Modules 8 & 9

Question 1

What is non-financial reporting?

Answer 1

Non-financial reporting provides insights into non-monetary factors that may contribute to the overall success and sustainability of an entity.

It 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.

Question 2

What are environmental factors?

Answer 2

Factors relating to the use and treatment of natural environment and natural systems e.g. biodiversity loss, GHG emissions, climate change etc..

Question 3

Social factors

Answer 3

Factors relating to people e.g. labour standards in supply chains, workplace health and safety, freedom of speech etc.

Question 4

Governance factors

Answer 4

Factors relating to corporate governance and general governance of a company which includes government of environmental and social matters e.g. board leads her ship, shareholder engagement, company strategy, diversity and competence of board…

Question 5

What is financial materiality?

Answer 5

Financial materiality considers the importance of information which affects the financial position or performance of the reporting entity.
Disclosures prepared in accordance with financial materiality are prepared for the same audience as general purpose financial statements: actual and potential investors and lenders.
IFRS Sustainability Disclosure Standards are based on financial materiality.
IFRS Sustainability Disclosure Standards refer to “risks and opportunities that could reasonably be expected to affect the entity’s prospects”.

Question 6

What is the role of SASB standards?

Answer 6

SASB standards are industry-specific disclosure standards addressing environmental, social and governance related issues.
SASB provides a materiality finder which allows reporting entities and users of reports to search by company or industry to identify material subjects - organised as general issues and disclosure topics relevant to the typical business operating in that industry or industries.
IFRS S1 refers to the SASB Standards as a source of guidance for entities.
To report in accordance with IFRS Sustainability Disclosure Standards, entities must refer to the disclosure topics ad metrics identified in the SASB standards relevant to their business and consider whether those metrics are applicable to the entity’s reporting.

Question 7

What is the structure of GRI standards?

Answer 7

The GRI Standards system is modular, so they can be used by different organisations in a way which is appropriate for their own situation.
Universal Standards set out basic requirements and principles for using the GRI standards and specify the disclosures required about the reporting entity. They apply to all organisations.
The entity will apply all three Universal Standards.
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.
Topic standards cover economic, social and environmental impacts grouped into topics.

Question 8

What are the two ways to use GRI Standards?

Answer 8

An entity can choose to:
- report in accordance with GRI Standards. In this case it has to report on all its material topics and related impacts and completes all parts of the GRI reporting process (including notifying GRI of its reporting).
- report with reference to GRI Standards. In this case it can report only some specific information, for example only some topics, some metrics etc.

Question 9

Climate-related risks

Answer 9

IFRS S2 Climate-related Disclosures defines this term as follows: Climate-related risks are the potential negative effects of climate change on an entity. These could include higher direct costs (e.g. energy costs, taxes) or higher risk from operational challenges (e.g. supply of materials or resilience of supply chains).

Question 10

Climate-related physical risks

Answer 10

Physical risks are risks resulting directly from climate change: arising from events or from long-term shifts in climatic patterns.
These could include floods, heatwaves, power cuts etc or simply reduced availability or increased cost of materials that cause interruptions in production or distribution.

Question 11

Climate-related transition risks

Answer 11

Transition risks are risks that arise from efforts to transition to a lower-carbon economy. These might reduce the value in use of predicted useful life of assets, thus reducing current or future profits.

Question 12

Climate-related opportunities

Answer 12

Climate-related opportunities are the potential positive effects arising from climate change for an entity. Entities which sell products or services aligned to a lower-carbon economy or that can create new products taking advantage of this change can expect to benefit from such opportunities thus increasing revenues and profits.

Question 13

Explain the extent and quality of information required by IFRS Sustainability Disclosure Standards.

Answer 13

The IFRS Sustainability Disclosure Standards set out expectations about the extent and quality of information required. The entity should use all reasonable and supportable information that is available at the reporting date without undue cost or effort.
The information is not expected to be perfect and there will be occasions where the cost of providing information, or enhancing it further, is either impractical or simply outweighs the benefits of doing so.
IFRS S1 includes a proportionality principle which specifies that an entity need not undertake an exhaustive search for information and should use a balanced consideration of the costs and efforts for the entity and the benefits of the resulting information for users.
The entity should ensure it is able to justify the information disclosed. Given the issue with the company’s supply chain, it should ensure that it is not reporting information simply because it is inconvenient to disclose.

Question 14

Differences between the Strategic Report and financial disclosures on impairment.

Answer 14

The reporting required in the financial statements is historic. It shows the users of the financial statements information related to current financial position and past financial performance. This limits the potential for providing wider context to impairments.
The Strategic report will contain information on market conditions that have led to the asset impairment, such as the property market declining or overall decline in the sector. It is also more forward looking.
The strategic report will allow stakeholders to understand the wider context for the impairment than just the historic financial impacts as the information is more analytical.
The strategic report will contain analysis of the principal risks and uncertainties facing the businesses.
Consistency between the strategic report and the financial disclosure is important.

Question 15

What is a sustainability report?

Answer 15

This is a broad term that refers to a report, or sections of a report, which contains information about an organisation’s sustainability activities and approach. Sustainability reports can also be called ESG (Environmental, Social and Corporate Governance), corporate citizenship, corporate responsibility, responsible business or sustainable development reports.

Sustainability reports can be prepared on different bases and with different objectives and target audiences.

Question 16

Why would investor and lenders be interested in non-financial information?

Answer 16

Financial impacts: These issues can have a direct impact on the financial position and performance of the entity

Investor preferences: Investors and lenders may have their own non-financial objectives and requirements, for example, some may have a personal preference to invest in businesses that have high ethical standards of behaviour or may prefer to avoid industries whose activities by their nature are controversial and may clash with investors’ and lenders’ personal ethical codes. As such, users of financial statements may value detailed information about the activities or business partners of the reporting entity.

Question 17

Impact materiality

Answer 17

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. They are designed to help organisations communicate their contributions to, and impacts on, “environmental stewardship and societal wellbeing”.

Question 18

Double materiality

Answer 18

Double materiality considers both the impact of the organisation on environmental and social issues, 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.

ICAS supports the double materiality approach and has urged the UK government to adopt this approach to make reporting more comprehensive and holistic.

European Sustainability Reporting Standards are based on double materiality.

Question 19

What is the strategic report?

Answer 19

Other than small companies, all other UK companies must produce a strategic report. This is a requirement of the Companies Act 2006. The review provided in the strategic report should be consistent with the size and complexity of the business.

STRATEGIC MANAGEMENT: This section should include an explanation of the company’s strategy, objectives and business model.

BUSINESS ENVIRONMENT: This section should explain the business environment in which the company operates, including the principal risks and uncertainties facing the business, changes in the marketplace and relevant environmental and social matters.

BUSINESS POSITION AND PERFORMANCE: This section should contain an analysis of the entity’s performance, including appropriate qualitative and quantitative information, with appropriate reference to key performance indicators.

Question 20

How should the strategic report be?

Answer 20

1. Balanced and objective
2. Comprehensive but clear and understandable
3. Forward looking
4. Specific to the reporting entity
5. Cohesive and synthesised with the annual report
6. Up to date and relevant

Question 21

Climate-related disclosures in the strategic report

Answer 21

Publicly quoted companies and all private companies and limited liability partnerships (LLPs) with more than 500 employees and turnover greater than £500m must include climate-related financial disclosures within the strategic report, based on (but not identical to) the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Question 22

Why did the ISSB develop the IFRS SDS?

Answer 22

To provide a comprehensive foundation of disclosures for global adoption
To be a common language for comparable, decision-useful disclosures
To meet investor needs across global capital markets

Question 23

IFRS SDS extent of information required

Answer 23

Entities should use all reasonable and supportable information that is available at the reporting date without undue cost or effort

Entities should use an approach that is commensurate with the skills, capabilities and resources that are available to the entity for preparing those disclosures

Question 24

Advantages of IFRS SDS

Answer 24

The IFRS Foundation’s track record in financial accounting standard setting
Its existing relationships with regulators, exchanges, businesses and educators
The possibility of achieving further global consistency and reduced complexity in sustainability reporting
The possibility of enforcing politically desirable mandatory climate change disclosures on businesses

Question 25

Disadvantages of IFRS SDS

Answer 25

The focus on the financial impact to an organisation of sustainability issues (and not the impact of an organisation to people and planet) The IFRS Foundation’s lack of previous expertise in sustainability

Question 26

Information required by IFRS S1 and S2

Answer 26

Governance= The governance processes, controls and procedures the entity uses to monitor and manage sustainability-related risks and opportunities Strategy= The approach the entity uses to manage sustainability-related risks and opportunities Risk management = The processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities Metrics and targets= The entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation

Question 27

Requirements in IFRS S1 of using SASB

Answer 27

Identify relevant industry standards Select relevant disclosure topics Select relevant metrics Produce disclosures using metrics and technical protocols

Question 28

Application of GRI

Answer 28

The GRI Standards system is modular, so they can be used by different organisations – including for-profit companies and not-for-profit organisations – in a way which is appropriate for their own situation. Universal Standards: These set out basic principles and apply to all organisations. Sector Standards: These 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. Topic standards: these cover economic, social and environmental impacts grouped into topics.

Question 29

9 requirements of REPORTING IN ACCORDANCE WITH GRI

Answer 29

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 30

KEY reporting principles in GRI 1

Answer 30

Accuracy Balance Clarity Comparability Completeness Sustainability context Timeliness Verifiability

Question 31

What do GRI Topic standards include?

Answer 31

Requirements Recommendations Guidance

Question 32

Advantages of GRI

Answer 32

They require entities to present information which is relevant to all stakeholders, not just investors and lenders. Therefore, the information is likely to be comprehensive. By providing standards, GRI helps entities to produce information which is comparable, and therefore arguably more useful

Question 33

Criticism of GRI Standards

Answer 33

They are voluntary, and so entities can choose to avoid reporting information which may cast them in a negative light. Obtaining and presenting comprehensive information is likely to be time consuming and expensive. There is still a question over whether all the information is likely to be valuable to providers of finance and, in this respect, entities and their investors and lenders may prefer IFRS Sustainability Disclosure Standards.

Question 34

Process to identify material topics

Answer 34

Understand the organisation’s context Identify actual and potential impacts Assess the significance of the impact Prioritise the most significant impacts for reporting

Question 35

Reporting in accordance vs with reference to GRI

Answer 35

Reporting in accordance with the GRI Standards means that the entity reports on all its material topics and related impacts and how it manages these impacts. Reporting with reference to the GRI Standards means that the entity reports specific information (for example, to comply with specific regulatory requirements) using some but not all standards or parts of standards.

Question 36

European Green Deal

Answer 36

The European Green Deal – established in 2020 – is a large-scale initiative, comprising several policies and strategies, with the overall aim of achieving net zero emissions of greenhouse gases by the EU by 2050.

Question 37

EU Taxonomy

Answer 37

The EU Taxonomy is a classification system that defines sustainability activities according to the extent to which they are aligned with the 2050 net zero objective. The EU Taxonomy includes specific key performance indicators which can be used to assess the extent of a company’s sustainable activities.

Question 38

EU Action Plan on Sustainable Finance

Answer 38

The EU Action Plan on Sustainable Finance aims to direct flows of finance within the EU into assets and operations which are defined as sustainable by the criteria in the EU Taxonomy.

Question 39

Corporate sustainability reporting directive

Answer 39

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 Report in accordance with European Sustainability Reporting Standards (ESRS)

Question 40

European sustainability reporting standards

Answer 40

The European Sustainability Reporting Standards (ESRS) are the detailed reporting requirements of the CSRD, developed by European Financial Reporting Advisory Group (EFRAG).

Question 41

Sustainable finance disclosure regulation

Answer 41

The Sustainable Finance Disclosure Regulation (SFDR) requires asset managers and other institutional investors to disclose information about how sustainability is integrated into their investment decision-making process.

Question 42

ESRS applies to:

Answer 42

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

Question 43

Layers of ESRS disclosure

Answer 43

Sector-agnostic disclosures Sector-specific disclosures Company-specific disclosures

Question 44

ESR1

Answer 44

Overall structure and objectives of ESRS Qualitative characteristics of information Explanation of materiality and stakeholders Value chain Overall structure and presentation

Question 45

Stakeholders in ESRS

Answer 45

- affected shareholders - users of sustainability statements

Question 46

ESRS 2

Answer 46

Sets out the general sustainability disclosures: Governance Strategy Impact, risk and opportunity management Metrics and targets

Question 47

ESRS IMPACT MATERIALITY

Answer 47

It pertains to the entity’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- and long-term time horizons. Impacts include those caused or contributed to by the entity and those which are directly linked to the entity’s own operations, products, or services through its business relationships.

Question 48

ESRS FINANCIAL MATERIALITY

Answer 48

It triggers or may trigger material financial effects on the entity. This is the case when it generates or may generate risks or opportunities that have a material influence (or are likely to have a material influence) on the undertaking’s cash flows, development, performance, position, cost of capital or access to finance in the short-, medium- and long-term time horizons. Risks and opportunities may derive from past events or future events and may have effects in relation to assets and liabilities already recognised in financial reporting or that may be recognised as a result of future events or factors of value creation that do not meet the definition or recognition criteria of assets and liabilities but contribute to the generation of cash flows and more generally to the development of the entity

Question 49

ROLE OF ASSURANCE

Answer 49

IFRS Sustainability Disclosure Standards have been designed to make the reported information assurable, since the ISSB has already anticipated that regulators will require sustainability reporting to be subject to at least some level of assurance. 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. 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.

Question 50

WHAT IS AN ANNUAL REPORT?

Answer 50

The annual report is a comprehensive document that offers investors and other stakeholders detailed insights into the entity’s financial health, performance and prospects that will assist them in their decision-making process and promote effective stewardship.

Question 51

GREENWASHING

Answer 51

Greenwashing refers to deliberate or accidental claims about the sustainability of products/services/operations that are exaggerated, misleading and/or unsubstantiated by an entity or representative of that entity. It is a deceptive strategy intended to make an organisation appear more environmentally friendly or sustainable than it actually is.

Question 52

Common ethical challenges in reporting

Answer 52

Greenwashing Understatement of environmental risks and liabilities Selective disclosure of sustainability performance Inconsistency in sustainability reporting standards

Question 53

Frameworks useful because they

Answer 53

Define what to report Promote transparency Encourage accountability

Question 54

Assurance enhances ethical aspects of sustainability reporting by:

Answer 54

Verifying accuracy Ensuring completeness Building stakeholder trust