YOUR HEADING HERE10.05.2011

Today’s webinar 29th October 2013Strategic report regulations: guidance for companies and investors

Presenters:

Colleen Theron, Director of CLT envirolaw

Tim Barker, Director of Route 2 Sustainability

Expertise

Agenda• Strategic report regulations: what, when, how and non-

compliance• Practical guidance on:

1. How to determine whether a non-financial risk is ‘material’ and should therefore be disclosed?

2. Why are investors interested?3. What kind of process do you need?4. How does the strategic report overlap with voluntary reporting

standards such as Integrated Reporting and the Global Reporting Initiative?

5. What steps should you take next?

• Q & A

Poll question

• What is your key interest in the subject today?1) Compliance2) Practical steps3) Or both

What’s happening?

• UK government: renewed focus on ensuring that directors’ social and environmental duties have been covered in company reports

• The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 came into force on 1st October 2013

• duty to produce a strategic report • Financial Reporting Council (FRC) issued Exposure

Draft: Guidance on the Strategic Report in August 2013

What is a strategic report?

• ‘business review’ replaced• not to be confused with the Director’s report• be approved by the board of directors• includes more strategic information• forms part of the narrative report

What companies do the regulations apply to?

• ALL companies that:o are UK-incorporated and o are not exempted by the small companies regime

• must disclose:o a fair review of the company’s business;o a description of principle risks and uncertainties ;o an analysis of the development and performance of the

company's business, including environmental and employee matters;

o using financial Key Performance Indicators (KPIs) and, if large, non-financial KPIs

What’s required?

• quoted companies:o description of the strategy and business modelo main trends and factors affecting the companyo comply or explain - information about and policies for -

each of the following: o environmento employeeso social, community and human rights issues

o diversity statistics at different organisational levels• assurance required under the Companies Act and

International Standards on Auditing (ISA) 720 and 250

Human rights

• new requirement• driven by adoption on UN Guiding principles for

business and human rights • indicators can include employee training on human

rights policies and practices• supply chain risk

Communication principles• complement, supplement and provide the

context of related financial statements• signpost the location of supporting material• be fair, balanced, understandable, concise,

forward-looking, entity-specific and link reports

• cover trends and factors that could influence performance

• disclosure in the process• summary of key non financial metrics to

inform the process

Strategic reporting requirements: when?

• Requirement comes into place for company reporting years ending on or after 30th September 2013

Your usual financial year

Your first reporting year under the regulations

1 January to 31 December 1 January 2013 to 31 December 2013

1 April to 30 March 1 April 2013 to 30 March 2014

1 October to 30 September 1 October 2012 to 30 September 2013

What are the regulatory implications of non-compliance?

• 3 Companies Act offences• penalties• negligent misstatement• Financial Reporting Council Conduct Committee

enforcement: voluntary first and then through the courts• third party complaints: eg. Investors• reputational impact from committee references and

public notices

What is required for compliance on the non-financial side?

• only material information • ‘to the extent necessary’• excluded if it will seriously prejudice the company• definitions:– Companies Act 2006– International Financial Reporting Standard

When can an ESG risk have material financial implications?

RISKS WITH FINANCIAL

IMPLICATIONS:REPUTATIONAL, CONTRACTUAL, REGULATORY,

RESOURCE COSTS,OPERATIONAL

ESG CATEGORIES:ENVIRONMENTAL,

EMPLOYEE, SOCIAL,

COMMUNITY AND HUMAN RIGHTS

DISCLOSURE RQUIREMENTS: INFORMATION ABOUT ESG CATEGORIES THAT COULD AFFECT THE DECISION

TO INVEST IN THE COMPANY

Not getting it right• are you confident that you

have an informed disclosure?

• do you have a procedure in place to gather and evaluate all the necessary information?

What are the elements of a robust ESG risk process?

Stakeholder Engagement: Throughout The Process

1st stage: workshop with senior management to understand activities, processes, and views on ESG themes. Identification and evaluation of key stakeholders.

2nd stage: engagement with other key stakeholders on ESG themes

Material Issues: Identification

With regard to business strategy, full value chain business footprint and stakeholder inputCovering a comprehensive list of relevant ESG themes

Material Issues: Prioritisation & Impact

Exposure to ESG risks / opportunitiesSignificance of business’ full value chain economic, environmental and social impact Influence of the business’ value chain impacts on relevant stakeholders

Risk MitigationCoverage of ESG risks on existing company risk registerIdentification and prioritization of management procedures Development of an action plan, budget and programDevelopment of KPIs and reporting procedure

Disclosure

KPIs linked to material issues

Strategic information in strategic report. Supplementary information in sustainability report.

ESG risk themes

• Risk themes supported by risk primers to support internal understanding and external communication

• Alignment to GRI G4 ‘material aspects’ to support disclosure

• Flexible approach allows screening of some to most to all themes as required

Risk diagnostic: identifying value chain exposure

• Overall Risk Score indicate weighted exposure to all relevant risk themes

• Participation Risk indicates whether risk exposure driven by the country (of operation or procurement)or the sector (of operation or procurement)

• Value Chain Risk indicates whether exposure risk is attached to the direct operations or sits within the supply chain

Which themes are relevant?

Benchmark / Peer Set Company

Risk diagnostic: risk prioritisation

The risk matrix helps communicate an organization's material risks and opportunities - risks in the top right hand quadrant represent the most material risks based on exposure to that risk and the estimated financial impact of that risk / opportunity. Subject to testing with relevant stakeholders – these risks / opportunities should be prioritized for risk mitigation actions and consideration when reviewing an organization's strategy and operations

Risk register

Can compliance be converted into a competitive advantage?

• objective process for disclosure• robust ESG process• clear understanding of risk themes• enhanced reputation from

stakeholders • attract new business and investment• enhanced stakeholder relationships• reduce resource costs• enhanced procedures (e.g. risk

register to manage risks)• benchmark against best practice

standards

Ready for take-off?

Poll questions

1. Do you have a material ESG risk identification and management process in place?

2. Does it quantify potential financial impacts and cover your supply chain?

3. Does it include any form of stakeholder engagement (internal or external)?

4. Do you have a risk register that covers ESG risk?5. Will you be taking any action after today’s

webinar?

Q & A

Recorded version available

• http://clt-envirolaw.com/ghangout/strategic-report-regulations-guidance-for-companies-and-investors/

Who to call?

For more information or advice call:• Colleen Theron Mobile: +44 (0) 7714 979 936

E-mail: colleen.theron@clt-envirolaw.com• Tim Barker

Mobile: +44 (0) 7867 473 983 E-mail: timb@route2sustainability.com

www.clt-envirolaw.com