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Changes in corporate reporting

Changes in corporate reporting

12/03/2021
Piotr Biernacki

In the next two years, we will witness a fundamental change in corporate reporting. It will be implemented through a revision of the directive on non-financial information disclosure but it will primarily cover the architecture of corporate periodic reports. Its main goal is to make reports follow the reality and to make investors understand how companies create value.

Financial reporting has developed over hundreds of years, but the last century has been a period of the most dynamic changes. The balance sheet was complemented by account of results, then by cash flow statement, followed by other items, such as more and more detailed notes. However, despite this development, financial statements still mainly discuss changes of the two types of capital that is used to create (or destroy) value: financial and manufacturing capital. The other four types of capital, namely, natural, human, social and intellectual capitals have not been properly represented in financial statements. After all, the value is created or destroyed by a company using all six types of capital. Failure to consider them in financial statements is the reason why an increasing rift between the book value and the real valuation of companies has been observed for years now. At the same time, despite extensive work, the International Accounting Standards Board has not yet developed good enough and commonly accepted standards that would allow for considering intangible values in financial statements.

New NFRD

The EU regulator was aware of shortcomings of financial reporting in this area when, in 2014, it passed the Non-Financial Reporting Directive (NFRD). It was applied only to the largest companies (simply put, those with over 500 employees) and it did not lead to unification of reporting. This was clearly indicated by the respondents of the consultative process during the review of NFRD application that was carried out last year. The new directive is to address these challenges and make corporate reports meet reality to a larger extent.

The amended directive will determine what companies are to report on sustainability development issues and how. In practice, these changes will cover four key aspects: subjective scope of regulations, reporting architecture, report object and quality of information.

Who will the reporting requirement apply to?

The requirement to report on sustainability issues will be extended and, although today we do not know the outcomes of the legislative work, we can be quite sure to indicate which companies should be subject to the new regulations. This is based on the opinions collected by the European Union during its consultative process with different stakeholders, mainly from financial institutions and companies themselves. It is most likely that the requirement will apply to all listed companies and large private companies, and presumably also small and medium-sized enterprises, however the reporting of SME would be proportionally smaller in its scope.

New reporting architecture

The new reporting architecture will be based on two pillars: financial statements and sustainability statements. These pillars will be bonded with the activity statement. As a result, information on the ways of using all types of capital will be treated equally. To a similar extent, the contents of two types of statements will be precisely defined. The statement on activities will remain the document in which the management board will comment on past achievements and outline future plans. An important thing is that the current name raporty niefinansowe is planned to be retired for the sake of a wider and more independent notion of zagadnienia zrównoważonego rozwoju. We do not know yet if these Polish terms will remain because the EU-level work is carried out in English which offers the terms ‘financial statements’ and ‘sustainability statements’. ‘Sustainability’ does not have an elegant translation to Polish and zagadnienia zrównoważonego rozwoju has just the closest meaning to the English original.

New reports – topics, layers and areas

Reports are to focus their objective scope on all sustainability aspects related to four types of capital that are not covered in financial statements and their relations with the company. These issues, categorized in three topics, will be reported on three layers in three interfluent areas. We can thus try to imagine such a report to look like a solved Rubik’s cube that is made of 27 small cubes. Three topics to be covered in reports are the so-called ESG+ topics. The E (environment) area will include issues on combating climate change, adaptation to climate change, water and sea resources protection, circular economy, prevention of pollution as well as protection of biodiversity and ecosystems. Sounds familiar?

Indeed, these are the exact same six topics which are linked to the environmental goals defined in the regulation 2020/852 on Taxonomy. The S (social) area will cover issues related to ensuring compliance with international human rights norms, including the UN Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises, labour issues, including those related to workers in the whole value chain, relations with local communities and wider community as well as issues related to clients and consumers. The detailed structure of the S area will be worked out as part of the Platform on Sustainable Finance which has started its project to define the Taxonomy in the social area. The G+ area will include not only corporate governance issues but also ethics, managing relations with stakeholders and business partners, management governance, research and development as well as communication, reputation, and brands.

The three layers of reporting are related to indicators which are uniform for all companies, uniform for a given sector and specific to a given company. The first group, which is relatively small, will ensure comparability of reports of all companies. The second group, the most comprehensive, will allow for an accurate comparison of companies which are similar to one another as they operate in the same industry. Using them, investors will be able to determine how companies deal with multiplying capital and how they address identified risks, threats and opportunities. The third group will allow companies to consider in their reports outstanding issues which were not reflected by the indicators that are uniform to all companies or a given sector.

The three areas of reporting are the issues of strategy, its implementation and efficiency measurement. The area of strategy is basically uniform for the whole company or group and should include information about the business model and the company’s growth strategy, identified material risks, threats and opportunities related to sustainability issues and the ways in which the company impacts these issues as well as information on corporate and management governance. In relation to each of the material sustainability issues, there should be a description of policies, established goals and planned actions as well as allocated resources, which accounts for an area of implementation. This information, together with historical results (for the reporting year or a few previous years) should also create the expected perspectives the company has in relation to a given issue in future.

Reporting standardisation and verification

Quality of information in sustainability reports will be ensured by a collection of tools. One of them is standardisation. Reports will be prepared in accordance with uniform European standards, contrary to what takes place today when companies can quite freely choose what standards or guidelines to apply. Thanks to unification of reporting standards, it will also be possible to introduce an obligatory verification of reports. An obligatory audit was one of the most common demands raised during the last year’s consultation carried out by the European Commission. Thanks to standardisation, it will be possible from the very beginning to digitalize the new reports, i.e., they will be prepared in the iXBRL format using the applicable taxonomy. The EU institution issuing the new reporting standards will also create relevant guidelines which will outline the requirements regarding the quality of information and data included in reports.

Changes in the coming two years The reform of the corporate reporting system is an enormous project which is carried out under time pressure stemming from the needs of investors and financial institutions. In the next two years we will witness a simultaneous process of passing the amended directive and establishing an institution to set reporting standards and the very process of standards creation. The aim of all this is for annual reports for 2023 (published in 2024) to be prepared in accordance with the new model. These two years are the last call for companies which today do not prepare reports in line with the European Commission’s guidelines, so that they could spend that time to identify risk, build policies and establish working systems for collecting and consolidating non-financial data. There will be no time to do so later on and all shortcomings will be spotted by independent auditors who verify reports or by the very investors for whom comparing data reported by different companies will be very simple. Work on the new sustainability-related information reporting system is carried out simultaneously at the regulatory and legislative levels (led by the European Commission) as well as at the level of designing the standards. The proposed architecture of the new reporting standards was created by a special group working by EFRAG, which I had the pleasure to be part of. Basing on the effects of our work, the standards will gradually be designed, consulted, and published in the coming two years by the institution issuing the standards. It is worth to keep an eye on this project and gradually i

READ OTHER NEWS

Changes in corporate reporting

In the next two years, we will witness a fundamental change in corporate reporting. It will be implemented through a revision of the directive on non-financial information disclosure but it will primarily cover the architecture of corporate periodic reports.

Read More »

INFRS AS A NEW REPORTING STANDARD

A week ago, I described best practice for climate reporting. Now it is worth to describe what changes in non-financial information disclosure are to come in the nearest quarters.

Read More »
OUR ADDRESSES:

64 Chłodna St, Warsaw, 00-872, Poland
111 Marszałkowska St, Warsaw, 00-102, Poland
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VALUE CHAIN OF A COMPANY AND A CIRCULAR ECONOMY

VALUE CHAIN OF A COMPANY AND A CIRCULAR ECONOMY

18/03/2020

Justyna Biernacka

A transcription of a discussion from the Polish Association of Listed Companies conference on ESG reporting and sustainable investments on 11 September 2019

WHAT IS THE DIFFERENCE BETWEEN A SUPPLY CHAIN AND A VALUE CHAIN?

A supply chain is part of a value chain. In a supply chain we assess everything which is related to sourcing raw materials, materials, components, production, sales and distribution of a product. In this case the goal is to efficiently and effectively provide goods by keeping low costs, ensuring quick turnover of goods and flexibility in addressing clients’ needs. A value chain is, in turn, a wider term coming from the strategic management area and it relates to a set of activities in different areas of an enterprise’s activity which lead to creating a value for a buyer and thus reaching a competitive advantage.

HOW TO DEFINE A VALUE CHAIN?

First and foremost, we need to determine the reason why we will define a value chain. In the context of non-financial issues, we will be interested in the topics of CO2e emissions, climate change, circularity. We identify the chain in order to estimate risks, threats and opportunities in these areas.

We can start our work with analysing the company’s business model basing on the classic Porter’s value chain model. Here we analyse what processes take place at the company during the complete cycle of manufacturing the product and client service, starting with sourcing production resources, through production, distribution, marketing, sales and product maintenance. We also take a closer look at the processes related to managing the company, the existing organizational culture, relations with the social environment, human resources management, supplies, as well as processes related to research and development, new technology introduction, IT. These parts of the value chain have a final impact of the product’s value. The ESG context makes us extend our perspective with processes that take place outside of the company but yet have an influence on creating the product’s value, both in the upstream area (before they reach the phase of the company’s own activity) and downstream (namely, the processes that happen once servicing the product at the user stage is complete). Such a broader perspective will help us to diagnose to what extent the processes related to sourcing raw materials or manufacturing components of our product have an impact on the final value of the product for the client.

WHAT BENEFITS ARE THERE FOR A COMPANY THAT TAKES THE EFFORT TO IDENTIFY ITS VALUE CHAIN?

Such a company can learn about the risks, threats and opportunities that are hidden in this broadened area. During the value chain analysis, we can obtain information that was previously not known, for example, whether or not the products are manufactured under conditions that violate human rights or whether they have any negative impacts on the local communities. Considering these aspects, we can tell whether the product maintains its value over time and whether its use does not cause negative effects in the social or natural environment. What we learn during this process can also translate into financial results for our company. For instance, adjusting the processes to the requirements of circular economy will enable us to avoid the fees related to materials that are introduced in circulation which will increase significantly in the coming years for most of companies in Poland.

Ile trwa proces identyfikacji łańcucha wartości?

Warto mieć na uwadze, że identyfikacja łańcucha wartości nie jest działaniem jednorazowym, tylko długim procesem, w którym będziemy uszczegóławiać wiedzę na temat kolejnych elementów łańcucha. Dobrze do tego tematu podejść w sposób racjonalny i na początku stworzyć ramy dla dalszego, wieloletniego działania. W pierwszym etapie trzeba określić główne elementy łańcucha wartości, najpierw na poziomie ogólnym, a potem w miarę upływu czasu badać go bardziej szczegółowo. Myślę, że ten etap, na który składa się analiza modelu biznesowego łańcucha wartości w granicach spółki/grupy i poza jej granicami, w przypadku pracy ze spółką o spójnym modelu biznesowym, może zająć od kilku do kilkunastu tygodni.

HOW LONG IS THE PROCESS OF IDENTIFYING A VALUE CHAIN?

W najbliższym czasie większość spółek będzie mapowała łańcuch wartości na potrzeby raportowania emisji w Scope 3, zatem na ich potrzeby dobrym standardem będzie Greenhouse Gas Protocol – „Scope 3 Standard”, który powstał właśnie po to, by pomóc przedsiębiorstwom mapować emisje pojawiające się w pełnym łańcuchu wartości.

Mapowanie to dotyczy zarówno procesów upstreamowych jak i downstreamowych, czyli z jednej strony emisji gazów cieplarnianych związanych z pozyskaniem surowców, ich transportem, obróbką, przetwarzaniem odpadów produkcyjnych, przetworzeniem produktu i dostarczeniem go do spółki, a także podróżami służbowymi, zakupionymi dobrami i usługami, a z drugiej strony z emisjami związanymi z dalszym procesowaniem produktu (komponentu), jego użytkowaniem i utylizacją. Rozpoznanie źródeł emisji w Scope 1, 2 i 3 prowadzi do uzyskania informacji, gdzie są ponoszone największe koszty związane ze zużyciem paliw i negatywnym wpływem na środowisko. To z kolei daje nam szansę na wprowadzenie procesów naprawczych prowadzących w efekcie do podniesienia wartości produktu dla klienta.

ARE THERE ANY STANDARDS THAT COULD SERVE AS GUIDELINES IN THIS PROCESS?

In the near future, most of companies will map their value chain for the purpose of their Scope 3 emission reporting, thus the Greenhouse Gas Protocol ‘Scope 3 Standard’ will cater to their needs. The standard was created exactly for the purpose of helping enterprises to map the emissions that are generated in their whole value chain. The mapping is related to both upstream and downstream processes, so on the one hand, greenhouse gases emissions related to sourcing raw materials, their transport, processing, treatment of post-production waste, processing of the product and delivering it to the company as well as business travel, purchased goods and services, and on the other hand, emissions related to further processing of the product (component), its use and utilization. Determining the sources of Scope 1, 2 and 3 emissions helps us to learn where we have the biggest costs related to fuel use and negative impact on the environment. This in turn gives us a chance to introduce corrective actions that lead to increasing the value of the product to the client in the end.

ARE THERE ANY REGULATIONS THAT REQUIRE US TO IDENTIFY OUR VALUE CHAIN?

The supplement to the European Commission guidelines on non-financial reporting related to climate clearly state that enterprises, during their materiality assessment of climate-related information, should consider their whole value chain, covering both the upstream and downstream areas.

The term ‘value chain’ appears in the supplement very often. In accordance with its provisions, the value chain should be considered in the materiality assessment of information related to climate, in the company’s policies on its impact on climate change and its mitigations, in the assessment of risks and opportunities related to climate in the short, medium and long-term, in the assessment of the impact of the product or service on climate in its whole lifecycle, and in the company’s or group’s activities supporting smaller entities in delivering the necessary non-financial data. It is thus worth to spend some time and effort now to identify the value chain as many things indicate that this will be a requirement in the near future.

WHAT DOES THE IDEA OF A CIRCULAR ECONOMY HAVE TO DO WITH A COMPANY’S VALUE CHAIN?

The idea of a circular economy revolutionizes the currently existing linear economy model which is about sourcing raw materials, processing them, using and throwing them away. When you spend a while thinking about it, it seems to be a completely irrational thing to do, yet it is commonly legitimised. In the linear model we irreversibly exploit unrenewable resources and, a moment later, we throw them away without making us of their full value, and at the same time we destroy and pollute the natural environment. The concept of a circular economy is based on three main principles: to design products in such a way that no waste and pollution is generated, to keep products and materials in constant use, and to regenerate natural resources.

The circular approach materially impacts the way we run business way before we reach the waste management stage. Firstly, it becomes significant how the product is designed. If we want to avoid waste and ensure its long-time use, it needs to be enduring, needs to have good quality and be easily serviced. It has to be disassembled easily so that it could be carried over to a different place without any problem. It has to be produced under a no-waste process – namely, designed in such a way that the production requires only as much material or raw material as is needed, maybe using prefabrication. Secondly, visualisation becomes important – a transition from the material to the virtual world. Just look at our phones to see how many products have disappeared from our lives – calendars, atlases, watches, books, newspapers, cassette players, printed documents or bank counters. Thirdly, the implementation of circular economy principles is supported by the transition from production to offering services as part of the ‘product as a service’ model. Instead of owning things, we can rent them – such as renting a car per minute or lighting. Lastly, a recovery approach to natural systems makes us start using renewable resources and recover these resources actively, for instance, through recovering valuable organic matter and returning it to nature.

When mapping the value chain of an enterprise it is worth to pay attention to the circular economy principles, as in the closing or reverting of circulations there is an opportunity to add or recover value that is hidden in the product. A good illustration is the clothing industry which generates more and more products made from recycled materials, such as PET bottles. Today it is possible to transform a valueless bottle waste into a fashionable jacket worth 180 euro and lined with cleaned plumage from recycled old coats.

WHAT REGULATIONS ON A CIRCULAR ECONOMY AND VALUE CHANIN ARE THERE IN THE EU?

Unia Europejska przyjęła dwa pakiety regulacji zmierzających ku ekonomii cyrkularnej. Pierwszy z tych pakietów został wprowadzony w 2015 roku wraz z ogłoszeniem Circular Economy Action Plan i dotyczył pięciu priorytetowych sektorów, w których zmiany przyspieszą przejście na gospodarkę o obiegu zamkniętym. Zmiany i nowe regulacje dotyczyły tworzyw sztucznych, odpadów spożywczych, surowców krytycznych, odpadów z budowy i rozbiórki, biomasy i półproduktów.

The European Union has passed two packages of regulations that aim towards circular economy. The first package was introduced in 2015 when the Circular Economy Action Plan was announced and referred to five priority sectors where the introduced changes would speed up the process of transition to a circular economy. The changes and new regulations focused on plastics, food waste, critical resources, construction and demolition waste, biomass and semi-products.

A new waste package was implemented in 2018, consisting of 6 directives and 4 statements, and it specifies goals set until 2030 covering, among other aspects, residential waste and limiting sending such waste to landfills; recycling of packaging made of plastics, metal, wood, glass, paper and cardboard; prohibition of using plastics for the production of disposable goods; limiting the use of plastic containers; limiting the use of primary raw materials for the production of plastics and using recycled materials. However, the most intense change that companies will face will be the introduction of the extended producer responsibility scheme in 2021, which states that the polluter is the one who pays. The increase in payment for entrepreneurs will be a significant financial burden, therefore, it is worth to consider already today how we can limit the amount of waste that is generated by our company’s activities. Still, this is not the end of the expected changes. In December 2019, the new European Commission announced the European Green Deal, a development strategy of the European Union. One of its foundations is to enhance the transition to a circular economy. For the following months of 2020, the Commission is planning to present a number of drafts of regulations and directives which will intensify this process.

READ OTHER NEWS

Changes in corporate reporting

In the next two years, we will witness a fundamental change in corporate reporting. It will be implemented through a revision of the directive on non-financial information disclosure but it will primarily cover the architecture of corporate periodic reports.

Read More »

INFRS AS A NEW REPORTING STANDARD

A week ago, I described best practice for climate reporting. Now it is worth to describe what changes in non-financial information disclosure are to come in the nearest quarters.

Read More »
OUR ADDRESSES:

64 Chłodna St, Warsaw, 00-872, Poland
111 Marszałkowska St, Warsaw, 00-102, Poland
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INFRS AS A NEW REPORTING STANDARD

INFRS AS A NEW REPORTING STANDARD

19/02/2020

Piotr Biernacki

A week ago, I described best practice for climate reporting. Now it is worth to describe what changes in non-financial information disclosure are to come in the nearest quarters.

Currently, we are only in the third non-financial data reporting cycle. This requirement entered the Polish law when the 2014/95/EU directive was implemented. And this very directive is being now reviewed by the European Commission, which plans to present a draft of the amendment by the end of 2020. It is quite fast considering that the first reports were published only two years ago, because the EU regulator usually evaluates how regulations work after 4-5 years since their introduction.

The rush is caused by the climate crisis and pressure from financial institutions. Banks, insurers and investment funds want, as soon as possible, to direct their financing to those companies which actively reduce their negative impact on the natural environment. At the same time, financing parties want to diligently assess the risks of their individual portfolios. To be able to do this, they need reliable and, most of all, comparable data. The very general directive allowed companies to report non-financial information by using any standards they wanted. Since 2018, large companies have been flooding the market with reports that present different level of detail and, let us be honest, quality. The guidelines of the European Commission, due to their general nature, have not unified the way of reporting.

Financial institutions expect the same quality and comparability of non-financial data as they get in the case of financial statements prepared throughout the Union in accordance with the International Financial Reporting Standards. In response to the lack of comparability of non-financial data, there are various forms, surveys and questionnaires which companies receive either directly from investors or indirectly from agents, data brokers, analytics firms or rating agencies. They fill the gap and try to provide investors with data that are comparable at least to some extent. This, however, creates an increase in personnel, organisational and financial costs for companies because someone has to fill in all these questionnaires.

A solution to this problem is very simple. I have postulated on the Union forum for a few years that an ‘International Non-Financial Reporting Standard’ is created, which would make it easier for companies to prepare their reports and for investors to use them. Such INFRS would become, to paraphrase Tolkien, one standard to rule them all, a uniform platform for reporting, analysing and exchanging of ESG data and information. During the last year, I have heard more and more opinions that support similar unification of non-financial reporting. And finally, at the end of January, the Vice-President of the European Commission, Valdis Dombrovskis announced that, collaterally to the revision of the directive, work on creating a European standard for non-financial reporting would be commenced. Once the standard is announced, it would be promoted by the Union in the wider international arena as well.

The Commission plans to delegate work on the standard project to EFRAG which seems to be a relevant institution to complete this huge task. When creating a standard, one does not only need to include in it a number of non-financial areas (environmental, social, labour, human rights, corporate governance issues) but at the same time embrace all industry branches (without losing out on their specificity) and ensure that reports will be concise and comparable. Details of the planned work should come to light only in the coming weeks but we can be sure that representatives of issuers as well as investors, analysts, banks, insurers and rating agencies will be involved. The work on the standard will be conducted collaterally with the revision of the non-financial reporting directive because for the European Commission, which is acting under pressure from financial markets, time is of great importance. In regular circumstances, a working group in charge of the standard would be appointed only after the new directive is passed. However, thanks to commencing work on these two projects at the same time, it will be possible to save about two precious years. The Commission representatives also mention a possibility to replace the directive with a regulation. Such a move would also save two years because the new regulations could enter into force soon after they are passed, without the necessity of time-consuming transposition the law of member countries.

The shortest agenda could anticipate the regulations to be designed in 2020, passed in 2021 and entered into force in 2022. Maybe the process will take more time but companies should be prepared for such a scenario. It refers not only to those companies which already report, as today a reporting requirement for smaller companies (with over 250 employees, contrary to the current 500-employee threshold) is more widely discussed, which would increase the number of reporting entities threefold, more or less. It is also worth to remember that the European Commission has collaterally started concept work on a limited, basic scope for non-financial data reporting which could be introduced for small and medium-sized enterprises. The transitional period of changes always seems difficult but we are closer and closer to a situation in which reporting basic data on the company’s impact on the natural environment, society and employees will be something normal and common, and not only a difficult task which only the most ambitious and largest companies can afford to complete.

READ OTHER NEWS

Changes in corporate reporting

In the next two years, we will witness a fundamental change in corporate reporting. It will be implemented through a revision of the directive on non-financial information disclosure but it will primarily cover the architecture of corporate periodic reports.

Read More »

INFRS AS A NEW REPORTING STANDARD

A week ago, I described best practice for climate reporting. Now it is worth to describe what changes in non-financial information disclosure are to come in the nearest quarters.

Read More »

Our addresses:

64 Chłodna St, Warsaw, 00-872, Poland

111 Marszałkowska St, Warsaw, 00-102, Poland

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Privacy Policy of MATERIALITY.PL

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MATERIALITY is a joint venture of MOD Sp. z o.o. (111 Marszałkowska St, Warsaw, 00-102) and EMCG Sp. z o.o. (64 Chłodna St, Warsaw, 00-872).

All information provided on the website is indicative and does not constitute legal nor any other form of advice. MOD and EMCG are not responsible for the use of the information provided on the website without prior seeking professional advice from MATERIALITY experts.

Copyright © 2017 MOD Sp. z o.o. and EMCG Sp. z o.o. All rights reserved.

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How do the best report on climate

How do the best report on climate

12/02/2020

Piotr Biernacki

If you are still wondering how to best report on issues related to climate or what you can learn from such reports, look no further. A few days ago a report „How to improve climate-related reporting. A summary of good practices from Europe and beyond” was published. I had the pleasure to participate in the work of the EFRAG (The European Financial Reporting Advisory Group) team that prepared the report commissioned by the European Union. The report can significantly facilitate the preparation phase for companies which today try to meet the requirements on non-financial information disclosure that were strengthened last year.

When we started our work precisely one year ago, we were thinking what information can be most useful for companies preparing their reports and for investors and other stakeholders who use these reports. Back then, in February 2019, it was already known that the European Commission would in a few months significantly broaden its requirements in the area of reporting issues related to climate change. Eventually, this was what insurers, banks and investors expected from it. We decided that a set of thoroughly discussed best practices selected from the already existing corporate reports would be most helpful to authors and readers of reports dedicated to climate-related issues..

It is the first compilation of examples from reports which considers both perspectives: not only of the company itself, but also of people who read the report and then make investment decisions based on the information and data they found therein. The study covered nearly 150 reports that were diligently selected to represent issuers from diversified industries and sectors as well as large, medium-sized and small enterprises.

The work was conducted collaterally in two working groups. One of the groups, which I was a member of, analysed the way companies addressed the twelve TCFD recommendations. The recommendations themselves lay ground to the new guidelines of the European Commission. The other working group tackled the most complex part of climate reporting, namely scenario analysis. There is not even a single company among the largest companies listed on the largest stock exchanges that perfectly reports on all climate-related aspects. There is no evidence showing that best reporting practices are to be seen only in reports issued by large companies that have more organisational, human and financial resources. On the contrary, sometimes it was the smaller or medium-sized companies that surprised us with their exceptionally coherent approach to describing climate-related risks and opportunities or with their diligent presentation of climate strategy management process. These are the two very important conclusions which indicate that good reporting does not depend on what resources you have but it depends on how seriously you approach the issues that are, strategically speaking, most important both to the company’s future and its investors as well as other stakeholders.

The common features of best climate-related disclosure boil down to a few points. Firstly, reports that are packed with numbers do stand out. A company which, in line with the standards, measured its greenhouse gases emissions, quantified the effect of particular risks or calculated expenditures necessary to be incurred for the forthcoming years to meet the coming changes was usually better positioned to justify that it would be able not only to survive but also to grow and develop in the coming economic reality. Secondly, companies that were outstanding where those which did not treat climate-related disclosure as compliance homework they were made to do, but approached the task considering the in-depth review of what really was material in the interrelated influence of business, conducted operations and environment. Conclusions from diligent materiality assessment helped ensured consistency of the whole equity story and strongly supported the undertaken strategic decisions and their expected outcomes.

Thirdly, rich commentary to presented data and explanation of observed trends added credibility to reports. This made the reader feel that the management board indeed used the presented performance indicators to make decisions and navigate the company’s activities. On the other hand, there was quite a negative contrast build up by companies which tried to use their reports to boast about superficial achievements, to underline insignificant, although presented as spectacular, “actions” and “projects” or even to do greenwashing.

Lastly, solid climate-related reports were marked by far-reaching honesty. When a company openly stated that some data had not yet been calculated or that a part of risk assessment would be conducted next year, a more coherent picture is created as to the state in which the company is today and what path it has taken to be better prepared for the changes. I am convinced that the report available at www.efrag.org/Lab1 will be useful to almost 150 companies listed on the Warsaw Stock Exchange that will for the first time this year try to meet the investor disclosure requirements which are thoroughly described in the new European Commission guidelines, as they prepare their reports covering the year 2019.

Read other news

Changes in corporate reporting

In the next two years, we will witness a fundamental change in corporate reporting. It will be implemented through a revision of the directive on non-financial information disclosure but it will primarily cover the architecture of corporate periodic reports.

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SUSTAINABILITY STRATEGY AND NON-FINANCIAL REPORTING

SUSTAINABILITY STRATEGY AND NON-FINANCIAL REPORTING

12/06/2019

Justyna Biernacka

Why build a sustainability strategy?

A sustainable development strategy is a tool which complements a company’s business strategy with ESG (Environmental, Social, Corporate Governance) issues. Companies which report non-financial information have data on their achievements in these areas. A sustainability strategy will dictate what should be done with such data, how such data should be changed, and how we want to use it in the context of the company’s operations. It should be noted that such a strategy is not a CSR strategy. A sustainability strategy is an undertaking that is deeply embedded in the essence of the company’s activities, it gives an additional perspective that allows us to see our business in the context of global challenges, e.g., climate, economic, and social.

What benefit does it bring to shareholders and stakeholders?

Survival and protection of life on our planet is a benefit in the long run, although it is commonly known that for investors it is the profit which matters the most. Well selected indicators and strategy goals should show shareholders that the management board recognizes and properly addresses development potentials and risks, both in the short- and long-term perspective. This enables the company to make better use of its opportunities and makes it more resilient to threats. Properly selected key performance indicators allow for monitoring of the company’s progress year on year, which facilitates investment decision making.

Is the European Commission planning on regulatory actions that will make it obligatory to implement a sustainability strategy?

The European Commission has an integrated approach to it. Sustainability issues are embedded in the documents which the EC is currently working on. The term sustainability strategy is not present there but the EC in many places refers to a business strategy that should include issues related to, for example, climate. It is clearly visible in the EC guidelines on climate and recommendations of the Task Force on Climate-related Financial Disclosures. These recommendations form guidance on what companies should write about in their financial statements(!) when it comes to the impact of climate change on the corporate strategy, financial plans and business model.

Nonetheless, there is no obligation to create a sustainability strategy.

What should the process of preparing a sustainability strategy at a company look like?

Building such a strategy is basically similar to building a business strategy. We should determine the main objectives, specific targets, the way of their implementation and key metrics, and then implement them and monitor the implementation process. There are many companies that have not yet prepared such a strategy, and if they have, they usually prepared CSR strategies which, in many cases, do not refer to issues that are material to their business activities.

A baseline study should embrace the company’s business strategy and the collected non-financial data. It would be good to conduct materiality assessment which points out non-financial matters which are key to the operations of a given company. It is also worth to investigate competitors’ actions to check what goals they set and with what time frame, what aspects they discuss, what policies they have in place. Additionally, we need to consider the regulatory environment. The global context is a novelty in the regulatory aspects as we all need to engage in actions to combat the climate crisis as well as environmental and social challenges. The activities of organizations such as the UN, EU will thus have an influence on the shape and nature of such a strategy.

How do we know that a sustainability strategy is adjusted to the company’s needs and that it is well prepared?

First of all, it is worth to pay particular attention to the above-mentioned materiality assessment. If a company conducts energy-intensive operations but does not report on emissions and does not collect data on energy consumption, yet it boasts about its charitable activities, there is a clear rift between the created image and actual problems such a company may face. We should consider how the company’s business activity impacts and how it is impacted by its environment – communities, natural environment, regional economy. If the impact perspective is not included in the strategy, this means that the strategy is not properly designed. Materiality is specific to each business; we cannot apply a universal pattern here. It is also worth to conduct materiality assessment once every few years to set goals in the strategy in the areas that are material to the business. Second of all, the strategy should set goals to be implemented within a specified timeframe. Some goals are easily defined and measured and can be quick to be implemented. In such cases they could be set within a short-term timeframe – up to two years. Other goals require prior preparation, research, data, cost estimation, introduction of necessary modifications; their implementation depends on a number of factors which must appear in advance; thus, their implementation can be possible within 4-5 years’ perspective. Lastly, targets need to be measurable and that is why we need to prepare relevant metrics and indicators related to their implementation.

In 2015, the United Nations created the Sustainable Development Goals (SDGs) which we should co-create. Can these goals help companies to set their own goals?

The 17 sustainable development goals (SDGs) are global goals. Each of them is complemented with detailed tasks which more specifically describe the ways of implementing these goals. All SDGs fall within aspects related to 3 areas: social, environmental and economic, and they interpermeate internally. For example, goal 11, focused on sustainable cities, intertwines with goals related to energy and water consumption, equality, decent work. It is, of course, impossible for a single company to implement all these goals, thus there is a need to select key goals for each company, depending on the nature of its business activity.

Is the selection of goals a specific commitment? Should it be reported and monitored if the goal has actually been supported?

The sustainable development goals serve the purpose of communication and education. It is an image-related issue and a declaration to enter into community actions that aim to improve the environmental, economic and social situation. If we want to be perceived as a responsible company, we have to select our goals, implement them and communicate about it. Who should approve a sustainability strategy at a listed company?

The management board is responsible for approving the strategy. The implementation should be conducted through employees and the very approval should take place in line with the rules that are applied at the company.

What if a company has approved a strategy but noticed that in practice it does not meet the nature of the company?

We would have to investigate where the mistake has been made. Maybe the strategy was not prepared with consultation with employees who then boycotted it. Maybe the selected goals were not relevant for the company’s activities or the business environment has changed drastically. In order to avoid at least some mistakes, when drafting our first strategy, it is good to set a preparatory period which will serve to determine more specific goals. For example, if we do not have detailed data on energy consumption and we do not know the cost of implementing energy-efficient solutions, we could first introduce a goal to collect such data and gain knowledge. Only once we establish such a solid foundation will we be able to declare reduction targets in our next strategy. We should remember that we create a sustainable development strategy with a 3 to 5 years’ time horizon and before we move on to create a new strategy, we will verify the implementation of the previous one. This is a good moment for introducing improvements.

READ OTHER NEWS

Changes in corporate reporting

In the next two years, we will witness a fundamental change in corporate reporting. It will be implemented through a revision of the directive on non-financial information disclosure but it will primarily cover the architecture of corporate periodic reports.

Read More »
OUR ADDRESSES:

64 Chłodna St, Warsaw, 00-872, Poland
111 Marszałkowska St, Warsaw, 00-102, Poland
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Privacy policy of MATERIALITY.PL

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MATERIALITY is a joint venture of MOD Sp. z o.o. (111 Marszałkowska St, Warsaw, 00-102) and EMCG Sp. z o.o. (64 Chłodna St, Warsaw, 00-872).

All information provided on the website is indicative and does not constitute legal nor any other form of advice. MOD and EMCG are not responsible for the use of the information provided on the website without prior seeking professional advice from MATERIALITY experts.

Copyright © 2017 MOD Sp. z o.o. and EMCG Sp. z o.o. All rights reserved.