frameworks for consistency and comparability.

🔍 Promote Transparency: Disclose both achievements and shortcomings honestly.

📊 Independent Assurance: Use third-party verification to ensure accuracy and completeness.

📉 Avoid Conflicts of Interest: Especially when sustainability targets affect bonuses or performance evaluations.

📣 Stakeholder Engagement: Regularly communicate with stakeholders to address concerns and align reporting with expectations.

Question 10

How do you apply the five ethics principles to address issues related to sustainability?

Answer 10

🧭 1. Integrity
- Report sustainability data truthfully—no exaggeration or omission.
- Avoid misleading stakeholders (e.g., greenwashing).

⚖️ 2. Objectivity
- Remain impartial, especially when sustainability data affects executive pay or reputational risk.
- Avoid bias or influence from internal incentives tied to ESG targets.

🎓 3. Professional Competence and Due Care
- Stay informed about evolving sustainability standards and frameworks.
- Ensure accurate, well-researched sustainability disclosures.

🤐 4. Confidentiality
- Protect sensitive sustainability-related data.
- Balance confidentiality with the need for transparency when public disclosure is ethically necessary.

🧍 5. Professional Behaviour
- Avoid conduct that discredits the profession or misleads stakeholders.
- Uphold values like diversity, equity, and inclusion with sincerity—not for appearance.

Question 11

Why are the following stakeholders interested in sustainability reporting?

• Investors
• Customers
• Employees
• Suppliers
• Regulators
• Community members

Answer 11

 Investors use sustainability reports to assess how sustainability and climate-related factors could affect the company’s financial health and growth prospects. Ultimately investors are
interested in the returns on their investments.

 Customers have shown a strong preference for buying products from entities that demonstrate ethical practices and environmental stewardship. They may want to find
information on the sustainability of products and their overall impact on the environment.

 Current and prospective employees may be interested in the company’s commitment to creating a positive, inclusive, and safe work environment.

 Suppliers seek information on the company’s policies over ethical and sustainable supply chain practices. Increasingly entities are enquiring about the carbon intensity and other specific metrics of their supply chain partners.

 Regulators monitor company’s compliance with environmental laws and regulators. Sustainable reporting also helps policymakers to monitor progress towards environmental and social goals.

 Community members are concerned with the corporate impact on local communities and the environment. Community members are looking for evidence of genuine engagement and
positive contributions to the environment and society.