Beyond the Balance Sheet IFC Toolkit for Disclosure and Transparency
Beyond the Balance Sheet IFC Toolkit for Disclosure and Transparency
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency i © 2018 International Finance Corporation. All rights reserved.
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ii Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Contents iii 1 x 24 124 124 124 ix xi 18 97 15 55 123 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit ......
...... Beyond the Balance Sheet | Beyond
...... Materiality ...... 123 Materiality ...... Quality Information 2.1. Leadership and Culture: Commitment to ESG Leadership and Culture: ...... 55 2.1...... 2.2. of Directors and Functioning of the Board Structure 58 2.3...... Environment Control 68 ...... Shareholders of Minority Treatment 81 2.4...... 92 2.5. of Stakeholder Engagement Governance Performance Report 3.1...... 97 ...... 102 3.2. Financial Statements 3.3...... Sustainability Statements 109 ...... Scope of Disclosure ...... Requirements Disclosure Annual Report? ...... the in Preparing Who Should Be Involved 125 Reporting Formats ...... 125 ...... 126 and Reporting Technology ...... 126Annual Report Disseminating the 1.4. Sustainability Opportunities and Risks ...... 26 Opportunities Sustainability and Risks 1.4. Key Performance Indicators ...... Introducing 1.5. 49 1.1. Business Model and Environment Business Model and Environment ...... 1.1. 18 1.2. Objectives Strategic ...... 22 and Response Analysis ...... 1.3. Risk ...... 1 Transparency and of Disclosure Benefits 0.1...... 4 Reporting to Corporate Approach 0.2. and Integrated Comprehensive ...... Acknowledgments Part II: Reporting Guidance 2. Governance Corporate 3. Financial Position and Performance Part Framework I: Disclosure Strategy 1. Foreword 0. Introduction Executive SummaryExecutive Contents IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond ii Contents iv Beyond the BalanceSheet| References Reading for Further Boxes Examples Glossary Appendixes 2016 ...... Example 1.3: BusinessModel—Commercial BankofCeylon Annual Report Example 1.2: BusinessModel—ChugaiPharmaceutical2016 20 Annual Report ...... Example 1.1: BusinessModel—Gold Fields2016 ...... 19 Annual Report Box A.2: Materiality The SASB’s 131 Five-Factor Test...... Box A.1: 130 The
iv Beyond the Balance Sheet | IFC Toolkit for Transparency and Disclosure Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency v Example 2.9: Board Diversity—Natura 2016 Annual Report ...... 65 Example 2.10: Board and Management Team—Aggreko 2015 Annual Report .....66 Example 2.11: Committee Description—Absa Group (formerly Barclays Africa) Contents 2015 Annual Report ...... 67 Example 2.12: Board Sustainability Committees—BHP Billiton Annual Report 2016 ...... 68 Example 2.13: Internal Controls—Fresnillo 2015 Annual Report ...... 72 Example 2.14: Internal Audit—Nedbank Group 2014 Integrated Report ...... 72 Example 2.15: Audit Committee—Aggreko Annual Report 2015...... 73 Example 2.16: External Auditor—CLP Group Annual Report 2015 ...... 74 Example 2.17: Assurance of Sustainability Data—Gold Fields Integrated Annual Report 2016 ...... 75 Example 2.18: Risk Appetite and Profiling—CLP Group 2015 Annual Report ...... 77 Example 2.19: Quantitative Risk Appetite Objectives—UBS 2016 Annual Report ...... 77 Example 2.20: Risk Management—CPL Group 2015 Annual Report ...... 78 Example 2.21: Risk Management—Santova Limited 2016 Annual Integrated Report ...... 78 Example 2.22: Compliance—Li & Fung Limited 2015 Annual Report ...... 80 Example 2.23: Beneficial Ownership—True Group Thailand 2015 Annual Report ...... 81 Example 2.24: Shareholdings Distribution—Telekom Malaysia Annual Report 2015...... 83 Example 2.25: “Deemed Interest”—Telekom Malaysia Annual Report 2015 ...... 83 Example 2.26: Control Chains—Itau Unibanco Brazil 2014 Annual Report ...... 84 Example 2.27: Controlling Shareholders—True Group Thailand 2015 Annual Report ...... 85 Example 2.28: Voting and Minority Rights—Türk Telekom 2015 Annual Report ...... 86 Example 2.29: Change of Control—Türk Telekom 2015 Annual Report ...... 87 Example 2.30: Remuneration Policy—Absa Group (formerly Barclays Africa) 2015 Integrated Report ...... 88 Example 2.31: Actual Remuneration—Fresnillo 2015 Annual Report...... 89 Example 2.32: Managing RPTs—Fresnillo 2015 Annual Report ...... 90 Example 2.33: Details on RPTs—Sappi Group 2014 Annual Financial Statements ...... 91 Example 2.34: Summary Information on RPTs—Reliance Industries Limited 2015 Annual Report ...... 92 Example 2.35: Stakeholder Identification—Vopak Annual Report 2016 ...... 94 Example 2.36: Stakeholders and Sustainability—Tata Motors 2015–2016 Annual Report ...... 96 Example 3.1: Forward-Looking Guidance—Novo Nordisk Annual Report 2016 ...... 99 Example 3.2: Financial KPIs—Rio Tinto 2017 Annual Report ...... 100 Example 3.3: Snapshot of KPIs: Financial and Commercial and Strategic Goals—SAB Miller 2016 Annual Report ...... 101 Example 3.4: Core Sustainability KPIs—CEMEX Integrated Report 2016 ...... 102
vi Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Example 3.5: Income Statement—Novo Nordisk Annual Report 2016 ...... 103 Contents Example 3.6: Balance Sheet—Novo Nordisk Annual Report 2016 ...... 104 Example 3.7: Statement of Cash Flows—Sasol Integrated Report 2017 ...... 105 Example 3.8: Statement of Change in Stockholders’ Equity—Liberty Holdings Integrated Report 2015 ...... 106 Example 3.9: Independent Auditor’s Report—Liberty Holdings Integrated Report 2015 ...... 107 Example 3.10: Independent Auditor’s Report—AkzoNobel Report 2016 ...... 107 Example 3.11: Segment Reporting—Liberty Holdings Integrated Report 2015 ...108 Example 3.12: Segment Reporting—BASF 2017 Integrated Report...... 108 Example 3.13: Results per Share—Santova Limited 2016 Annual Integrated Report ...... 109 Example 3.14: Tax Statement—Telefonica Integrated Report 2016 ...... 110 Example 3.15: Consolidated Sustainability Statements—AkzoNobel Report 2016 ...... 111 Example 3.16: Employee Metrics—Standard Chartered Sustainability Summary 2015...... 111 Example 3.17: Nonfinancial Summary—Westpac Group Annual Report 2016 ...... 112 Example II.1: Amazon 2017 CEO Letter to Shareholders—Excerpt ...... 127
Figures Figure 0.1: Roadmap for Integration of Environmental and Social Issues ...... 5 Figure 0.2: IFC Performance Standards ...... 7 Figure 0.3: Using the Toolkit as an Information Management and Communication System ...... 10 Figure 0.4: The Process of Stakeholder Dialogue ...... 12 Figure 1.1: Materiality: Assessing the Probability and Magnitude of Occurrence ...... 33 Figure 1.2: Climate-Related Risks, Opportunities, and Financial Impact ...... 39 Figure 1.3: The Sustainable Development Goals ...... 43 Figure 1.4: IFC’s Anticipated Impact Measurement and Monitoring Framework...... 48 Figure 2.1: The Three Lines of Defense Model ...... 79
Tables Table 0.1: Comparing the Toolkit with the Main Disclosure Frameworks and Standards ...... 8 Table 0.2: IFC Corporate Governance Matrix—How It Works...... 9 Table 0.3: Correspondence between the Modules of the Pyramid and the Toolkit ...... 10 Table 0.4: IFC Corporate Governance Matrix—Disclosure and Transparency ...... 13 Table 1.1: Model Structure of an Annual Report ...... 15 Table 1.2: Core Environmental and Social Issues ...... 37 Table 2.1: IFC Corporate Governance Matrix—Commitment to Environmental, Social, and Governance (Leadership and Culture) ...... 57
vi Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency vii Table 2.2: IFC Corporate Governance Matrix—Structure and Functioning of the Board of Directors ...... 59 Table 2.3: IFC Corporate Governance Matrix—Control Environment
Contents (Internal Control System, Internal Audit Function, Risk Governance and Compliance) ...... 69 Table 2.4: IFC Corporate Governance Matrix—Treatment of Minority Shareholders ...... 82 Table 2.5: IFC Corporate Governance Matrix—Governance of Stakeholder Engagement ...... 93 Table 3.1: Core Sustainability Indicators—IFC Performance Standards ...... 113 Table 3.2: Model Governance Indicators ...... 116 Table 3.3: Most Commonly Reported E&S Metrics ...... 117 Table 3.4: Link between ESG Metrics and SDGs Indicators ...... 120 Table C.1: Internal Resources for the Annual Report, and Key Questions ...... 133
viii Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Foreword
Foreword The UN Sustainable Development Goals have brought To promote high standards in disclosure and trans- the global community together in a quest to end parency across emerging capital markets, IFC devel- poverty, ght inequality, and tackle climate change by oped this Disclosure and Transparency Toolkit. It is 2030. Reaching these goals across emerging markets designed to guide companies in the preparation of requires a $4 trillion annual investment—a sum far be- comprehensive and best-in-class annual reports that yond the means of governments and development part- are appropriate for their size and organizational ners. Capital markets in developing countries—many complexity and adapted to the context of opera- still in their infancy—hold great potential to channel tion—to provide information that investors and other private capital toward priority development needs. stakeholders can use to make informed decisions.
Strong local capital markets are essential for a thriving What is new and different about this Toolkit is that private sector. They help people and businesses obtain it re ects today’s investors’ views of what drives long-term nancing. They encourage the kind of corporate value. These factors include the impact entrepreneurial risk-taking that fosters innovation and of environmental and social risks on a company’s accelerates job creation and economic growth. They strategy, governance, and performance. They affect can shield entire economies against potentially desta- how key opportunities and risks are managed as part bilizing uctuations in international nancial markets. of the company’s corporate governance.
IFC plays a vital role in strengthening local capital The Toolkit is based on IFC’s comprehensive new markets, introducing innovative tools to unlock integrated approach to assessing environmental, social, private sector funds for an array of important devel- and governance practices in the context of its own opment goals and to set standards. We are often the investments in emerging markets. In addition to rst international nongovernment issuer of local- applying this approach in evaluating its prospective currency bonds in developing countries, helping estab- investee companies, IFC incorporates it into its advi- lish the conditions that enable local markets to grow sory work with regulators and stock exchanges for and thrive. We help developing countries draft policies application to listings, reporting requirements, and and regulations that build stronger capital markets. disclosure obligations, among others.
Equally important, well-functioning markets require We hope this Toolkit will help build momentum across trust. Investors need to know that markets are reliable capital markets—matching responsible companies in and credible, and that the information disclosed— emerging markets with institutional investors. Stock which they base their trading decisions on—is accu- exchanges, regulators, and development organiza- rate, complete, and veri ed. Disclosure of accessible, tions are our key partners in advancing standards for reliable, timely, and useful information contributes increased disclosure and transparency to help build to liquid and ef cient markets by enabling investors investor trust and con dence in emerging markets. to make decisions based on material information. Adhering to high standards of disclosure and trans- On behalf of IFC, I thank Luxembourg’s Ministry of parency can mitigate some inherent risk of investing Finance for support that made this Toolkit possible. in emerging and frontier markets, including weaker public institutions and governance, heightened social Ethiopis Tafara and environmental risk, and smaller companies with IFC Vice President and General Counsel, Legal, controlling shareholders. Compliance Risk and Sustainability
viii Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency ix Foreword
Acknowledgments In April 2016, the IFC Corporate Governance Group Project team: Ralitza Germanova, Jerome Lavigne- called together 50 representatives of international Delville, Charles Can eld, and Atiyah Curmally. organizations and development nance institutions, Special thanks to Jerome Lavigne-Delville, the author reporting frameworks, investors, asset managers, insti- of this publication. The team would like to thank tutes of directors and corporate governance associa- particularly the following IFC staff members for their tions, stock exchanges and regulators, subject-matter valuable contributions: Amira El Saeed Agag, Stefanus experts in the eld, and members of the IFC Corporate Handoyo, Boris Janjalia, Zhaowen (Maggie) Lin, Anh Governance Private Sector Advisory Group. Nguyet Thi Nguyen, and Chinyere Almona. These participants explored key changes in interna- A special acknowledgment of the contributions of the tional corporate governance standards and codes of following people (in alphabetical order): Anar Aliyev, best practice in the wake of the recent global nancial Philip Armstrong, Francisco Avendano, Susan Blesener, crisis and how these changes have helped draw cor- Bistra Boeva, Ivan Choi, Kathlyn Collins, George porate attention to sustainability issues and enhanced Dallas, John Graham, Sunita Kikeri, Monika Kumar, disclosure and transparency. This publication arises Mary Jo Larson, Irina Likhachova, So e Michaelsen, from the issues and information from these discussions Anthony Miller, Anne Molyneux, Peter Montagnon, and builds on previous work and research. Abhijit Pai, Jean Pesme, Neil Puddicombe, David The project team would like to thank those who Robinett, Debra Sequeira, and Erik Vermeulen. attended the April 2016 gathering. We are grateful We also want to acknowledge (in alphabetical order) to everyone who participated in the Practice Group the following participants from the Practice Group meeting on Corporate Governance Codes, Standards, meeting in Vienna for their assistance with reviewing Disclosure, and Transparency and provided us with the Toolkit draft: Fiorella Amorrortu, Rosario insights and information. All responses were instru- Carmela Austria, Swapan Kumar Bala, Willem mental in developing the rationale and key thinking Bartels, Pietro Bertazzi, Andrei Busuioc, Mark points for this publication. Eckstein, Hebatallah El Sera , Jaime Gornsztejn, In January 2018, in a joint event with the UN Sus- Tiffany Grabski, Rudina Nallbani Hoxha, Vladimir tainable Stock Exchanges Initiative hosted by London Hrle, Qendresa Isu , Ann Marie Jourdan, Joseph Stock Exchange, the Toolkit was launched to represen- Kania, Cristina Tébar Less, Irina Likhachova, Ian tatives of 15 stock exchanges from around the world, Mackintosh, Tarfa M. C. Makyur, Miguel Marques, investors, asset managers, and development partners, Piotr A. Mazurkiewicz, Jean-Baptiste Morel, Louis as a tool for lling in the environmental, social, and Philippe Mousseau, Paul Muthaura, Valeria Piani, governance information gap. Gorazd Podbevsek, Oleksandr Panchenko, Ansie Ramalho, James Christopher Razook, Ting Ting Ru, This publication was developed by a team led by Vladislava Ryabota, David Shammai, Patricio Rojas Ralitza Germanova, in cooperation with Charles Sharovsky, Christian Strenger, Michael Tang, Jorge Can eld, as part of the IFC Corporate Governance Villegas, Marco Antonio Zaldivar, Bashar Abu Zarour, Group. and Madina Zhanuzakova. Thanks to Shannon Roe for editing support and to Wendy Kelly for designing the publication.
x Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Executive Summary
Executive Summary IFC is releasing this Toolkit as part of a broader effort It provides guidance on the disclosure of material in- to enhance disclosure and transparency in countries formation—about a company’s strategy, governance, and companies we work with, either as investors or and performance—that will be useful in making advisers. Disclosure and transparency have become investment decisions. increasingly relevant for IFC as the eld of corporate governance has expanded from purely board-related The Toolkit often goes beyond legal requirements matters to include engagement with various external for disclosure and transparency, looking to the next stakeholders. frontier of reporting on environmental, social, and governance (ESG) issues and making sure it is inte- The Toolkit and IFC’s efforts to promote corporate grated into the company’s strategy, culture, and risk disclosure and transparency more broadly are part management, and that the information is subject to of IFC 3.0—a new strategy that focuses on creating independent veri cation and assurance. markets and mobilizing private capital, especially in low-income countries and FCS (fragile and con ict Incorporating International Best Practices situations). The Toolkit incorporates international best practices and standards in corporate governance, environmen- The Toolkit builds on IFC’s Access to Information tal and social management systems, and disclosure Policy, which seeks to provide accurate and timely and transparency, including the following: information regarding IFC investment and advisory services activities to its clients, partners, and stake- • The IFC Corporate Governance Progression 1 holders. Matrix for Listed Companies (Integrating Environmental, Social, and Corporate Focus on Building Markets in Emerging Economies Governance Issues)—referred to herein as the In developing countries, economic and social devel- IFC Corporate Governance Matrix, or the opment is often limited by insuf cient ow of private Matrix capital. In part, this is due to a heightened perception • The IFC Performance Standards of risk in these countries, compounded by a lack of • Global frameworks for sustainability information or transparency or limited price discovery. management and disclosure
This Toolkit is designed to help companies in emerg- Flexible Framework ing economies access global capital markets, and to The practice of disclosure and transparency is not a help global investors better price the risk of investing compliance exercise. Rather, it is a journey that takes in these markets. It is also designed to help regula- into account a company’s size and organizational tors and market authorities in developing countries complexity. The Toolkit’s modular approach makes improve the local market infrastructure. it applicable to a range of company sizes, organiza- tional complexity, and operating contexts. A Comprehensive and Integrated Approach to Corporate Reporting For example, smaller and family-owned businesses The Toolkit’s purpose is to guide companies in the can initially focus on the following sections: preparation of integrated annual reports for investors. Strategic Objectives, Risk Analysis and Response,
1 Use of the Matrix is not limited to listed companies. Any organization—listed or not, and across sectors—can apply its concepts. For greater detail, see Appendix D of this Toolkit.
x Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency xi Structure and Functioning of the Board of Direc- The Toolkit also provides general Reporting Guidance tors, and Financial Statements. Publicly listed and and considerations for preparing and presenting the global companies should consider more compre- information—including information quality, materiality, hensive reports, with information covered in the and speci city. sections on Sustainability Governance, Stakeholder Engagement, and Sustainability Statements. Primary Users of the Toolkit The Toolkit is designed to guide emerging-markets Toolkit Structure companies in the preparation of integrated annual
Executive SummaryExecutive At its core, the Toolkit provides a Disclosure reports that include strategic, governance, and per- Framework with detailed guidance, best practices, formance information and that are commensurate and examples in the three areas of an integrated with their size and organizational complexity and annual report: Strategy, Corporate Governance, and adapted to their context of operation. It can also be Performance. used by developed-markets companies looking to create sophisticated annual reports that integrate economic, social, and environmental factors.
Abbreviations
BBG Broadcasting Board of Governors CDP Climate Disclosure Project CDSB Climate Disclosure Standards Board CSO civil society organization DJSI Dow Jones Sustainability Index German Association for Financial Analysis and Asset Management DVFA (Deutsche Vereinigung für Finanzanalyse und Anlagenberatung) E&S environmental and social ECM External Communications Mechanism EFFAS European Federation of Financial Analysts Societies ESG environmental, social, and governance ESMS Environmental and Social Management System FASB Financial Accounting Standards Board FSB Financial Stability Board FRC Financial Reporting Council Group of 20 countries in an international forum for the G20 governments and central bank governors GAAP Generally Accepted Accounting Principles GHG greenhouse gas GRI Global Reporting Initiative IAS International Accounting Standard, a standard under IFRS IASB International Accounting Standards Board ICGN International Corporate Governance Network IFRS International Financial Reporting Standards IIRC International Integrated Reporting Council
xii Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Introduction
0. Introduction The business case for disclosure and transparency is is a continuation of company performance and is the clear: Disclosure and transparency ll information mechanism by which performance is re ected in a gaps for customers, investors, and employees and, company’s nancial valuation. as a result, can have a positive effect on a company’s revenues or its access to human capital or nancial Some studies have found proof of that relationship capital. Their use also promotes more ef cient capital in individual companies, regardless of the level of markets by ensuring “fair disclosure” to all investors disclosure and transparency in the rest of the market. and preventing asymmetric information. These bene- However, there is an added bene t to individual ts are ampli ed when companies take into account companies when the level of transparency increases wider sustainability concerns, such as environmental, across the market. Indeed, information asymmetry social, and governance issues, and disclose how they can lead to adverse selection, where less informed manage material environmental and social issues and investors either require additional return or exit the stakeholder concerns. market, which results in higher cost of capital or lower levels of liquidity for individual companies. 0.1 Benefits of Disclosure and Academic research points to the positive effect of Transparency transparency on the liquidity of capital markets and A growing body of academic research con rms the the associated bene t that a rm in that market can positive results of enhanced disclosure by companies. receive in the form of cheaper cost of capital (Garay Studies in developed markets—covering nancial et al. 2013). and non nancial disclosure (including corporate At the same time, academic research also suggests governance)—have found strong correlations between a positive, differentiating effect of disclosure and improved disclosure and 1) lower cost of capital, 2) transparency in markets or for topics where the better access to nance, and 3) increased company val- prevailing level of disclosure is low. For example, a uation.2 Additional bene ts include improved capital recent study of rms in the ve largest markets in allocation, enhanced earnings and growth of earnings, Latin America shows a statistically signi cant and and more liquidity in the market for the securities of positive correlation between the level of disclosure on the company. More recent research has found a simi- the one hand and Tobin’s Q (ratio of book to market lar correlation in emerging markets.3 value) and return on capital on the other. This is Academic research often points to selection bias (or especially true in areas of reporting—such as boards adverse selection) of any studies on the link between of directors, risk management, and responsibility disclosure and performance, since companies that to customers, suppliers, and shareholders—where perform better tend to report more. The result is a disclosure is lacking in these markets (Davila and notion that the practice of disclosure and transparency Vasquez 2015).
2 For studies on the United States and other developed economies, see Khurana, Pereira, and Martin (2006); Lang and Lund- holm (1993); Leuz and Verrecchia (2000); and the papers summarized in Bushman and Smith (2003) and Leuz and Wysocki (2008). 3 For studies that include emerging markets, see Durnev and Kim (2005); Klapper and Love (2004); Leuz, Lins, and Warnock (2009); Francis, Khurana, and Pereira (2005); and Aggarwal, Klapper, and Wysocki (2005).
xii Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 1 0.1.1. Benefits of ESG Management and emerging markets (see 0.1.3. Drivers of ESG Report- Disclosure ing, below. Academic studies also have found a strong link between ESG reporting and nancial performance: 0.1.2. Benefits of Integrated ESG Disclosure Companies with effective management and disclosure When integrated with strategic and nancial reporting, Introduction of sustainability issues tend to have lower costs of cap- ESG information can bring both internal and external 5 ital, attain higher valuations, and deliver better returns bene ts. The following are some of the internal bene ts: to shareholders.4 A recent Harvard Business School • Understanding value creation over the short, study differentiated between material and immaterial medium, and long term; sustainability factors and found that rms with good performance on material sustainability issues—using • Improving internal data quality and decision the Sustainability Accounting Standards Board (SASB) making; framework—and low performance on immaterial issues • Identifying gaps in ESG practices and improving generated an annualized alpha (performance above a risk management; market index or benchmark) of 6.01 percent (Kahn, • Raising awareness and educating board direc- Serafeim, and Yoon 2015). This was also found to be tors about new or emerging material risks, and true in emerging markets, where a recent study found improving collaboration with the management. that ESG factors helped investors achieve signi cant outperformance (Cambridge Associates 2016). For investors and external stakeholders, integrated ESG reporting helps provide context and give a broader This link was con rmed in a subsequent study of 1,333 view of strategy and performance and can provide U.S. companies representing 56 percent of U.S. market con dence in the long-term viability of the business capitalization, excluding nancials and utilities, for model. Some non nancial dimensions of performance, 2007–2014. The study found that disclosure of material such as employee turnover or product quality, may even ESG information (de ned by SASB) results in stock be thought of as pre- nancial or leading indicators of prices that re ect more rm-speci c information and long-term nancial performance. (See Box 0.1.) thereby lower synchronicity (or correlation) with mar- ket and industry returns. This provides additional evi- Integrated ESG reporting can also help external stake- dence of the link between stock prices and the effective holders and investors assess how a company is creating integration of ESG in business operations and strategy value over time and whether it is making a positive (Grewal, Hauptmann, and Serafeim 2017). contribution to society, a factor that is increasingly important, given the rise of impact investing6 and the Meaningful ESG reporting can provide insights into increased perception that companies should participate the quality of a company’s management, including its in economic and social development and the realiza- ability to do the following: tion of the United Nations Sustainable Development Goals (SDGs). It provides an account of a company’s • Understand key stakeholder priorities; total contribution beyond economic and nancial—its • Assess risks and opportunities over different human capital, relationships, and destruction or preser- time horizons; vation of natural resources as well as its effect on other • Create and execute strategies that achieve dimensions of society’s wellbeing. multiple objectives, both nancial and non- nancial; 0.1.3. Drivers of ESG Reporting A recent study by HSBC, conducted with 1,000 com- • Manage different concerns and priorities from panies and institutional investors globally, found that a diverse set of stakeholders. the main driver for ESG disclosure is investor pressure ESG reporting can help publicly listed companies—or (83 percent), followed by international regulation (77 those contemplating a listing—comply with increasing percent) (HSBC 2017). ESG stock exchange listing requirements, especially in
4 See Dhaliwal et al. (2011); Goss and Roberts (2011); El Ghoul et al. (2010); El Ghoul et al. (2014); Khan, Serafeim, and Yoon (2015); and Deutsche Bank (2012). 5 In a survey of 66 companies that were early adopters of the IIRC’s Integrated Reporting Framework, more than 90 percent of respondents reported improvements in internal understanding of how their organizations create value—including improvements in understanding by the board (Black Sun 2014). 6 Impact investing: investments intended to generate a measurable, bene cial social or environmental impact alongside (or in lieu of) a nancial return.
2 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Introduction Box 0.1: Benefits of ESG Management factors in credit risk analysis shows that investors and credit rating agencies are ramping up efforts to consider Managing environmental, social, and governance ESG factors in credit risk analysis, mostly focused on factors can contribute to various corporate value environmental issues (PRI 2017b). drivers: • Revenue generation: However, ESG integration into nancial analysis is Innovation hindered by the low quality of ESG information. In the New consumer needs 2017 HSBC study, 56 percent of investors described Access to new markets current disclosure levels as “highly inadequate.” In its Increased customer loyalty recent survey, the CFA Institute found that the main factor limiting investors’ ability to use non nancial • Cost savings: information in investment decisions was the lack Optimizing use of natural resources (water, of appropriate quantitative ESG information (55 energy, and other inputs) in production percent), followed by the lack of comparability across Establishing partnerships and developing rms (50 percent) and the questionable data quality suppliers and lack of assurance (45 percent) (CFA 2017).
• Productivity and intellectual capital: One partial explanation is the gap between company Attracting and retaining talent performance and disclosure. The HSBC survey found Raising workforce productivity that 53 percent of companies now have an environ- • Risk mitigation: mental strategy, yet only 43 percent actively disclose Reducing exposure to environmental and it (HSBC 2017). Another explanation is a gap social risks between the perceptions of investors and companies. Impact on operational, market, nancial, A recent PwC study on investors, corporations, and and other risks ESG reporting found that only 29 percent of investors view the information the companies report as high- • Compliance with and anticipation of legal quality, while 100 percent of the companies rank requirements the same information as high-quality (PwC 2016b). • Enhancement of reputation and image Another study, by MIT Sloan School of Management, found that 75 percent of investors agree that sustain- ability performance is materially important for invest- Source: BM&F Bovespa (2016). ment decisions, compared with 60 percent of managers in publicly traded companies (Unruh et al. 2016). Investor Demand There is empirical evidence that investors value ESG Regulatory Pressure information, driving rapid growth in the demand for Regulatory and quasi-regulatory mechanisms also this information.7 According to a global survey of put pressure on companies to disclose information mainstream investment organizations, conducted by that is relevant for a growing list of stakeholders, the Said Business School at the University of Oxford including investors, customers, and employees. For and Harvard Business School, “The clear majority of example, stock listing requirements in emerging respondents (82%) suggest that they use ESG infor- markets, where capital markets represent the main mation because it is nancially material to investment driver for reporting, often include disclosure and performance” (Amel-Zadeh and Serafeim 2017). transparency and increasingly require the disclosure of sustainability information. (See Box 0.2 on the Investors want to know about ESG factors for a range next page.) of purposes, but their main objectives are risk man- agement and credit analysis. The Said/HBS study cited Adding to the regulatory pressure, the EU High-Level above found that ESG material is perceived to provide Expert Group on Sustainable Finance issued its nal information primarily about risk. Similarly, a CFA report on January 31, 2018, and included as one of (Chartered Financial Analyst) Institute survey found its key recommendations to upgrade disclosure rules that 73 percent of investors take ESG issues into ac- to make sustainability risks fully transparent, starting count in their investment analysis and decisions, mainly with climate change. The report also recommends to help manage investment risks (CFA 2017). A PRI having listing authorities promote disclosure of ESG (Principles for Responsible Investment) report on ESG information.
7 A formal analysis of the growing demand for environmental, social, and related information is provided by Eccles, Krzus, and Serafeim (2011).
2 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 3 Box 0.2: Drivers of ESG Reporting
Regulations. Increasingly, regulation at the national level requires disclosure of ESG information. For example: • India. The securities regulator requires the 500 largest listed companies to include a business re- Introduction sponsibility report in their annual nancial report, based on the National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business. The guidelines encourage disclo- sure of amounts spent on community programs, stakeholder engagement on speci c issues, and supply-chain management. • South Africa. Since 2010, companies listed on the Johannesburg Stock Exchange (JSE) are required to produce integrated nancial and sustainability reports or explain their reasons for not complying. • Brazil. In 2011, the Brazilian stock exchange amended its sustainability reporting requirement to allow listed companies to decide whether to produce sustainability reports or integrated reporting. • Peru. In 2015, the Securities Market Regulator issued a resolution requiring public companies to produce an ESG report together with their annual report. • European Union. An EU directive on disclosure of non nancial and diversity information (2014/95/ EU) requires large companies (with more than 500 employees in the EU) to disclose non nancial information, including policies, main risks, and outcomes relating to environmental, social, and employee matters, respect for human rights, anticorruption and bribery issues, and diversity on the board. Corporate governance codes. An increasing number of countries have adopted corporate governance codes that often include speci c provisions on the management and public reporting of sustainability (Bra- zil, Kenya, Malaysia, and South Africa, among others). Stewardship codes. An emerging practice among institutional investors in many countries, including the United Kingdom and the United States, is to adopt stewardship codes that set guidelines for proxy voting and engagement, and for investor expectations about governance practices. Stock exchanges. Stock exchanges in many countries either require or actively encourage sustainability reporting. For example, stock exchanges in Brazil, Malaysia, and South Africa have adopted a “comply or explain” approach, requiring sustainability or integrated reporting or an explanation for nondisclosure. The BVL (Lima Stock Exchange) has issued detailed guidance for listed companies on what ESG informa- tion to report and how to report it. State-owned enterprises. Sustainability management and reporting requirements for state-owned enter- prises are now in place in more than a dozen counties, including China, Ecuador, Indonesia, and Russia. Supply chains. As large, multinational companies are under increasing pressure to report and to manage supply-chain risks, they are asking or requiring their main suppliers to also report on sustainability poli- cies and performance.
Source: IFC.
0.2. Comprehensive and Integrated strategy, risk pro le, and performance, and how key Approach to Corporate Reporting opportunities and risks are managed as part of the As part of its effort to further disclosure and transpar- company’s corporate governance. ency, IFC promotes a comprehensive and integrated 0.2.1. Sustainability Integrated into approach to corporate reporting—one that supports Strategic, Governance, and Performance the analysis of modern drivers of corporate value that Reporting are not always captured in typical annual reports. Sustainability represents both opportunities and risks for companies, and it should be integrated into all major This approach presents strategic and corporate gov- sections of an annual report, including the following: ernance information together with nancial results— providing investors with a better understanding of • Sustainability strategy. In the strategy section how the company is likely to perform in the future. of the annual report, companies should present It also calls for disclosure of the impact that environ- an overview of key sustainability issues and their mental and social issues may have on the company’s method for selecting those issues.
4 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Introduction • Sustainability governance. Management and • Sustainability performance. In the performance governance processes related to sustainability section of the annual report, companies should issues—whether considered strategic objectives report on their performance in managing the or risks—should be disclosed in the governance sustainability issues they have identi ed as ma- section. terial. This includes a discussion of performance and key performance indicators (KPIs) in the performance report as well as the disclosure of quantitative, comparable, and consistent sustain- Model Structure of Annual Report ability metrics in the sustainability statements. 1. Strategy Figure 0.1 provides a roadmap for integration of en- • Business Model and Environment vironmental and social (E&S) issues into a company’s • Strategic Objectives • Risk Analysis and Response strategy. • Sustainability Opportunities and Risks The integration of a company’s reporting on strategy, • Introducing Key Performance governance, and performance re ects a long history Indicators of innovation in corporate reporting. It brings togeth- 2. Corporate Governance er reports that are typically separate, and combines • Leadership and Culture: Commitment disclosures that are mandatory in most markets (such to ESG as nancial statements and elements of corporate • Structure and Functioning of the Board governance) with disclosures that are voluntary in most of Directors markets (such as sustainability). • Control Environment This approach is in line with a recent international • Treatment of Minority Shareholders • Governance of Stakeholder trend toward integrated reporting, which expands the scope of traditional nancial reports and integrates Engagement non nancial information about such intangible factors as environmental, social, and governance consider- 3. Financial Position and Performance ations. Various practical applications of the concept • Performance Report have been proposed, including the Integrated Report- • Financial Statements ing (
Figure 0.1: Roadmap for Integration of Environmental and Social Issues
Create an E&S Strategy
Source: IFC.
4 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 5 The Toolkit promotes a version of integrated reporting The IFC Corporate Governance Matrix that combines the most material elements of informa- The Toolkit incorporates the IFC Corporate Gov- tion currently contained in separate reports—such as ernance Matrix, a tool to evaluate and improve the nancial, management commentary, governance and corporate governance of a company—including the remuneration, and sustainability—into a single coherent governance of key environmental and social policies Introduction document. and procedures—to identify, reduce, and manage risk. The Matrix does not include all of the requirements of The Toolkit builds on international best practices and the IFC Performance Standards for Environmental and promotes a set of principles for corporate disclosure Social Sustainability, but it does include the govern- and transparency that are particularly relevant for ance attributes required to manage these risks. emerging markets. The Matrix updates the IFC Corporate Governance Matrix (2007) to include key corporate governance Principles of Corporate Disclosure and considerations following the nancial crisis and Transparency in Emerging Markets integrates environmental and social issues consis- • Connected. Links strategic, governance, and nancial tent with IFC’s Policy on Environmental and Social information Sustainability. It expands the de nition of stakeholders to include Affected Communities, contracted workers, • Integrated. Sustainability addressed as part of the primary-supply-chain workers, suppliers and contrac- company’s core management and governance functions tors, and local and international nongovernmental • Open. Promotes a culture of openness and transparency organizations (NGOs) and civil society organizations within and outside the organization, based on dialogues (CSOs). Use of this tool can help a company con- and feedback loops and a dynamic information rm its commitment to demonstrate leadership and management system promote good environmental, social, and corporate • Inclusive. Supports dialogue and mutual learning governance practices throughout the company. between the company and its stakeholders The Matrix is based on the IFC Corporate Governance • Material. Relevant, based on the context of operation, Methodology, which de nes corporate governance especially in emerging markets as a set of structures and processes for the direction • Credible/reliable. Robust management process for and control of companies, involving a set of relation- internal data collection and external veri cation, ships between a company’s shareholders, board, and including ESG information executive bodies, for the purpose of creating long- term shareholder and stakeholder value. The Matrix represents a summary of key ESG provisions along six 0.2.2. Incorporating ESG Good Practices and parameters:8 Global Standards Disclosure guidance on ESG issues is based in large part • Commitment to Environmental, Social, and on IFC’s own Corporate Governance Matrix and Per- Governance (Leadership and Culture) formance Standards as well as other globally recognized • Structure and Functioning of the Board of standards, such as the IIRC’s
8 The IFC Corporate Governance Matrix is found in Appendix D.
6 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Table 0.1 on the next page compares the Toolkit with Introduction How the IFC Corporate Governence Matrix is Used global frameworks and standards that are widely used in the Toolkit and most comprehensive, focusing on differences in Relevant excerpts of the Corporate Governance Matrix are objectives, audiences, and the assessment of what is replicated at the beginning of each section on corporate material. (Appendix E provides a more detailed, but governance to suggest how companies can manage and not exhaustive, list of major frameworks for sustain- disclose ESG practices with increasing levels of sophistication. ability management and disclosure.)
The Toolkit and model annual report do not include a 0.2.3. Progressive Levels of ESG Performance section on the fourth parameter of the Matrix: Disclosure and Reporting and Transparency. Instead, these practices are integrated The IFC Corporate Governance Matrix is organized by throughout the Toolkit and its recommendations. four levels of company maturity and complexity and emphasizes the importance placed on ongoing improve- ments in a company’s governance practices, graduating from basic to intermediate to advanced: IFC Performance Standards The Toolkit provides guidance for E&S disclosures n Level 1. Basic ESG practices that the company that are consistent with IFC’s Environmental and should develop and adopt. Level 1 likely Social Performance Standards (2012),9 which de- re ects newly formed or young compa- ne IFC clients’ responsibilities for managing their nies or those developing an ESG agenda environmental and social risks. The Performance from the beginning. Standards were developed as a risk management Level 2. Intermediate ESG practices, incorporating framework and have become a global benchmark for n basic steps to strengthen ESG within the project nance. (See Figure 0.2.) organization, which re ects a culture of Global Frameworks for Sustainability Management continuous improvement. and Disclosure Level 3. Good international practices, including The Toolkit is consistent with the major global sus- n incorporating intermediate and other tainability frameworks and provides a exible tool good ESG practices that indicate that the that can be used to integrate a variety of sustainability organization has a track record of mature management and reporting best practices. and established ESG practices.
Figure 0.2: IFC Performance Standards n Level 4. Leadership, international best practic- es, indicating that the organization has achieved the preceding three levels of ESG maturity and conforms to the recognized international practices.
Table 0.2 on page 9 provides a general illustration of how the progression works. (For the complete IFC Corporate Governance Matrix, see Appendix D.)
Modular Use of the Toolkit In addition to providing reporting guidance for differ- ent levels of performance, the Toolkit can be used in Source: IFC. modules to implement different depths of reporting, based on the company’s size and organizational RESOURCE: IFC’s Environmental and Social Management System complexity. Figure 0.3 on page 10 describes the Implementation Handbook. different elements of an integrated strategy, governance, and performance report and suggests how different modules can be used, depending on company size and sophistication.
9 IFC Performance Standards: http://www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Sustainability-At-IFC/Policies-Standards/ Performance-Standards.
6 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 7 Table 0.1 Comparing the Toolkit with the Main Disclosure Frameworks and Standards
IIRC GRI CDSB SASB TFCD IFRS/IASB IFC DT Framework
Framework Standards Framework Standards Guidelines Standards Framework
Introduction Type of Guidance
Application Voluntary Voluntary Voluntary Voluntary Voluntary Compulsory Voluntary
Coverage Global Global Global U.S., can be Global Global Global, focus applicable on emerging globally markets
Objective Help organiza- Enable all or- Help Help public Enable Provide Improve capital tions explain to ganizations— organizations corporations stakeholders financial flows to emerg- providers of regardless of prepare and disclose material to understand information ing markets by financial capital size, sector, or present sustainability the financial that is useful reducing actual how they create location— environmental information in system’s in making and perceived value over time to report the information in mandatory SEC exposures investment risk sustainability mainstream filings to climate- decisions information reports related risks
that matters
Topics Value creation Reporting Environmental Environment, Climate- Financial Strategy, over time; use entity’s information & social capital, related risks, accounting governance, and of or effects economic, natural capital human capital, opportunities, performance on all capitals: environmen- business model financial financial, manu- tal, and social & innovation, impacts, factured, activities and leadership & and scenario intellectual, impacts governance analysis human, social & relationship, and natural
Target Providers of Multiple Investors Investors Investors Current/ All stakeholders Audience financial capital stakeholders potential capi- addressed; tal providers, investors lenders prioritized
Materiality A matter is “Material Allow inves- A fact is mate- Public Information is A combination material if it aspects” are tors to see rial if “there is companies’ material if of financial could substan- those that major trends a substantial legal obliga- omitting it or materiality and tively affect the reflect the and significant likelihood” that tion to disclose misstating it sustainability organization’s organization’s climate- a “reasonable information in could influence material ability to create significant change events investor” their financial decisions that value in the economic, en- that affect or would view its filings— the primary short, medium, vironmental, have ability to omission or including users of general- or long term and social im- affect financial misstatement material purpose pacts; or that condition as “having climate- financial reports substantively and/or ability significantly related make on the influence the to achieve altered the information basis of assessments strategy total mix of financial and decisions information” information of stakeholders about a specific reporting entity
8 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Introduction Table 0.2: IFC Corporate Governance Matrix—How It Works
Source: IFC.
Toolkit and IFC Corporate Governance Matrix Terminology Progression Levels: The Toolkit provides guidance for companies to report ESG practices that are considered good international practices, in line with Levels 1–3 of the Matrix. When applicable, the Toolkit also provides guidance on practices that constitute leadership, according to Level 4 of the Matrix. The following terminology is used in the Toolkit: Common Practices: Refers to the Matrix Level 1 (Basic Practices) and Level 2 (Intermediate Practices). Good Practices: Refers to the Matrix Level 3 (Good International Practices). Leadership Practices: Refers to Matrix Level 4 (Leadership Practices). Best Practices: Refers to other good practices, outside of the IFC Corporate Governance Matrix.
For example, small, family-owned companies with basic and people in the organization. As Figure 0.3 shows, it management and ownership can report at the basic follows the typical internal organization of a company, level, focusing on the business model and environmen- in which different departments collect, analyze, and tal and strategic objectives, the structure and function- provide the information for relevant components. At ing of the board of directors, and nancial statements. the top, the executive management and the board of A midsize company with more complex management directors connect the dots and provide the narrative and ownership could also focus on risk analysis and linking the company’s strategy and governance to its management, report on its control environment, and nancial and sustainability performance. produce audited nancial reports. At the top end of the spectrum, publicly traded companies that are part of The Toolkit can also be used as an external informa- the global value chain can demonstrate leadership in tion management system or communication tool for ESG by following the more sophisticated modules of companies to build strong relationships and engage- the Toolkit, including the integration of sustainability ment with stakeholders. The pyramid re ects the most into strategy, governance, and performance reporting. important components of an integrated ESG report and follows progressive levels of disclosure, from basic to Use of the Toolkit as an Information Management intermediate and good practices, and culminating with and Communication System ESG Leadership. The pyramid also builds on a two- The three pillars of the Toolkit disclosure framework— way stream of information, where material stakeholder strategy, governance, and performance—form an priorities inform the company’s strategy, while proper integrated pyramid structure, illustrated in Figure 0.3 disclosure creates a company culture of openness and on page 10. This pyramid shows how the Toolkit can transparency that encourages ongoing constructive and be used as an internal as well as external management dynamic dialogue with all stakeholders and mutual and communication system. learning both inside and outside the company.
The Toolkit can function as a dynamic internal infor- Note: Modules of the pyramid correspond exactly to the mation management system emphasizing the impor- different sections of the Toolkit’s Disclosure Framework tance of ongoing collaboration, communication, and (Part I). Table 0.3 on page 10 provides a correspondence feedback loops among different departments, functions, between the modules of the pyramid and the Toolkit.
8 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 9 Figure 0.3: Using the Toolkit as an Information Management and Communication System
STAKEHOLDERS Introduction
VALUE- CREATION Communication Dynamics NARRATIVE Progressive Levels of Performance and Disclosure “Connecting the Dots”
LEVEL : E S Risks Governance 4 & & Sustainability LEADERSHIP Opportunities of Stakeholder Statements E&S KPIs Engagement
LEVEL 3: GOOD Key Performance Treatment of Performance INTERNATIONAL Indicators Minority Shareholders Report PRACTICE
LEVEL 2: Ongoing Stakeholder Dialogue INTERMEDIATE Risk Analysis Response Control Environment Audited Financials PRACTICE
LEVEL 1: BASIC PRACTICES Business Model & Environment Commitment to ESG, Structure & Financial Statements Strategic Objectives Functioningof the Board of Directors
STRATEGY GOVERNANCE PERFORMANCE
Internal Feedback: Management and Board
Note: The progressive levels of performance and disclosure are cumulative, whereby each level also integrates practices of the preceding levels. Source: IFC.
Table 0.3: Correspondence between the Modules of the Pyramid and the Toolkit
Pyramid Sections Toolkit Sections (page #) STRATEGY (page 18)
E&S Risks & Opportunities, E&S KPIs Section 1.4 and 1.2 (pages 26 and 22) Key Performance Indicators (KPIs) Section 1.5 and 1.2 (pages 49 and 22)
Risk Analysis & Response Section 1.3 (page 24) Business Model & Environment; Strategic Objectives Section 1.1 and 1.2 (pages 18 and 22) GOVERNANCE (page 55) Governance of Stakeholder Engagement Section 2.5 (page 92) Treatment of Minority Shareholders Section 2.4 (page 81) Control Environment Section 2.3 (page 68)
Commitment to ESG, Structure & Functioning of the Board of Directors Section 2.1 and 2.2 (pages 55 and 58) PERFORMANCE (page 97) Sustainability Statements Section 3.3 (page 109) Performance Report Section 3.1 (page 97) Audited Financials Section 3.2 (page 102) Financial Statements Section 3.2 (page 102)
Source: IFC.
10 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Introduction 11
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit
—pro- Matrix Governance IFC Corporate vides four levels of performance that can be where rele- described in the annual report, supporting a exible and progressive vant, framework that accommodates companies of different sizes and sophistication. Integration of sustainability—describes how Integration sustainability information can be integrated into the main sections of the annual report, where relevant. Content elements—suggests elements to be included in the report and provides guidance on how to report.
• • • Disclosure Framework (Part I) is the core of (Part Framework Disclosure In this context, it is particularly important for companies important particularly it is context, In this its stakeholders with open communication to have and of to coordinate the interests a mechanism communication Open interests. various stakeholders of informationa one-way dissemination is not just or from the to another, of the company from one part notably investors; most external actors, company to dialogue and a process ofit is an ongoing stakeholder trans- which supports an open and learning, “mutual” engagement, of involvement, parent company culture inside and outside the organiza- and connectivity both page 12.) on (See Figure 0.4. tion. and Transparency It provides detailed guidance for the Toolkit. the , three main parts of the annual report: Strategy For each . and Performance , Governance Corporate provides the Toolkit of those major content areas the following: IFC Corporate Governance Matrix on Disclosure IFC Corporate Governance of the Matrix—on disclosureThe fourth dimension further guidance onand transparency—provides 0.4 on page 13 Table different levels of reporting. andpresents an excerpt of the Matrix on disclosure transparency. 0.2.5. Toolkit Structure The
Beyond the Balance Sheet | Beyond
The guidance in the Toolkit re ects globally accepted standards of environmental, social, and corporate social, re ects globally accepted standards of environmental, Toolkit The guidance in the some standards may apply differently in different places around the world, However, governance practices. practices for example, This includes, based on local corporate culture and corporate governance practices. on employees’ ethnicinvolving the board structure and the de nition of director independence or reporting composition in countries with tense ethnic relations. disclosure guidance rather than its speci c companies should follow the spirit of the In these situations, the company could discuss which areas are question- example, for For board independence, prescriptions. a company could report on For ethnic diversity, and how it chooses to address them. able for independence, efforts to promote inclusion of employees of all ethnic backgrounds. Global versus Local Practices Global versus sustainable, long-term value creation and pro tability. value creation and pro tability. long-term sustainable, A of this Appendix As described in Section 1.4 and de ning the materiality of environmental and Toolkit, outward social issues is based in part on a company’s including its impacts on the environment and society, IFC Performance internal and external stakeholders. and Management of Envi- Assessment Standard 1 on provides thatronmental and Social Risks and Impacts an effective Environmental and Social Management engagement, System (ESMS) should include stakeholder external communication and grievance mechanisms, Affected Communities. and ongoing reporting to is also anGovernance of stakeholder engagement Companies today operate in an environment where today operate in an Companies stakeholders, is affected by numerous their business high degree of loyalty, Building a not just shareholders. stakeholders mutual trust with key and cooperation, engage- and dynamic constructive, through ongoing, have a signi cant impact on thement and dialogue can of the company. future performance is a key to integrating sus- Stakeholder engagement and governance, strategy, tainability in the company’s performance. is a critical tool for identifyingStakeholder engagement risks and opportunities forenvironmental and social strategies that ensurethe company and developing 0.2.4.to Key Engagement—A Stakeholder Sustainability Integrating as described governance, integral part of the company’s and it is one of the six Toolkit, in Section 2.5 of this pillars of the IFC Corporate Governance Matrix. Matrix. pillars of the IFC Corporate Governance includesGovernance of stakeholder engagement stakeholder engagement policy, stakeholder mapping, Affected and and grievance mechanisms for workers Communities. Stakeholder engagement is a key outcome of an inte- grated corporate disclosure and transparency report, which should include matters that substantively in u- ence the assessments and decisions of shareholders as well as stakeholders. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 10 Part I: DisclosureIntroduction Framework 12 Beyond the BalanceSheet| Figure 0.4: TheProcess ofStakeholderDialogue Appendixes nonfinancial information. ity. Italsooffersguidanceonintegratingfinancialand including informationquality, materiality, andspecific- erations forpreparingandpresentingtheinformation, Reporting Guidance(Part II)offersadviceandconsid- For greaterdetail, seeAppendixDofthis Toolkit. 10 Source: IFC. UseoftheMatrixisnotlimitedto listedcompanies. Any organization—listedornot, andacrosssectors—canapplyitsconcepts. • • •
Sustainability Issues for Materiality Assessment Appendix A: countries. annual reportsfromarangeofcompaniesand Examples ofdisclosure—providesexcerptsfrom elements. frameworks andguidanceforrelevantcontent International standards—summarizeskey 2. 1. ance, performance, andreporting. stakeholder engagementintostrategy, govern- Interactive dialogueembedsinsightsfrom directors, investors, andotherstakeholders. The processinvolvesexecutivemanagement, How dowe dothis?
Customer surveys, assessmentsofemployee customers, regulators, employees, Affected what stakeholdersvalue. engagement areallwaystogaininsightinto engagement, focusgroups, andcommunity Insights fromkeystakeholders(e.g., IFC Toolkit IFCfor Disclosure and Transparency
cited inthe Toolkit. References forFurtherReading—includingsources Glossary 4. 3. REPEAT
and profitability. ensure sustainable, long-termvaluecreation Communities) areusedinstrategysettingto individuals throughouttheorganization. assigned tounits, departments, andspecific implement strategy, thesegoalsarethen down intoannualperformancetargets. To holders ininterimandannualreporting. gy andobjectives, isdisclosedtoallstake- Long-term strategic goals can be broken Long-term strategicgoalscanbebroken Progress, orperformanceagainstthestrate- • • • • • Used inthe Toolkit Appendix F: Annual andSustainabilityReports ability ManagementandDisclosure Appendix E:MajorFrameworksforSustain- Corporate GovernanceIssues) (Integrating Environmental, Social, and Progression MatrixforListedCompanies Appendix D:IFCCorporateGovernance Report Preparation Appendix C:InternalPlanningfor Annual on ESGManagementandDisclosure Appendix B:QuestionstheBoardShould Ask
10
Introduction
13
dent provider. dent
- indepen an by audit annual Communities. Communities.
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ESG Disclosure
holders. mat and language. and mat
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issues ESG of reporting 9. Affected to disclosed Information
6.
Periodic nonfinancial nonfinancial Periodic
8. ESG data subject to independent review. independent to subject data ESG
GRI, IIRC, SASB). IIRC, GRI,
annual report ESG information. ESG report annual
ment. international standards (e.g., (e.g., standards international
&
7. S/sustainability committee reviews reviews committee S/sustainability E
- require national minimum follows accordance with highest highest with accordance
6. Annual report includes ESG information. ESG includes report Annual 5. 4. ESG/sustainability reporting, if any, any, if reporting, ESG/sustainability Nonfinancial disclosure in in disclosure Nonfinancial
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit affiliates (ownership concentration). (ownership affiliates
Corporate Disclosure
by controlling shareholders and their their and shareholders controlling by
number of shares of all classes held held classes all of shares of number
rate and timely information on the the on information timely and rate
disclosed.
timely fashion. timely
3. - accu with provided Shareholders
4. is policy Dividend
made available online in a relevant and and relevant a in online available made
disclosed. with shareholders and stakeholders stakeholders and shareholders with
regarding information disclosure. information regarding
3. 5. Executive compensation is is compensation Executive All disclosure and communications communications and disclosure All
financial analysts are treated equally equally treated are analysts financial
statement disclosed. statement conduct. holders are disclosed. are holders ments and listing rules. Investors and and Investors rules. listing and ments
2. 3. 4. transparency Tax 2. ethics/ of code its discloses Company - share beneficial ultimate Significant - require disclosure all with Compliance the Balance Sheet | Beyond
Risk Appetite Risk Appetite
information.
quantitative and
includes both qualitative qualitative both includes
3. 1. Company discloses its risk appetite. appetite. risk its discloses Company Risk appetite disclosure disclosure appetite Risk
Financial Reporting Financial Reporting
Standards on Auditing (ISA). Auditing on Standards
accordance with International International with accordance
2. Financial statements are audited in in audited are statements Financial
equivalent.
2. Disclosure policy in place. in policy Disclosure
auditing firm. auditing Reporting Standards (IFRS) or or (IFRS) Standards Reporting
by recognized independent external external independent recognized by accordance with International Financial Financial International with accordance nonfinancial reporting and audit. and reporting nonfinancial
1. 1. 1.
Financial statements are audited audited are statements Financial Financial statements prepared in in prepared statements Financial Audit committee oversees financial and and financial oversees committee Audit
+ + +
4. Leadership 4. 1. Basic Practices Basic 1. 2. Intermediate Practices Intermediate 2. 3. Good International Practices International Good 3.
Table 0.4 0.4 Table IFC Corporate Governance Matrix—Disclosure and Transparency and Matrix—Disclosure Governance Corporate IFC IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 12 0.2.6. Users of the Toolkit Regulators and stock exchanges can use the Toolkit Companies are the primary intended users of the to design or re ne regulatory requirements related to Toolkit, especially those with the following circum- disclosure and transparency and for comparison of stances: local practices with global good practices. • Companies with separation of ownership and Others may nd the Toolkit useful, including suppliers, Introduction control, either publicly held or privately owned customers, and the media as well as academia, data but with outside investors; providers, and standard-setting organizations that • Companies based in emerging markets, or prepare guidelines on corporate reporting. foreign companies with signi cant operations in these markets; TOOLKIT STRUCTURE: Modular Use of the Toolkit • Companies looking to leverage superior ESG for Small Companies performance to increase their capital market The Toolkit’s modular approach makes it relevant for a range valuation. of company sizes and operating contexts. For example, smaller and family-owned businesses can use the sections Investors and banks can use the Toolkit and the result- that are most appropriate for their size—Strategy and Risk, ing company reports to reduce risk and support their Board Structure and Functioning, and Financial Statements— valuation and credit analyses. and then introduce other sections, such as Treatment of Minority Shareholders and Stakeholder Engagement, at a later stage of development. (For more detail on modular use of the Toolkit, see Figure 0.3, page 10 of this Toolkit).
14 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part I: Disclosure Framework
Model Structure of Annual Report 1. Strategy • Business Model and Environment • Strategic Objectives • Risk Analysis and Response • Sustainability Opportunities and Risks • Introducing Key Performance Indicators
2. Corporate Governance • Leadership and Culture: Commitment to ESG • Structure and Functioning of the Board of Directors • Control Environment • Treatment of Minority Shareholders • Governance of Stakeholder Engagement 3. Financial Position and Performance • Performance Report • Financial Statements • Sustainability Statements
Part I: Disclosure Framework Part
Part I: Disclosure Framework Part I of the Toolkit is a disclosure framework, which annual reports. Table 1.1 outlines the main content provides guidance on the different topics that com- elements of a model annual report, structured around panies should address in their communication with a company’s strategy, governance, and performance. investors and other stakeholders, including in their
Table 1.1: Model Structure of an Annual Report
STRATEGY
STRATEGY Business Model • Products and services • Customers • Business processes • Relationships, resources, and inputs Business Environment • Markets • External environment • Internal drivers Strategic Objectives • Major plans and initiatives; financing needs • Target setting • Use of KPIs for target setting
RISK Risk Analysis • Risk factors • Sustainability risks Risk Response and Mitigation
SUSTAINABILITY Assessing Sustainability Opportunities and Risks • Opportunities identification process • Risks identification process Materiality Determination of Sustainability Issues Management of Sustainability Opportunities and Risks • Core issues • Industry- and context-specific issues • Contribution to economic and social development • Context- and outcome-based reporting
(Continued on next page)
14 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 15 Part I: Disclosure Framework 16 Beyond the BalanceSheet| TABLE 1.1:ModelStructureofan Annual Report(Continuedfrompreviouspage) TO ESG COMMITMENT FUNCTIONING STRUCTURE AND BOARD ENVIRONMENT CONTROL AND COMMITTEES BOARD WORK CORPORATE GOVERNANCE
IFC Toolkit IFCfor Disclosure and Transparency
Risk Governance Internal Controls andInternal Audit Governance of Sustainability Board Evaluation Committees Work ofBoards Diversity Independence Qualification Nomination, Appointment, andSuccession Compliance withESGCodesandPolicies Description ofESGCodesandPolicies External Audit Compliance • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •
Integrating sustainability Risk oversight Risk assessmentandmanagement Risk appetite Role ofboard versus management Main activitiesandresponsibilities Role ofnominationcommittee(optional) Rights ofshareholders andotherstakeholders Board membertenure Integrating sustainability and reporting Audit committee:role anddeliberations, includingfinancialaccounting Internal audit:mainactivities,challenges,andfindings Internal controls: managementandoversight; scope Composition, qualification(aggregate), andindependence Committee mandatesandwork(types,roles) Other Age Ethnicity Gender Balance ofpower: independenceofboard chair;role ofindependentboard members Links between company andnon-independentdirectors Executive versus non-executive versus independentdirectors Director training (aggregate andindividual) Sustainability expertise Background (work,education);linkwithboard role and company strategy Non-audit work Tenure Qualifications Role Integrating sustainability Management system (whistleblowing,complianceprogram, officer incharge) (Continued onnextpage)
Part I: Disclosure Framework 17
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Significant direct shareholders shareholders direct Significant ownership or “deemed” Indirect chains and control Groups policy) succession role, (identity, shareholder Controlling Financial Operational Sustainability Statements of income Balance sheet Statement of cash flows Statement of change in stockholders’ equity Notes to financial statements Financial results Financing needs and initiatives Investments Intangibles Material changes or trends information Forward-looking Sustainability performance Board nomination and other minority shareholder rights rights nomination and other minority shareholder Board Change of control rights Voting rights Protective policy Remuneration Actual remuneration process Policy and management Details on RPTs
• • • • • • • • • • • • • • • • • • • • • • • • • • • Statement of Audited Financial Results Audited Financial Results Statement of Segment Report Disclosures Tax Dividends, and Results per Share, Issues Core Industry- and Context-Specific Issues and SDGs Contribution to Economic and Social Development Link Back to Strategy Key Performance Indicators Financial Statements Investor Relations Function Investor Stakeholder Identification and Strategy Stakeholder Commitment, Policy, and Workers Mechanisms for External Communication and Grievance Rights of Minority Shareholders Rights of Minority Remuneration Related-Party Transactions (RPTs) Communities Affected PerformanceDiscussion of Financial and Sustainability Ownership and Control Ownership
SUSTAINABILITY SUSTAINABILITY AND KPIs STATEMENTS STATEMENTS STATEMENTS FINANCIAL GOVERNANCE OFGOVERNANCE STAKEHOLDER PERFORMANCE REPORT ENGAGEMENT TREATMENT OF TREATMENT SHAREHOLDERS MINORITY MINORITY CORPORATE GOVERNANCE CORPORATE FINANCIAL POSITION AND PERFORMANCE FINANCIAL POSITION Source: IFC.Source: (Continued from previous page) from previous (Continued Report Annual of an 1.1: Model Structure TABLE IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 16 Part I: Disclosure Framework 18 Beyond the BalanceSheet| Model Structure of Annual Report 3. FinancialPositionand Performance 1. Strategy 2. Corporate Governance 2. SustainabilityStatements • FinancialStatements • Report Performance • Governance ofStakeholder • Treatment ofMinorityShareholders • Control Environment • Structure andFunctioning oftheBoard • LeadershipandCulture: Commitment • Introducing KeyPerformance • andRisks SustainabilityOpportunities • Risk Analysis andResponse • Strategic Objectives • BusinessModelandEnvironment • Indicators Engagement of Directors to ESG 1. Strategy challenges (Rumelt2011). lever increases mechanicaladvantage, goodstrategy focuses sources ofadvantage onspecific you are doingit.Justasa and“why” you are doing,but“how” Good strategy isnotjust“what” external environments inwhichtheorganization competes(Nag,Hambrick,andChen2007). behalf ofowners,basedonconsideration ofresources andanassessmentoftheinternal implementation ofthemajorgoalsandinitiatives topmanagementon takenbyacompany’s outthesegoals(Chandlercarrying 1962).Strategicmanagement involves theformulation and enterprise, andtheadoptionofcoursesactionallocationresources for necessary Strategy IFC Toolkit IFCfor Disclosure and Transparency can bedefinedasthedeterminationofbasiclong-termgoalsandobjectives ofan context andrationaleforstrategic priorities. materially affectsthebusiness model, anditprovides ment, anditsstrategy. The business environment between thecompany’s businessmodel, itsenviron - text ofitsoperations. There isadynamicrelationship what acompanydoes, howitoperates, andthecon- Investors andotherstakeholdersneedtounderstand 1.1. BusinessModelandEnvironment Critical questionsincludethefollowing: zation’s market valueandsustainability. in ordertomakeinformeddecisionsabouttheorgani- information thatinvestorsandotherstakeholdersseek and performanceindicators. Itprovidesthecritical tion onthecompany’s distinctadvantages, riskfactors, The • • • • • strategy sectionofanannualreportfocusesatten-
the business? the business? What arethekeyperformanceindicatorsfor and socialriskstakenintoconsideration? What aretheriskfactors? Are environmental How does the company create value? How doesthecompanycreatevalue? competitors? competitors? What distinguishesthiscompanyfromits What is the purpose of the company? What isthepurposeofcompany?
Part I: Disclosure Framework
1. Strategy 19
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit In Example 1.1, Gold Fields, a South African miningAfrican a South Gold Fields, 1.1, In Example inputs, model—its business explains its company, context of nancial outcomes—in the and process, information. and non nancial shows the concise on the next page Example 1.2 innovation in the for continuous business model at Chugai Pharmaceutical, drug-development process relation- key inputs, It focuses on a Japanese company. development includes drug Product and results. ships, and optimization of value in proof of value, discovery, in contribu- The process results marketing territories. care. tions to global health Bank of Commercial next page, In Example 1.3 on the business model in terms of valueCeylon describes its including based on different kinds of capital, creation, human, intellectual, network, social and manufactured, are centrally positioned Strategic advantages and natural. range of products, to focus attention on the bank’s Governance and Risk and delivery channels. services, as priorities. and Capital Management are highlighted
Beyond the Balance Sheet | Beyond
for the report to present what for the report to present Source: Gold Fields. Source: Business Environment—Gold Fields 2016 Annual ReportAnnual Fields 2016 Business Environment—Gold Example 1.1: BEST PRACTICE the company does to create value—and how it does it. create value—and how it does it. the company does to and process, steps—inputs, What are the business the genera- outcomes—that are most important for The examples below tion and preservation of value? attention ondemonstrate how three companies focus depending the advantages in their business process, and their their products and services, on the industry, challenges. 1.1.1. Business Model Business 1.1.1. - main prod company’s should describe the The report it ts in and where its customers, ucts and services, the It should describe for the industry. the value chain gen- important to the that are most business processes This can be value. or capture of preservation, eration, Also, value-creation process. stages of the different at resourc- the relationships, the report should describe es, and that are key for the business to succeed. inputs the the company is structured, It should describe how and how it engages with those in, operates it markets markets. It is IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 18 Part I: Disclosure Framework 20
Beyond the BalanceSheet| 1. Strategy Box 1.1: IIRC’s Value-Creation Process Source: ChugaiPharmaceuticalCompany. Example 1.2: BusinessModel—ChugaiPharmaceutical2016 Annual Report Source: IIRC
Part I: Disclosure Framework
1. Strategy 21 -
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit trends in the markets where the company operates. Include product prices and input operates. drivers of demand and competitors’ prices, and technology. supply, External environment: Describe the macroeco- and environmental, regulatory, legal, nomic, social factors that can materially affect the Identify industry- and context-speci c business. environmental and social issues (such as climate Acknowledge the product footprint). change, legitimate and reasonable needs and interests of stakeholders. Describe company resources, Internal drivers: and processes that can affect the or structures, Include ability to support strategy. ganization’s and productivity, internal forces driving costs, Recognize the potential effects market access.
• • Beyond the Balance Sheet | Beyond
Elaborate on the business markets: Company’s model to provide clarity on key changes and
• Reporting on the business environment provides con- strategic business model and text for the company’s It also provides a key link between strategy, objectives. careful analysis of the busi- A and performance. risk, ness environment can determine whether the company is able to create value in a sustainable manner. Guidance for reporting on the business environment: 1.1.2. Business Environment 1.1.2. Source: Commercial Bank of Ceylon. Commercial Source:
Beyond the BalanceSheet| 1. Strategy challenges totheindustry, suchasstakeholderpressure economic development. The reportalsoacknowledges drivers ofgrowth, includingagingpopulationsand global marketforprescriptiondrugsanddescribesthe drug markets. The reportprovidesforecastsforthe ronment andkeytrendsintheprescriptiongeneric pharmaceutical company, describesitsexternalenvi- In Example1.4, Astellas PharmaInc., aJapanese development ofnewproductsandservices. of majorinvestmentsandprojects, includingthe Example 1.4: BusinessEnvironment—Astellas Pharma 2016 Annual Report Source: Astellas PharmaInc. IFC Toolkit IFCfor Disclosure and Transparency of itsbusinessenvironment, performance, andfuture intends toachieveitsstrategicobjectivesinthecontext model. Itshouldalsodescribehowthecompany objectives, especiallyinthecontextofitsbusiness The reportshoulddescribethecompany’s major Strategic Objectives 1.2. innovative medicines, andbettertherapeuticsolutions. are associatedwithsound, long-terminvestments, requirements fornewdrugapprovals. Opportunities to restrainhealth-carespendingandstricterregulatory Part I: Disclosure Framework
1. Strategy 23
One approach IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Quantify, or at least suggest, an or at least suggest, Quantify, Specify who will do it. Target a speci c area for improvement. Target Speci c: Measurable: indicator of progress. Assignable: Realistic: State what results can realistically be achieved given available resources. Specify when the result can be Time-related: achieved.
• • • • • social environment risks and opportunities in the short in and opportunities risks environment social and long terms. a one-page strategy on page 25 provides Example 1.7 and sustainabilitythat links pro tability overview Limited. for Kumba Iron Ore objectives Target Setting setting are considered a proxy Objectives and target suggests BEST PRACTICE for good management. strategic objectives intothat companies translate targets or goals. speci c and measurable developed by management goals, “SMART” is to use Doran (Doran 1981): T. consultant George Beyond the Balance Sheet | Beyond
of this Toolkit.) Source: Santova Limited. Santova Source: Strategic Initiatives—Santova Limited 2016 Annual Integrated ReportAnnual Integrated Limited 2016 Initiatives—Santova Strategic Example 1.5: s, 26 page Risks, Opportunities and the medium-term to long-termExample 1.5 presents company in a logistics Santova, strategic initiatives of in the context of its key differentiators. Africa, South strategicExample 1.6 on the next page lists key including the Africa, directions for Nedbank South strategic-focus environmental and social company’s economic and and it links them to its considerations, prospects. This includes plans and initiatives as well initiatives plans and includes This prospects. needed for speci c and other resources as nancing investments. the company should indicate how The report Sustainability see 1.4. (For further guidance, integrates sustainability opportunities and risks intosustainability opportunities integrates include sustainabilityThis may objectives. its strategic to other which are in some cases linked objectives, objectives. nancial or non nancial can constitute major opportunities. Sustainability issues an integral suggests that they be BEST PRACTICE process. strategy-setting aspect of a company’s IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 22 Part I: Disclosure Framework 24 24
Beyond the BalanceSheet| 1. Strategy management systems and receive regular reports on management systemsandreceive regularreportson management. However, theboardshouldoverseerisk Risk analysisandresponsesshould beundertakenby how torespondthem. pany. This includesassessing therisksanddetermining identi cation ofinternalandexternalriskstothecom- A criticalelementofthestrategy-settingprocessis 1.3. Risk Analysis and Response Toolkit. Sustainability KPIsandStatements, this page 110 of Indicators, page 3.3.2.99, and Suggested Metricsfor mance Indicators,page 49, For furtherguidance, see1.5. Introducing KeyPerfor environmental andsocialcommitments. formulated astargetsthatrelatetothecompany’s Example 1.8onpage26showshowKPIscanbe setting process. SMART goalsandtargetsaspartofthestrategy- and evaluateperformance. KPIscanbeusedtoset measure theeffectivenessofcompanystrategy Companies canusekeyperformanceindicatorsto Using KPIsintheStrategy-SettingProcess Source: Nedbank Group. Example 1.6: Strategic Focus—NedbankGroup 2015Integrated Report IFC Toolkit IFCfor Disclosure and Transparency 3.1.2. Key Performance
- page 68 ofthis Toolkit.) and boardoversight, see2.3. ControlEnvironment, governance ofrisk, includingthroughinternalcontrols independent directors. (Forfurtherguidanceonthe with riskexpertiseandcomposedofamajority the auditcommitteeoranotherspecialized their effectiveness. This isusuallytheresponsibilityof report shoulddescribethefollowing: and itsoperations. (SeeExample1.9onpage 27.) The have thepotentialtosigni cantlyaffectcompany The reportshoulddescribethekeyriskfactorsthat Risk Factors the companyshouldmanageandmitigatethem. cannot beavoided—asabasisfordetermininghow magnitude ofinherentandresidualrisks—thosethat Risk assessmentinvolvesanalyzingthelikelihoodand 1.3.1.Risk Analysis • •
and nancialperformance. impact ofsigni cantriskevents onoperational Risk analysis: likelihoodandmagnitudeof the events andhowtheymightbe triggered; Risk events: descriptionofsigni cantrisk Part I: Disclosure Framework
1. Strategy 25 limit/ , avoid IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Risk mitigation for each signi cant risk; and business-continuity Disaster-recovery plans.
• • 1.3.2. Risk Response and Mitigation Risk response is the course of action a company It should be chooses to take when a risk event occurs. risk appetite and tolerance aligned with the company’s Risk responses include accept, levels. Speci cally, the report should Speci cally, and transfer. , mitigate address the following: Beyond the Balance Sheet | Beyond
of this Toolkit.) suggests that BEST PRACTICE page 27, Kumba Iron Ore Limited 27, page 1.4. Sustainability Opportuni- (See 1.4. Source: Kumba Iron Ore Limited. Ore Kumba Iron Source: Strategy—Kumba Iron Ore Limited 2017 Limited Report Ore Integrated Iron Strategy—Kumba 1.7: Example In Example 1.10 on showing the uses a heat map to present its risk factors, and integrating likelihood and magnitude of impact, both nancial and sustainability risks. Incorporating Sustainability Risks Sustainability issues can constitute major risks for Therefore, companies. page 26 ties and Risks, they be an integral aspect of risk analysis, monitoring, monitoring, they be an integral aspect of risk analysis, and management. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 24 Part I: Disclosure Framework 26
Beyond the BalanceSheet| 1. Strategy following steps: and SocialManagementSystem (ESMS), includingthe scores theimportanceofaneffective Environmental management. IFCPerformanceStandard1under integral aspectoftheirstrategy-settingprocessandrisk and risksforcompaniesthereforeshouldbean Sustainability issuescanconstitutemajoropportunities and Risks 1.4. SustainabilityOpportunities efforts. past scalyear, andthecompany’s keyriskmitigation its mainrisks, howthoserisksevolvedduringthe power generationcompanyinHongKong, describes In Example1.11onpage 28, CLPGroup, anelectric Source: EnBW. Example 1.8: KPIsfor Target Setting—Integrated ofEnBW 2017 Annual Report • •
Identi cation ofrisksandimpacts Policy IFC Toolkit IFCfor Disclosure and Transparency - the report, includingthefollowing: Social ManagementSysteminthestrategy sectionof reporting oncriticalelementsofanEnvironmentaland In thissection, the Toolkit providesguidancefor • • • • • • • •
Ongoing reportingto Affected Communities External communicationandgrievancemechanisms Stakeholder engagement Monitoring andreview Emergency preparednessandresponse Organizational capacityandcompetency Management programs evolving natureofsustainability issues; how ittakesintoaccountthe dynamicand opportunities andrisksforthe company—and The processforassessingkey sustainability Part I: Disclosure Framework
1. Strategy 27 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: Astellas Pharma Inc. Source: Risk Assessment—Astellas Pharma Inc. 2016 Annual ReportAnnual Inc. 2016 Pharma Assessment—Astellas Risk 1.9: Example Residual Risk Ratings—Kumba Iron Ore Limited 2017 Report Ore Integrated Residual Risk Ratings—Kumba Iron Example 1.10: Source: Kumba Iron Ore Limited. Ore Kumba Iron Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 26 Part I: Disclosure Framework 28
Beyond the BalanceSheet| 1. Strategy can differsigni cantlyfromonecompanytothenext. tion ofitsoperationsandmarkets. What ismaterial company’s business model, itsindustry, andtheloca- Sustainability opportunitiesandrisksarespeci ctoa andRisks Opportunities 1.4.1. Assessment ofKeySustainability Culture: CommitmenttoESG, guidance forreportingonthegovernanceofsustainability risks andimpacts. (See2.1. Leadership and Reporting onSustainabilityGovernance: Sustainability Issues GuidanceonGovernanceTOOLKIT andPerformance Reporting RESOURCES: Further 3.1. Performance Report, page 97, 3.3. and SustainabilityStatements, page 109 ofthis Toolkit.) and socialissues, includingmitigation efforts, andtheresultsofsuchefforts. (Formoreinformation, see statements, the Toolkit providesguidance forreportingonthemanagementofmaterialenvironmental Reporting onPerformance inMitigatingRiskandImpact:Inthe performance reportand and page 58; • •
Example 1.11: RiskMitigation—CLPGroup 2015 Annual Report Source: CLP Group. location ofitsoperationsandmarkets. the contextofitsbusinessmodel, industry, and for thecompanytomonitorandmanage—in The keysustainabilityopportunitiesandrisks key sustainabilityrisksandopportunities; The managementsystemsinplacetoaddress 2.5. Governance ofStakeholderEngagement,page 92.) IFC Toolkit IFCfor Disclosure and Transparency
page 55; page 55; 2.2. Structure andFunctioningoftheBoard ofDirectors, The Governancesectionofthe Toolkit providesfurther
can be useful in understanding companies’ future can beusefulinunderstandingcompanies’future such asenvironmentalandsocialinformation—that evolved tore ectother, non nancialinformation— closure of nancialinformation, buttheconcepthas Materiality was rstde nedasathresholdfordis- Materiality ofSustainabilityIssues assessment. of managementandtheboardinoverseeing how oftentheassessmentisperformedandroles opportunities andrisks. The reportshouldalsoaddress company’s method forassessingmaterialsustainability In thestrategy section, thereportshoulddescribe sustainability sustainability
Part I: Disclosure Framework
1. Strategy 29 Part II: in Part IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit magnitude of impact on a speci c entity’s operational magnitude of impact on a speci c entity’s or nancial condition. and outward impacts are both inward At some level, on stakeholders or the as outward impacts related, impacts onenvironment can translate into inward license to regulation, performance through reputation, and quality affordability, and the availability, operate, of capitals. Building on this creation. on long-term value Focus a companynotion of a two-way interaction between the and its surrounding environment and community, proposes an integrated approach based on long- IIRC “matters de nes as material the It term value creation. ability to that substantively affect the organization’s and long term,” medium, create value over the short, where value creation is de ned with reference not only intel- to nancial capital but also to manufactured, and natural social and relationship, human, lectual, 2013). capitals (IIRC and 31 show the 30 Examples 1.12 and 1.13 on page African companies—Absa Group processes two South Africa) and Sasol—use to identify (formerly Barclays the company de nes In each example, material issues. material issues as those that could substantially affect and medium, its ability to create value in the short, de nition. according to the IIRC long term, For guidance on the general use of the concept of ma- see Materiality teriality in annual reporting, Toolkit. of this 123 page Reporting Guidance,
Beyond the Balance Sheet | Beyond
include the effect of the company’s physical activities on the environment or physical activities on the environment the company’s include the effect of Environmental factors include harmful releases, Effects on the environment uses to operate. natural capital the company as well as the use of natural and waste, air pollution, such as greenhouse gas (GHG) emissions, minerals) that adversely affect other users of energy, water, resources in production (for example, these resources. include considerations that affect the wellbeing of employees, customers, and local customers, that affect the wellbeing of employees, include considerations Social factors - This includes fair treat the company. are under the control or in uence of communities and that access to and affordability of basic and consumers, health and safety of workers ment of workers, resto- and conditions of relocation and livelihood economic impact on local communities, services, ration for resettled communities.
• • is development that meets the needs of the present without compromising the without compromising needs of the present that meets the is development development Sustainable “ Brundtland Commission The – meet their own needs.” generations to ability of future the creation of economic) refers to sustainability (or corporate sustainability to companies, When applied customers, including workers, rm, stakeholders of the of various into account the interests taking value, environmental impacts It typically includes social and and the environment. Affected Communities, local affect their long-term performance: and that can impose, that companies may Definition of Corporate Sustainability Corporate of Definition reputation or the license to operate, impact on non- reputation or the license to operate, for com- nancial capitals) but are nonetheless key investors topanies to create long-term value and for understand future prospects of the company. Global frameworks for nancial and sustainability IIRC) SASB, GRI, accounting and reporting (IFRS, propose different but related de nitions of materiality focusing on outward as it relates to sustainability, inward impacts on the impacts of the company, prospects. (See Box 1.2 on the next page for de ni- (See Box 1.2 prospects. tions of materiality.) they consti- Sustainability issues are material when or risks that can mean- opportunities, tute trends, operational and nancial ingfully affect a company’s results. that haveMaterial impact can also arise from issues toa less direct nancial impact (such as damage and long-term value creation. company, GRI focuses on companies’ outward outward. Focus impacts on the environment and society and de nes as material the matters that re ect the signi cant of and social impacts environmental, economic, the organization or that substantively in uence the assessments and decisions of stakeholders. focus inward on the and SASB IFRS inward. Focus impact that environmental and social factors have as and they de ne on the performance of companies, material the information that a reasonable investor would consider important in making an investment based on the probability and or voting decision, IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 28 Part I: Disclosure Framework Example 1.12: MaterialityDetermination—AbsaGroup (formerly Barclays Integrated Report Africa) 2017 30 Source: Absa Group (formerly Barclays Africa).
Beyond the BalanceSheet| 1. Strategy Box 1.2:DefinitionsofMateriality of information, orboth.”. pose nancialstatementsmakeonthebasisofthosestatements. Materialitydependsonthe natureormagnitude it couldreasonablybeexpectedtoin uencedecisionsthattheprimaryusersofaspeci creportingentity’s generalpur amendments totheIFRS de nition of “material,” asfollows: “Information ismaterialifomitting, misstatingorobscuring a or socialimpacts, orsubstantiallyin uencetheassessmentsanddecisionsofstakeholders.” GRI: “The reportshouldcoveraspectsthat:re ecttheorganization’s signi canteconomic, environmental, company activity(BasicInc. versusLevinson, 485U.S. 224, 1988). bility thataneventwillhappenagainstthepotentialmagnitudeofinlighttotality Inc., versusNorthway, Inc, 426U.S. 438, 449, 1976). Materialityisdeterminedbybalancingtheproba- signi cantly alteredthe ‘total mix’ofinformationmadeavailable” (U.S. SupremeCourt, TSC Industries, that thedisclosureofomittedfactwouldhavebeenviewedbyreasonableinvestorashaving SASB (referencingtheU.S. SupremeCourt):Informationismaterialifthere “a substantiallikelihood nization’s abilitytocreatevalueovertheshort, mediumandlongterm.” IIRC: “An integratedreportshoulddiscloseinformationaboutmattersthatsubstantivelyaffecttheorga- formation relatesinthecontextofanindividualentity’s nancialreport” (IFRS ConceptualFramework). entity-speci c aspectofrelevancebasedonthenatureormagnitude, orboth, ofthe itemstowhichthein- on thebasisof nancialinformationaboutaspeci creportingentity. Inotherwords, materialityisan IFRS: “Information ismaterialifomittingitormisstatingcouldin uencedecisionsthatusersmake Materiality According toMajor Frameworks Accounting andReporting InSeptember2017, theInternational Accounting StandardsBoard(IASB)submittedforpubliccommentproposed IFC Toolkit IFCfor Disclosure and Transparency - a Part I: Disclosure Framework
1. Strategy 31 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: Sasol. Source: Materiality Determination—Sasol Integrated Annual ReportAnnual 2017 Integrated Determination—Sasol Materiality 1.13: Example IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 30 Part I: Disclosure Framework 32
Beyond the BalanceSheet| 1. Strategy AICPA 2013). relies (e.g., theavailabilityofclean water)” (IIRC and and qualityofcapitalsuponwhich theorganization spill intheocean), ortheavailability, affordability or diminishedorganizational reputation (e.g., anoil “pressure backontheorganizationthroughenhanced IIRC, theeffecton externalstakeholdersrevertstoput These twoaspectsareoftenlinked. According tothe impacts, discussedonpage29.) is relatedtotheconceptofinwardversusoutward can affectacompany’s sociallicensetooperate. (This reliable productsandservices, orcommunityrelations company’s abilitytooperatepro tablyordeliver company. Forexample, climatechangecanaffecta impact thattheenvironmentandsocietyhaveon of indigenouspeople). Othersarerelatedtothe impacts (forexample, GHGemissionsorresettlement ing communities, andtheirefforttomitigatethose companies haveontheirenvironmentandsurround- Certain sustainabilityissuesrelatetotheimpact Impact thecompany“of” andimpact “on” thecompany. and fuelconsumption). as wellitsproductsandservices(suchcarsafety tions (suchasemployeetreatment, wastegenerated) Sustainability issuescanrelatetoacompany’s opera- Impacts ofoperation versusproductsandservices. hunger whilealsocreatinghealthissues. tive. Forexample, foodcompaniescanhelpalleviate impact ofcompaniescanbebothpositiveandnega- Positive sustainability andnegativeimpacts.The tive managementcanboostrevenueandreputation. and stakeholderconcerns/opposition, whereasproac- air emissionsandwastecangiverisetolegalliability they aremanaged. Forexample, poormanagementof resent bothrisksandopportunities, dependingonhow Opportunities andrisks.Sustainabilityissuescanrep- and manufactured), andcountriesofoperation. industry, thecapitalsused(human, natural, nancial, to thecontextofacompany’s operation, includingits Context-speci c. Keysustainabilityrisksarespeci c rial risks. surrounding communitieswilllikelytranslatetomate- because theirconcernsasemployees, customers, and engagement withthecompany’s keystakeholders, tal andsocialrisksshouldbebasedonanongoing Stakeholder-based. considerations: opportunities andrisksshouldincludethefollowing The processofidentifyingmaterialsustainability Opportunities andRisks Considerations in Assessing Sustainability IFC Toolkit IFCfor Disclosure and Transparency Identi cation ofkeyenvironmen-
determined tobeofgreaterimportance. (SeeFigure1.1.) the reportingorganizationoritsstakeholdersshouldbe a greaterlikelihoodofsigni cantimpactoneither Issues thathaveagreaterlikelihoodofoccurringor (Basic Inc. versusLevinson, 485U.S. 224, 1988). event inlightofthetotalitycompanyactivity” will happenagainstthepotentialmagnitudeof determined bybalancingtheprobabilitythatanevent be considered. As notedinBox1.2, “materiality is tude ofimpactandthelikelihoodoccurrenceshould tute risks, uncertainty, orfutureprospects, themagni- Magnitude andprobability. Formattersthatconsti- safety forCEMEX. and waterstewardshipforNestlé, and healthand and informationsecurityforDeutsche Bank, nutrition ef ciency for Tata Motors, tocustomersatisfaction panies andindustries, fromproduct safetyandfuel but themostmaterialissuesvarygreatlyamongcom- Common E&Sissuesarefoundinallthreematrixes, and beverage, andresourcetransformationindustries. in theautomanufacturing, nancialservices, food pages showthematerialitymatrixesforcompanies stakeholders. Examples1.14–1.17onthefollowing issues tothecompanyagainstperceptionofitskey matrix thatrankstheimportanceofsustainability prioritizing materialissuesistocreateamateriality Materiality matrix. Anothercommonmethodfor this Toolkit.) of SustainabilityOpportunitiesandRisks, page 35 of more informationonESMS, see1.4.2. Management of environmentalandsocialrisksimpacts. (For acomprehensiveidenti cationandassessment includes a dynamicandmanagement-drivenESMS, which IFC PerformanceStandard1laysthefoundationfor for identifyingacompany’s keysustainabilityissues. ESMS canprovideimportantsourcesofinformation Environmental andSocialManagementSystem. An ment processes, andrelevantgovernancestructures. in strategydevelopment, riskmitigationandmanage- determined tobematerialareappropriatelyaddressed ry purpose” (IIRC 2013). This ensuresthatmatters others toensuretheintegratedreportmeetsitsprima- engagement withprovidersof nancialcapitaland zation’s management processesandincludesregular determination processisintegratedintotheorgani- ing totheIIRC, “To bemosteffective, themateriality risk andopportunityassessmentprocesses. Accord- and risksistointegratewiththecompany’s ongoing method forassessingkeysustainabilityopportunities Risk andopportunityassessment.Onecommon to determinewhatsustainabilityinformationismaterial. Different methodsexistforprioritizingrelevantissues Opportunities andRisksIdentificationProcess
Part I: Disclosure Framework
1. Strategy 33 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Materiality: Assessing the Probability and Magnitude of Occurrence Occurrence of Magnitude and Probability the Assessing Materiality: 1.1: Figure Materiality Matrix—Tata Motors 2015–2016 Sustainability Report Materiality Matrix—Tata Example 1.14: Source: Tata Tata Source: Motors. Source: IIRC. Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 32 Part I: Disclosure Framework 34
Beyond the BalanceSheet| 1. Strategy Source: Deutsche Bank. Example 1.15: MaterialityMatrix—DeutscheBank2016Corporate ResponsibilityReport Example 1.16: MaterialityMatrix—NestléinSociety2016 Source: Nestlé. IFC Toolkit IFCfor Disclosure and Transparency Part I: Disclosure Framework
1. Strategy 35
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit BEST-PRACTICE RESOURCES: RESOURCES: BEST-PRACTICE IFC ESMS Implementation Handbook Handbook provides step- ESMS Implementation The by-step instructions on how to develop and implement a management system in line with IFC Performance addressing common environmental, Standard 1, and labor, occupational health and safety (OHS), community risks and impacts that companies are likely to face. avoid—or where avoidance is not possible, mini- avoid—or where avoidance is not possible, where residual impacts remain, mize—impacts and, compensate for or offset risks and impacts to workers, and the environment. Affected Communities, Beyond the Balance Sheet | Beyond
1.4.2. Management of Sustainability 1.4.2. The report should describe how the company inte- grates sustainability opportunities and risks as part day-to-day management, of its strategic objectives, IFCThis is consistent with and risk management. shouldThe company ESMS Performance Standard 1. the and be consistent with international standards, particular system applied by the company should be ISO 14000). named and reported (for example, Companies should report on the strategy and man- agement systems they have in place to manage and IFC monitor the core environmental and social issues. Performance Standard 1 speci es that companies Opportunities and Risks to anticipate and should adopt a mitigation hierarchy Source: CEMEX. Source: Materiality Matrix—CEMEX 2017 Matrix—CEMEX Materiality Report Integrated 1.17: Example IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 34 Part I: Disclosure Framework 36 Source: KumbaIron Ore Limited. Example 1.18: ManagementofMaterialSustainabilityIssues—KumbaIron Integrated Ore Report Limited2017
Beyond the BalanceSheet| 1. Strategy Standards and other generally accepted sustainability Standards andothergenerallyacceptedsustainability Core issuesarethosecoveredintheIFCPerformance Core EnvironmentalandSocialIssues social development. address thecompany’s contributiontoeconomicand resources). Where relevant, thereportshouldalso cal habitatorindigenouspeople’s landandnatural or contextofoperations(suchasimpactsoncriti- as issuesthatarespeci ctothecompany’s industry mitigation orlaborandworkingconditions)aswell apply toallormostindustries(suchasclimate-change Typically includedarecoresustainabilityissuesthat its strategy, anditsriskpro le. they speci callyaffectthecompany’s businessmodel, nities andrisksfacingthecompanydescribehow The reportshouldlistthekeysustainabilityopportu- and Monitor 1.4.3. KeySustainabilityIssuestoManage material issuesandtheyear-on-year changeinoutlook. Limited, aSouth African miningcompany, manages Example 1.18providesdetailsonhowKumbaIronOre IFC Toolkit IFCfor Disclosure and Transparency
generally applytoallormostcompaniesandindustries. also referredtoascross-cutting, systemic, oruniversal— These coreenvironmentalandsocialissues—sometimes ance Standards. mental andsocialissuescoveredbytheIFCPerform- Table 1.2providesasummaryofthecoreenviron- pollution ofinternationalwaterways .” boundary effects, such aspollutionofair, oruse the adaptationopportunities, andpotentialtrans- relevant risksassociatedwithachanging climateand consider “theemissionsofgreenhousegases, the also The Standardfurtherrecommendsthattheprocess to beaffectedby such risksandimpacts.” ance Standards2through8, andthosewhoarelikely impacts, . including theissuesidenti edinPerform- “ ess foridentifyingrisksandimpactsshouldconsider IFC PerformanceStandard1speci esthattheproc- for SustainabilityManagementandDisclosure.) frameworks. (SeeAppendixE:MajorFrameworks all relevant all environmentalandsocialrisks
Part I: Disclosure Framework
1. Strategy 37
a of this Toolkit. a IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit
a in the value chain and with different intensity. For in the value chain and with different intensity. manufacturing-based companies affect the example, environment through manufacturing and distribution, whereas knowledge-based businesses can have a con- siderable effect on the environment through business travel and data centers. address how these core environ- report should The mental and social issues apply speci cally to the manages describe how the company company—and mitigat- including associated risks and opportunities, Examples 1.19 and 1.20 (next page) ing its impact. are from two very different industries. For a list of the most commonly reported E&S 3.3 on 117 page see Table metrics, Beyond the Balance Sheet | Beyond
GHG emissions Water use Water Resource efficiency Resource Pollution prevention Ecosystem Ecosystem services Protected areas areas Protected Endangered species Endangered Habitats and biodiversity sources Water Worker protection Worker Opportunitiesand fairness Health and safety Forced and child labor Forced Community health, safety, and security and security Community health, safety, Indigenous peoples heritage Cultural Environmental and social policy and social Environmental Land acquisition and resettlement Emergency response plan response Emergency and public safety Infrastructure External communication Grievance mechanism Grievance Environment and social management of supply chain and social management Environment
ISSUES Resource Efficiency and Pollution Prevention: Resource • • • • • Biodiversity ConservationBiodiversity Sustainable Management of and Resources Living Natural • • • • • • Labor and Working Conditions: Working Labor and • • • • • Community • • • • • • • • • • •
&
, page 49 of this Toolkit. page 49 of this , Indicators Introducing Key Performance see 1.5. For further details, Industry-speci c. a Environmental Issues Environmental
Social Issues
Environmental Environmental Social Management System
CATEGORY However, they apply differently depending on the in- However, (environ- A few of the core issues dustry and context. mental and social management in the supply chain, and infrastructure) are more forced and child labor, likely to apply in speci c industries. or con- most companies have employees For example, so management of labor issues and talent is tractors, depending on the nature However, generally relevant. these issues can range from working of the industry, conditions and safety in garment manufacturing to child labor in the agribusiness industry and discrimi- nation in service industries. environmental impacts are common to Similarly, but they occur at different points most industries, Core Environmental and Social Issues Social and Environmental 1.2: Core Table
Source: IFC.Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 36 Part I: Disclosure Framework 38
Beyond the BalanceSheet| 1. Strategy Environmental Responsibility Report 2016 Environmental ResponsibilityReport Example 1.19: GHGEmissions—Apple Example 1.20: Diversity—Takeda 2016 Annual Report Source: Apple. Source: Takeda. IFC Toolkit IFCfor Disclosure and Transparency Toolkit.) reported ESGmetrics, seeTable 3.3, this page 117 of sustainability statementsbasedonthemostcommonly (For suggestedmetricsforsustainabilityKPIsand contribution toeconomicandsocialdevelopment. strategy, theimpactofproductsandservices, and context ofoperation. can bematerialforcompanies, basedonindustryand PRACTICES suggestthatothersustainabilityissues generally acceptedsustainabilityframeworks, BEST covered intheIFCPerformanceStandardsandother In additiontothecoreenvironmentalandsocialissues Sustainability Issues Industry-Specific andContext-Specific This includesclimate-change
Part I: Disclosure Framework
1. Strategy 39 - IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Risks related to the physical consequences of consequences the physical related to Risks droughts, ooding, including change, climate reduction of erosion, landslides, heat waves, on the and effects infrastructure, lifetime of among others. supply chain,
• - risks has several subcate climate-related Each of these the risk of transition to a For example, gories of risks. comprises consumption shifts economy lower-carbon as well as policy and legal risks, (market-segment risk) regime for GHG emissions, such as a cap-and-trade based and tariffs imposed on companies, carbon taxes, or GHG emissions (such as car on energy ef ciency (See Figure 1.2.) bon taxation). Beyond the Balance Sheet | Beyond
Source: Apple. Source: Avoided Emissions—Apple Environmental Emissions—Apple Environmental Avoided Example 1.21: Responsibility Report 2016 Risks (and opportunities) involved in theRisks (and opportunities) economy; transition to a lower-carbon
Figure 1.2: Climate-Related 1.2: Figure Risks, Opportunities, and Financial Impact Source: TCFD TCFD Source: (2017). • Climate change affects change Climate Strategy. Climate-Change but and regions, industries all in virtually companies highly differentiatedare multifaceted and its effects It relates as risks. opportunities as well and include to the release contribution a company’s not only to to but also into the atmosphere of GHG emissions are affected by and operations assets, how its capital, (See Example climate change. the physical effect of 1.21.) risks there are two types of climate-related Broadly, 2007): and opportunities (Stern IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 38 Part I: Disclosure Framework 40
Beyond the BalanceSheet| 1. Strategy the underlyingassumptionsofclimate-relatedscenarios. applying morequantitativeanalysesindisclosures, including warming scenario. The Task Forcesuggests, overtime, ent potentialfuturescenarios, includinga2degreeCelsius businesses, strategies, and nancialplanningunderdiffer climate-related risksandopportunitiesonanorganization’s for climaterisk. Itinvolvesdisclosingthepotentialeffectsof (Financial StabilityBoard)recommendsscenarioplanning The Task Force onClimate-relatedFinancial Disclosure a company’s nancialperformanceandvaluecreation. companies. Itconsidershowclimate-changefactorsaffect designed toelicitclimate-change-relatedinformationfrom sider thevoluntaryCDSBReportingFramework, whichis work: Climate Disclosure Standards Board ReportingFrame- Reporting Climate-Related BEST-PRACTICE RESOURCES: Companies makingclimatedisclosuresmightcon- advantage ofclimateopportunities. Guidanceinthis Companies shouldalsoreportonhowtheywilltake outsourcing transportationcapabilities. model, suchasleasinginsteadofowningfacilitiesor gate climateriskbychangingaspectsoftheirbusiness elasticity oftheirvaluechainandabilitytomiti- and location. Forexamplecompaniescanaddressthe that arespeci ctothecompany’s context, industry, assets. This includesclimatevulnerabilityassessments effects ofclimatechangeontheiroperationsand Companies shouldreportonhowtheymanagethe retail. from cropstofoodprocessingandtransportation mate-change vulnerabilitiesinthewholevaluechain, companies inthefoodindustryshouldaddresscli- preferences andmarketexpectations. Forexample, climate regulationsaswellchangingconsumer compatibility oftheirbusinessmodelwithemerging In thestrategyreport, companiesshouldaddressthe Source: Apple. 2016 Environmental ResponsibilityReport Example 1.22: Product Take-Back—Apple IFC Toolkit IFCfor Disclosure and Transparency
- cation, andinsurance, thequalityofservicesprovided In certainindustries, suchashealthcare, nance, edu- munications, media, andretaile-commerceindustries. major effectoncompaniesinthetechnology, telecom- pacts concerningdataprivacy andsecuritycanhavea model, oruseofresources. Forexample, risksandim- a speci cindustrybecauseoftechnology, thebusiness Product-related sustainabilityissuescanbeuniqueto products. take-back, use-phaseemissions, andchemicalsin Apple’s reporting onproduct-relatedissues, including cle, orend-of-lifeimpact. Examples1.22–1.24show issues aresometimesreferredtoasuse-phase, life-cy- products attheendoftheirusefullife. Together, these They alsoincludeissuesarisingfromtheimpactof safety, energyef ciency, andpollutionduringuse. ed environmentalandsocialimpacts, suchasproduct ucts andservicestypicallyincludeconsumption-relat- Products andServices. Sustainabilityissuesforprod- potential forinvestmentisgreatest(IFC2016a). emissions, identi essectorsineachregionwherethe market economies, representing48percentofglobal commitments andunderlyingpoliciesof21emerging- IFC studybasedonthenationalclimate-change investments inemergingmarketsthrough2030. An nearly $23trillioninopportunitiesforclimate-smart By someestimates, theParis Agreement openedup adapt totheeffectsofclimatechange. manage itstransitiontoalow-carboneconomyand provide adetailedroadmapforhoweachcountrywill tended NationallyDeterminedContributions), which made inadvanceoftheParis Agreement (calledIn- area cancomefromthecommitmentsthatcountry Source: Apple. 2016 Environmental ResponsibilityReport Impact—Apple Example 1.23: Use-Phase
Part I: Disclosure Framework
1. Strategy 41 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: Apple. Source: Chemicals in Products—Apple Products—Apple in Chemicals 1.24: Example Report Responsibility Environmental 2016 In 2016, ABN AMRO was the rst nancial institution to publish was the rst nancial AMRO ABN In 2016, AMRO. Human Rights Report—ABN on Business anda human rights report based on the reporting framework of the UN Guiding Principles Human Rights. being violated by the activ- The report focuses on four categories of human rights that are most at risk of discrimination, privacy, ities of the bank and the companies it nances or invests in on behalf of clients: and land-related human rights. labor rights, actively monitors clients that operate in AMRO ABN minimize the risk of human rights violations, To to bring about improvement. engages with clients where necessary, high-risk industries and countries and, BEST-PRACTICE RESOURCES: Human Rights Reporting RESOURCES: BEST-PRACTICE IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 40 Part I: Disclosure Framework 42 42
Beyond the BalanceSheet| 1. Strategy business orintheirsupplychains. and humantraf ckingarenottakingplaceintheirown have takenduringthe nancialyeartoensurethatslavery subject totheactmustreportannuallystepsthey 2015 UnitedKingdomModernSlavery Act: BEST-PRACTICE RESOURCES: Ethics frameworks, whichincludethefollowing: using IFC’s company-level development-measurement contribution toeconomicandsocialdevelopmentby The annualreportcanaddressabusiness’s direct IFC DevelopmentImpactFramework UN SustainableDevelopmentGoals. works: IFCDevelopmentImpactFrameworkandthe area canbefoundintworelateddevelopmentframe- social licensetooperate. Guidanceforreportinginthis and reinforcepubliccon denceinthecompanyits to society. ItcanprovidecontextforitsE&Simpact balanced viewofthecompany’s overallcontribution social developmentintheannualreportcanprovidea Including acompany’s contributiontoeconomicand manage theirenvironmentalandsocialimpact. nomic andsocialprogress, especiallywhencompanies The privatesectorisanimportantcontributortoeco- Development Contribution toSustainableEconomicandSocial for sustainabilitymanagementandreporting.) Appendix Eforasummaryofthemajorframeworks Control Environment,page 68 reporting onacompany’s ethicalbehavior, see2.3. and regulatorycompliance. (Forfurtherguidanceon ruption andbribery, politicaldonations, taxation, Ethics. affect acompany’s sociallicensetooperate. can becomeanissueofpublicinterestandtherefore • • •
dimensions: project outcomes and contribution dimensions: projectoutcomes andcontribution actions (exante)andfocusingontwomain development impactattheoutset ofIFCtrans- DOTS bymeasuringtheexpected or potential Monitoring framework. AIMM complements The new Anticipated ImpactMeasurementand ments, communityoutlays, andtaxpayments. as thenumberofpeopleemployed, wagepay- in health, education, nance, andenergyaswell economy, suchasthenumbersofbasicservices economic andsocialreturninkeysectorsofthe tem. DOTS measures, amongotherthings, the The DevelopmentOutcomeand Tracking Sys- The IFCDevelopmentGoals(seeBox1.3). Issues relatedtoethicsusuallyinvolvecor IFC Toolkit IFCfor Disclosure and Transparency of this Toolkit; andsee
Companies Companies
-
Box 1.3:IFCDevelopment Goals progress againsttheGoals. Forexample, KPIson related totheSDGindicatorsmeasurecountries’ KPIs forcoresustainabilityissuesarealsoclosely degradation andhaltbiodiversityloss.” combat deserti cation, andhaltreverseland terrestrial ecosystems, sustainablymanageforests, “[p]rotect, restoreandpromotesustainableuseof have adirectcorollaryinSDG15, whichaimsto sustainable managementoflivingnaturalresources companies’ effortstoprotectbiodiversityandpromote with countries’effortstomeettheSDGs. Forexample, Core environmentalandsocialissueshaveadirectlink 2030. (SeeFigure1.3.) opment andsustainabilityagendasbetween2015 by UNmemberstatestoframetheireconomicdevel- Development Goals, asetof17universalgoalsissued sustainability strategyandrisktotheUNSustainable sustainable developmentbylinkingcompany-level Companies candemonstratetheircontributionto The SustainableDevelopmentGoals • • • • • •
SDGs andtheirindicators,see Table3.3,page117. social KPIsthathave adirect correspondence with the For examplesofgenerally acceptedenvironmental and Indicators TOOLKIT RESOURCE: ESGMetricsand SDG emissions. Climate Business:Reducegreenhousegas ture services. Infrastructure: Increaseorimproveinfrastruc- nancial servicesforSMEclients. Financial Institutions:Increaseaccessto nancial servicesformicro nanceclients. Financial Institutions:Increaseaccessto education services. Health andEducation:Improvehealth farming opportunities. Agribusiness: Increaseorimprovesustainable and Outcome-BasedReporting, below.) (For moreinformationon AIMM, seeContext- ty), theeconomyoverall, andtheenvironment. cluding customers, suppliers, andthecommuni- the indirecteffectsonotherstakeholders(in- include thedirecteffectsofaproject(or rm), to marketcreation. Project-leveloutcomes
Part I: Disclosure Framework
1. Strategy 43 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Context-Based Reporting fromContext-based reporting is a natural evolution where companies the concept of integrated reporting, processare expected to explain their value-creation in terms of their use of—and impact on—multiple “The According to the
Beyond the Balance Sheet | Beyond
The Sustainable Development Goals Development Sustainable The 1.3: Figure interest of institutional investors in the impact of their companies are increasingly expected to investments, report on their environmental and social performance in the context of the limits and carrying capacity of toThey are also expected the resources they rely on. measure the environmental and social outcomes of beyond direct inputs and outputs. their activities, Context- and Outcome-Based Reporting the rise of impact investing and the growing With Mexican resource transformation company, and Mexican resource transformation company, take a a Japanese pharmaceutical company, Takeda, different approach by aligning their activities to the SDGs. waste-recycling ratio is directly linked to SDG Indica- waste-recycling ratio is directly linked to which measures the national recycling rate tor 12.5.1, and quantity of material recycled. show howExamples 1.25 and 1.26 on the next page in different sectorsAfrican companies two South ofcontribute to the economic and social development focuses on bank, a Standard Chartered, the country. and Eskom, access to nance and responsible nance, provides access to main electric utility, the country’s electricity. - shows how global pharma 45 Example 1.27 on page forefront ofceutical company Roche has been at the efforts to nd a cure for cancers. Akzo 47, In Examples 1.28–1.30 on pages 46 and a CEMEX, a Dutch chemical company, Nobel, Source: United Nations. Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 42 Part I: Disclosure Framework 44
Beyond the BalanceSheet| 1. Strategy Source: Eskom. 2016 Example 1.26: SocioeconomicContribution—EskomIntegrated Report Standard Chartered Sustainability Summary 2015 Standard Sustainability Summary Chartered Example 1.25: ContributingtoSustainableEconomicGrowth— Source: Standard Chartered. IFC Toolkit IFCfor Disclosure and Transparency Part I: Disclosure Framework
1. Strategy 45 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Key Achievements in Oncology—Roche Annual Report 2016 in Oncology—Roche Achievements Key Example 1.27: Source: Roche. Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 44 Part I: Disclosure Framework 46
Beyond the BalanceSheet| 1. Strategy AkzoNobel Report 2016 AkzoNobel Report Example 1.28: ContributiontotheSustainableDevelopment Goals— CEMEX 2017 Integrated Report CEMEX 2017 Example 1.29: ContributiontotheSustainableDevelopment Goals— Source: CEMEX. Source: AkzoNobel. IFC Toolkit IFCfor Disclosure and Transparency Part I: Disclosure Framework
1. Strategy 47 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: Takeda. Source: Contribution to the Sustainable Development Goals—Takeda Annual ReportAnnual 2016 Goals—Takeda Development to the Sustainable Contribution 1.30: Example IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 46 Part I: Disclosure Framework 48
Beyond the BalanceSheet| 1. Strategy Source: IFC. ects fordevelopingimpact. the AIMM systemtoscoreallofitsinvestmentproj- Monitoring (AIMM)system. In2018, IFCbeganusing tool—the Anticipated ImpactMeasurementand IFC pilotedanewexanteprojectimpactassessment solutions todeliverdevelopmentimpact. In2017, new approachthatunlocksthepowerofprivatesector for theoldwaysofdoingbusiness. The needisfora The world’s development challengesarefartoovast measurement system. reporting ofoutcomes, includingIFC’s newimpact are creatingframeworksforthemeasurementand Investors inbothdevelopedanddevelopingmarkets Outcome-Based Reporting Figure 1.4: IFC’s Anticipated ImpactMeasurement andMonitoringFramework ex postevaluation. portfolio supervisionand, ultimately, to4) is tiedto3)resultsmeasurementduring ex anteprojectselection/scoring, which ventions. Itconnects1)diagnosticsto2) impact-assessment systemforIFCinter ment) thathelpconnectan “end-to-end” pillars (projectratingsandresultsmeasure- The AIMM systemcomprisestwocritical BEST-PRACTICE RESOURCES: Context-BasedReporting Tools determine the thresholds or carrying capacities of determine thethresholdsorcarryingcapacitiesof ing framework. Itusescontext-basedmetricsto context-based, multicapitalperformanceaccount- The MultiCapitalScorecardisanopen-source, MultiCapital Scorecard effective monitoringofprogress. complemented byindicatorsdesignedtosupport of 23socialandenvironmentalgoals. Eachgoalis even pointforbusiness, expressedasauni edset The Benchmarkidenti estheextra- nancialbreak- Future FitBusinessBenchmark IFC Toolkit IFCfor Disclosure and Transparency -
capitals andstakeholderwellbeing. fair shareofresponsibilities, toensuresuf ciencyof the capitals, andallocationsofanorganization’s and 4)newbusinessmodels. in the eldsof1)reporting, 2)accounting, 3)data, redesign fornext-generationsustainablepractices prepared Blueprintswithrecommendationsonthe ing outandacceleratingreportinginnovations, Reporting 3.0, aglobalwork-ecosystemforscout- 3.0Blueprints Reporting tries’ developmentpathtowardhigh-incomestatus. Bank emphasisonhumancapitalasakeytocoun- social services. The indexispartofabroader World comes oftheirinvestmentsinhealth, education, and Human CapitalIndextorankcountriesontheout- In asimilartrend, the World Bankislaunching a is addressed. (SeeFigure1.4.) is anticipatedtohaveand2)thedevelopmentgapthat sessment of1)theextentimpactthatinvestment project level, the AIMM frameworkisbasedonanas- it isexpectedtocontributemarketcreation. At the ect isexpectedtoachieve(projectoutcomes)andhow advisory projectsattwolevels:whatthespeci cproj- ipated—or exante—impactofIFCinvestmentand IFC’s AIMM systemisdesignedtoassesstheantic-
Part I: Disclosure Framework
1. Strategy 49
- Credibility also re- IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Consider discussing different time periods relating KPIs on resources consumed (energy, KPIs on resources consumed (energy, Ef ciency: materials) or released (waste/GHG emissions) can be contextualized as a ratio of nancial pro t) or operational results results (revenue, sold). (number of products produced,
• backward-looking; non nancial KPIs, on the other hand, on the other hand, backward-looking; non nancial KPIs, providing insight into future can be forward-looking, performance. time periods. Financial KPIs are often short-term and time periods. to performance—with KPIs that apply to the different TIP: innovation are important for software or pharmaceu- innovation are important commu- of mining rights, ticals; whereas acquisition important for and health and safety are nity relations, can also be Industry-speci c KPIs extractive industries. example, For strategies. very useful for sustainability can use FCRcompanies in the animal protein market ef ciency(feed conversion ratio) to benchmark their agricultural Similarly, against their peers’ performance. percompanies may use proxies such as productivity of produce tohectare and water consumption per ton document their performance. it is may evolve, Although the strategy Consistent. asimportant for the KPIs to remain as consistent the scope of the infor especially regarding possible, to show trends and to maintain both mation reported, credibility. De nitions and Assumptions. KPIs and theirquires that the assumptions behind the especially true if theyThis is measurement are clear. If been changed. or have otherwise new, are creative, the a KPI from the nancial statements is adjusted, This clear. adjustment and its relevance must be made standardis also true if industry standards or other KPIs are adjusted. Companies can improve the Context. Incorporating usefulness of KPIs for decision making by incorporating KPIs are generally formulated as context into them. forThe following are some suggestions absolute values. how to add context to environmental and social KPIs:
Beyond the Balance Sheet | Beyond
show of this Toolkit.) If there are generally accepted KPIs for Embankment Project for Inclusive Capitalism Inclusive for Project Embankment an outcome-based seeking to create and companies of global investors is a market-led initiative The project base of their creation for a broad and report on value to measure mechanism for corporations reporting isThe aim the environment. and government, communities, employees, including customers, stakeholders, - focused on outcomes for each signi that is underpinned by a methodology “agree on a set of metrics to nancial strategy and links it to long-term of a company’s measures the execution cant set of stakeholders, value for shareholders.” BEST-PRACTICE RESOURCES: Outcome-Based RESOURCES: Reporting BEST-PRACTICE Characteristics of KPIs KPIs should be speci c enough to re ect the company strategy while enabling a credible analysis of company performance on a standalone as well as a compara- Some of the key characteristics of KPIs are tive basis. described below. While qualitative goals are important, Measurable. and some cre- KPIs generally should be measurable, ativity may be needed when translating a qualitative goal into a metric. Comparable. the industry or activity, those may be more credible for the industry or activity, investors and other stakeholders. Industry-Speci c. Industry speci city is important for setting strategic KPIs. For example, talent and For example, for setting strategic KPIs. The Accounting Standards Board de nes key perform-Accounting Standards The by reference to which the“factors ance indicators as the business performance or position of development, They are of the entity can be measured effectively. critical suc- quanti ed measurements that re ect the towardscess factors of an entity and disclose progress achieving a particular objective or objectives.” non nancialThe report should introduce nancial and the wider KPIs with links to the high-level priorities, and the long-term prospects of the company. strategy, would likeKPIs should also link to risks the company to mitigate and challenges to overcome. how GoldExample 1.31 on the next page shows links KPIs African mining company, a South Fields, with a wider set of strategic objectives. 51 Examples 1.32 and 1.33 on pages 50 and 1.5. Introducing Key Performance Introducing 1.5. Indicators strategy andhow KPIs can be linked to the company company’s formulated as targets that relate to the (For guidance environmental and social commitments. as parton how to use key performance indicators Strategic see 1.2. of the strategy-setting process, , page 22 Objectives, IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 48 Part I: Disclosure Framework 50
Beyond the BalanceSheet| 1. Strategy Example 1.32: Targets for Environmental Impact—Takeda 2016 Annual Report Source: Gold Fields. Source: Takeda. Annual Report Example 1.31: Strategic Objectives andKPIs—GoldFields2015Integrated IFC Toolkit IFCfor Disclosure and Transparency Part I: Disclosure Framework
1. Strategy 51
SFG 7, 9 5 7, 12 6, 12 13, 15 17 3 4, 5, 8 4, 5, 8 of this Toolkit Progress in 2015 3.4 gigawatts 23% Reduced by 22% tropical, 17% temperate locations 44% 17.7 kg per FTE 1.42% $86.3 million 217,000 girls >1,200 entrepreneurs, including 71% women Table 3.3: Most Commonly Table IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Timeline 2013-2018 2013-2017 2008-2019 2008-2019 2012-2020 Annual 2003-2020 2006-2018 2013-2018 Example 1.34 on the next page shows how Rio Tinto Tinto Example 1.34 on the next page shows how Rio incorporates KPIs into its annual report. see 3.1. (For more guidance on reporting on KPIs, For sug- Toolkit. of this 97 Report, page Performance gested metrics for sustainability KPIs and sustainability page 109 Sustainability Statements, see 3.3. statements, Also, see of this Toolkit. page 117 Reported E&S Metrics, Beyond the Balance Sheet | Beyond
Target $5 billion. Expected 7,500 to add up to of megawatts generation capacity 25% women 35% in tropical locations 20% in temperate locations 71% 10 kg per full-time employee (FTE) 0.75% of prior year (PYOP) operating profit $100 million 600,000 girls and 5,000 micro small businesses, with 20% wom- en-owned or led Committment Bolster investment in power generation Sub-Saharan across Power Africa through Africa women Increase on the Board use Reduce energy intensity Reduce water use intensity Reduce office paper use Invest in our local communities Raise funds to tackle avoidable blindness Empower girls through education and sport and Educate micro small businesses Sustainability Strategy and KPIs—Standard Chartered Summary Sustainability KPIs—Standard and Strategy Sustainability 2015 E&S KPIs can be presented in the Targets: context of targets (percent of completion or reduction target). Performance on E&S issues can be Peers: compared with industry peers. Performance on E&S issues can be com- Time: and analyzed through a rate pared year-on-year of increase.
• • • Investing in communities Theme Contributing to sustainable economic growth Being a responsible company Source: Standard Chartered. Standard Source: Example 1.33: 1.33: Example IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 50 Part I: Disclosure Framework 52
Beyond the BalanceSheet| 1. Strategy BEST-PRACTICE KPIs RESOURCES: DeterminingandReporting effective communicationofkeyperformanceindicators, withthefollowingcriteria: PricewaterhouseCoopers Guide to Key Performance Indicators(2006) PricewaterhouseCoopers GuidetoKeyPerformance Review (2006): From • • • • • • • • • • • •
the Benchmarking: available. These changesneedtobeexplained. Changes inKPIs:KPIsmayevolveovertimeasstrategieschangeormoreinformationbecomes measures. Segmental: the datameans. Trend data:Howperformancehasimprovedorworsenedovertime. Explainwhatatrendin by accountingstandards. Reconciliation toGAAP: Where theamountsmeasuredarenot “traditional” measuresrequired Future targets:Forward-lookingorientationtoassessthepotentialforstrategiessucceed. the data. Source, assumptions, andlimitations:Identifythesources, assumptions, andlimitationsof Purpose: companies withinanindustry. De nition andcalculation:Understandexactlywhatismeasured. Allows comparisonsbetween potential tosucceed. Link tostrategy: Enablereaderstoassessthestrategiesadoptedbycompanyandtheir the industrysectorormoregenerally. Comparability willbeenhancediftheKPIsdisclosedareacceptedandwidelyused, eitherwithin enable memberstounderstandandevaluateeachKPI. and positionofthebusinessentityshallbedisclosed, togetherwithinformationthatwill Those KPIsjudgedbythedirectorstobeeffectiveinmeasuringdevelopment, performance Accounting Standards Statement:Operating andFinancial Board (ASB)Reporting IFC Toolkit IFCfor Disclosure and Transparency Measure progresstowardachievingaspeci cstrategicobjective. Assess progresstowardspeci csegmentalstrategicaims, inadditiontogroupwide Comparison withpeergroup, withexplanationofwhythesepeerswerechosen. provides a model for providesamodelfor
Part I: Disclosure Framework
1. Strategy 53 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: Source: Rio Tinto. KPIs—Rio Tinto 2017 Annual ReportAnnual Tinto 2017 KPIs—Rio 1.34: Example IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 52 Part I: Disclosure Framework 54 Beyond the BalanceSheet| IFC Toolkit IFCfor Disclosure and Transparency Part II: Reporting Guidance
Part I: Disclosure Framework
2. Corporate Governance 55 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit section of the report should include governance 2.1. Leadership and Culture: Leadership and Culture: 2.1. Commitment to ESG The leadership and a description of the organization’s corporateculture as well as its commitment to sound governance and the management of environmental of howThis includes an account and social issues. this commitment is translated into policies and codes the role of the board, at a minimum, that address, and compliance with all laws and shareholder rights, regu- including environmental and social regulations, It should also describe how compliance with lations. including internal policies and codes is monitored, internal controls and audit. extra- nancial strong corporate governance, Without such as environmental and social opportunities issues, would lack a decision chain that assures and risks, accountability and sound management across the it is recommended that the imple- Therefore, company. mentation of environmental and social management systems be placed within strong corporate governance including a designated corporate govern- mechanisms, ance of cer or corporate secretary. Beyond the Balance Sheet | Beyond
to ESG of Directors Engagement Indicators • Performance Report • Financial Statements • Sustainability Statements • of the Board and Functioning Structure • Environment Control • of Minority Shareholders Treatment • of Stakeholder Governance • Commitment Leadership and Culture: • Business Model and Environment • Objectives Strategic • and Response Analysis Risk • Opportunities Sustainability and Risks • Key Performance Introducing 2. Governance Corporate 3. Financial Position and Performance 1. Strategy 1. Corporate governance can be defined as a set of structures and processes for the direction and for the direction and processes can be defined as a set of structures governance Corporate stake- the company’s shareholders, between relationships of companies. It involves control and long-term shareholder of creating the purpose bodies for and executive holders, board, stakeholder value. to and others are Reporting is critical if investors and processes on these structures and management how the board and managed, governed understand how companies are ethical conduct, how they treat compliance with risks and ensure monitor and control relationships with a broader manage conflicts, and how they and avoid minority shareholders of stakeholders. group 2. Governance Corporate Model Structure of Annual Report of Model Structure IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 54 Part I: Disclosure Framework 56
Beyond the BalanceSheet| 2. Corporate Governance er suchcodesaddressthefollowing: and socialissues, andethics. Itshouldindicatewheth- codes regardingcorporategovernance, environmental The reportshoulddescribethecompany’s policiesor 2.1.1. ESGCodesandPolicies Level 4oftheMatrix. (See Table 2.1.) ed fordisclosureofleadershippractices, consistentwith to goodinternationalpractices. Guidanceisalsoprovid- related toLevels1–3oftheMatrix, whichcorresponds The Toolkit recommendsthedisclosureofinformation ment toenvironmental, social, andgovernanceissues. progress withleadershipandcultureitscommit- The Matrixcanbeusedtogaugeacompany’s levelof CONSULT THE MATRIX Source: Telekom Malaysia. Source: Telekom Example 2.1: Corporate Governance Model—Telekom Malaysia 2015 Annual Report • • • • • • • •
Code ofconductinthesupplychain. activities andstrategy; Integration ofESGpracticesinbusiness Governance ofstakeholderengagement; Compliance withE&Slawsandregulations; Objectives andprinciplesoftheinstitution; Disclosure andtransparency; Role oftheboard; other stakeholders; other stakeholders; Rights and treatment of shareholders and Rights andtreatmentofshareholders IFC Toolkit IFCfor Disclosure and Transparency
ance practices(whenoneexists). (SeeExample2.1.) sions ofthecountry’s codeofbestcorporategovern- policies andcodesconformtothevoluntaryprovi- The reportshouldalsoaddresswhetherthecompany’s business activities. code ofethicsorconductintegratesESGpracticesinto 3), thereportshouldindicatewhethercompany ability. Ingoodinternationalpractices(MatrixLevel its commitmenttocorporategovernanceandsustain- governance of cerorcompanysecretarytosupport that acompanyhavedesignatedfulltimecorporate suggest Intermediatepractices(MatrixLevel2) proval. the codeofethicsorconduct, includingboardap- The reportshoulddescribetheapprovalprocessfor corporate responsibilityandembeddingvalues. of boardcommitteesU.K. companiesindelivering report fromtheInstituteofBusinessEthicsonrole Culture by Committee—The ProsandCons boards inpromotingitthroughouttheorganization. emerging importanceofcorporatecultureandtherole developments incorporategovernance, highlightsthe in Corporate Governance, From CompaniestoMarkets—GlobalDevelopments BEST-PRACTICE RESOURCES: Corporate Culture an IFC publication on global anIFCpublicationonglobal is a survey is asurvey
leader in ESG practices. practices. ESG in leader
out the organization. the out
control consciousness through- consciousness control
embedded ESG awareness and a a and awareness ESG embedded
procedures is disclosed. is procedures
Adequacy of ESG policies and and policies ESG of Adequacy
Publicly recognized as a global global a as recognized Publicly
Organization culture has has culture Organization
3.
2.
1. 1.
4. Leadership 4.
+
leader in ESG practices. ESG in leader
Publicly recognized as a regional regional a as recognized Publicly
of ESG policies and procedures. and policies ESG of
Internal audit of implementation implementation of audit Internal
ethics and/or conduct. and/or ethics
policies and procedures, code of of code procedures, and policies
ensuring compliance with ESG ESG with compliance ensuring
Designated compliance function function compliance Designated
activities.
integrate ESG practices in business business in practices ESG integrate
Codes of ethics and/or conduct fully fully conduct and/or ethics of Codes
3. Good International Practices International Good 3.
4. 4.
3. 3.
2. 2.
1. 1.
+
S S
&
leader in ESG practices. ESG in leader
Publicly recognized as a national national a as recognized Publicly
or company/corporate secretary. secretary. company/corporate or
Designated fulltime CG officer and/ officer CG fulltime Designated
orientation program. orientation
Code of ethics included in employee employee in included ethics of Code
of best practices. best of
conformance to the country’s code code country’s the to conformance
on CG code and practices, and their their and practices, and code CG on
Periodic disclosure to shareholders shareholders to disclosure Periodic
issues.
CG code, which addresses E addresses which code, CG
5. 5.
4. 4.
3. 3.
2. Intermediate Practices Intermediate 2.
2. 2.
1. 1.
+
S law law S
&
IFC Corporate Governance Matrix—Commitment to Environmental, Social, and Governance (Leadership and Culture) and (Leadership Governance and Social, Environmental, to Matrix—Commitment Governance Corporate IFC
corporate secretary. corporate
A company officer serves as a a as serves officer company A
approved by the board. the by approved
Code of ethics and/or conduct conduct and/or ethics of Code
and regulations. and
minimum, compliance with E with compliance minimum,
guiding the company. the guiding
stating the objectives and principles principles and objectives the stating
and transparency and disclosure, and and disclosure, and transparency and
stakeholders, compliance with the law law the with compliance stakeholders,
treatment of shareholders and other other and shareholders of treatment
the role of the board, rights and and rights board, the of role the
(CG) code addressing, at a minimum, minimum, a at addressing, code (CG)
Written policies that address, at a a at address, that policies Written
governance policies/corporate Written
4. 4.
3. 3.
2.
1. 1. Basic Practices Basic 1.
Functions Functions
and Culture Culture and
Formalities Formalities Recognition Recognition
Designated Officer/ Officer/ Designated
Code of Ethics Ethics of Code
2.1: Table
56 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 57 Part I: Disclosure Framework 58
Beyond the BalanceSheet| 2. Corporate Governance principles. its owncompliancewithcorporategovernance Example 2.2illustrateshow Türk Telekom rates procedures. audit) toensureimplementationofESGpoliciesand trol processesfunction(compliance, internal suggest thatthereportalsodescribeinternalcon- Good internationalpractices(MatrixLevel3), ethics and/orconduct, includingthefollowing: that thecompanycomplieswithitspoliciesorcodeof governance mechanismsthatareinplacetoensure The reportshoulddescribethemanagementand Policies CompliancewithESGCodesand 2.1.2. audit, remuneration, governance, andsustainability. specialized committees, includingonnomination, duties andtocarryoutmorespeci cthrough The boardmeetsregularlytoconductitsgeneral performance, andto ensurelegalandethicalconduct. the chiefexecutiveof cer, tomonitormanagement’s the company. Itsprimarydutyistoselectandoversee oversee thestrategy, management, andperformanceof structure. The boardisappointedbyshareholdersto rate governanceandofthecompany’s organizational The boardofdirectorsisacentralfunctioncorpo- the Board ofDirectors Structure andFunctioningof 2.2. Source: Türk Telekom. Rating—Türk Telekom 2015 Annual Report Corporate Governance Example 2.2: • • •
External veri cation; External veri cation; Internal audit; with ESGpoliciesandcodes; corporate secretary—toensurecompliance fulltime corporategovernanceof ceror Designated compliancefunction—including IFC Toolkit IFCfor Disclosure and Transparency
by anindependentnon-executivedirector. and chairrolesbeseparatethattheboardled practice (MatrixLevel3)recommendsthattheCEO pendent leadershipoftheboard, goodinternational Further, tobalancepower andtobolstertheinde- shareholders ofthecompany. of directorsthatareneitherexecutivesnormajor pendence, whichistypicallyensuredbythepresence aspect oftheboardstructureandfunctioningisinde- the companyanditsstakeholders. Therefore, onekey shareholders andminorityshareholders, andbetween management andshareholders, betweenmajority problems thattypicallyariseincompaniesbetween The boardisalsoresponsibleformanagingagency the company. integrate sustainabilityintothevaluepropositionof results. Also criticalisalong-termstrategicvisionto ensures bothoperationalperformanceandquarterly It iscriticaltohaveabalancedboardmembershipthat with Level4oftheMatrix. (See Table 2.2.) vided fordisclosureofleadership practices, consistent to goodinternationalpractices. Guidance isalsopro- lated toLevels1–3oftheMatrix, whichcorresponds Toolkit recommendsthedisclosureofinformationre- of progresswithboardstructureandfunctioning. The The Matrixcanbeusedtogaugeacompany’s level structure andfunctioning: The reportshouldaddresskeyaspectsofboard CONSULT THE MATRIX DEFINITION: Board Structures supervisory board. and functioningoftheboarddirectorsor board. This sectionaddressesonlythestructure distinct fromtheexecutive boardor board) isreferredtoasthesupervisoryboard, board structure, theboardofdirectors(or In jurisdictionswherecompanieshaveadual • • • •
and socialissues. The roleoftheboardinoverseeingenvironmental evaluation, andthecompanysecretary; The workofboards, includingcommittees, management, andmanagementofcon icts; dent directorsinaccountability, oversightofthe Board independenceandtheroleofindepen- ing diversityandESGquali cations; Board quali cationsandappointment, includ- management management
-
-
S/
( continued on next page) Independent directors periodically meet separately. 1/2 or more of board members are of board or more 1/2 defined as independent in with international accordance best practices. Audit committee membership 100% independent. CG committee Special board-level established. Specialized committees (gov - ernance, nominations, E & and compensa - sustainability, tion) composed of a majority includingindependent directors, the chair. Compensation committee compen - that executive ensures sation is based on performance (and ad - and long-term incentives and all types of current justed for risk), based on financialfuture and nonfinancial performance. Risk management or other spe cialized committee with a major andity of independent directors, experience a majority who have managing risks.
7. 4. Leadership 4. 1. 2. 3. 4. 5. 6. +
-
S/sustainability, S/sustainability, a 1/3 or more of board members are of board or more 1/3 defined as independent in accord- ance with international best practices. Board diversity, including but not diversity, Board in all achieved limited to gender, aspects. separate.Roles of chair and CEO are Board chair is independent, or a leadBoard independent director has beenindependent director designated. risk management, etc.), if applica - ble. independent directorsCommittee of party all material related- approves transactions. Majority of audit committee mem - bership is independent. Specialized committees address special technical topics or potential (e.g., nomina - conflicts of interest tions, compensation, technology/ E & cybersecurity, Board-established succession plan Board-established manage senior and members its for ment. Non-executive directors Non-executive at leastmeet separately once a year.
3. Good International Practices 2. 3. 4. 7. 5. 6. 1. 8. + The board is fully elected on an The board annual basis. 1/5 or more of board members are of board or more 1/5 management and independent from shareholders. controlling composition is based on a Board skills matrix. Board-established audit committee. Board-established
2. Intermediate Practices 1. 2. 3. 4. +
IFC Corporate Governance Matrix—Structure and Functioning of the Board of Directors and Functioning of the Board Matrix—Structure Governance IFC Corporate Board meets at least quarterlyBoard and is charged with objectively and is charged management. overseeing The board has a number of The board independent directors inindependent directors and with law accordance regulations. Board approves strategy. approves Board sufficient given members are Board to exercisetime and information their duty.
4. 3. 1. 2. 1. Basic Practices 1.
and Succession and Frequency
Composition Composition Committees Committees
Election, Role, Meeting Table 2.2:Table
58 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 59
S issues. Board and committee evaluations Board conducted/facilitated by third party. Special board-level committee Special board-level E & established to review independent audits reviews Board of Environment on effectiveness and Social Management System (ESMS), including stakeholder andengagement processes mechanism. grievance
4. Leadership 4. 8. 9. 10. +
S S 1 director b S policies; routinely S risks and impacts. S performance; ensures S risks. S issues/risks. & & or more has in-depth knowledge ofor more E board recurring ESG issues are ESG approves agenda items; board and E & strategy E & reviews the dialogue between appropriate and key stakeholders; company of External effectiveness ensures Communications Mechanism (ECM). that management ensures Board in place to identify and are systems manage E & Board is trained on industry is trained E & Board risk issues. and risk appetite integrateStrategy E has experienceAt least 1 director risks. industries, In sensitive analyzing and interpreting E & analyzing and interpreting
directors undergo an annual evaluation. undergo directors Board, committees and individual Board,
3. Good International Practices 14. 15. 10. 11. 12. 13. continued from previous page) 9. ( + S Board is trained on general E & on general is trained Board risk issues. The board as a whole undergoes The board periodic evaluation. Formal performance evaluation of management conducted annually.
2. Intermediate Practices 7. 5. 6. +
Examples of “sensitive industries” include oil, gas, mining, heavy industry (steel, cement), and chemical manufacturers, and large agro-commodity production or processing. agro-commodity production industry and large industries” include oil, gas, mining, heavy (steel, cement), and chemical manufacturers, Examples of “sensitive For example, IFC’s “Indicative Independent Director Definition.” For example, IFC’s Independent Director “Indicative
1. Basic Practices 1. a b
Performance
& S E of Oversight Evaluation and and Evaluation Table 2.2: of Directors and Functioning of the Board Table Matrix—Structure Governance IFC Corporate
60 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part I: Disclosure Framework
2. Corporate Governance 61 - IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit 2015 DIRECTOR NOMINEES 2015 DIRECTOR that the number of Direc- provide Our By-Laws which tors shall be determined by the Board, has set the number at 15. Upon the recommen- and Cor- dation of the Committee on Directors has nominated the Board Governance, porate Allen, Marc Allen, Ronald W. A. each of Herbert Richard G. Buffett, Ana Botín, Howard Bolland, G. Evan Gayle, Helene D. Barry Diller, M. Daley, Alexis M. Herman, Muhtar Kent, Greenberg, Elena Lagomasino, A. Kotick, Maria Robert election for B. Weinberg Sam Nunn and David indepen- All of the nominees are as a Director. Stock Exchange (“NYSE”) York dent under New A. rules, except Herbert governance corporate Indepen- Allen and Muhtar Kent. See “Director Transactions” dence and Related Person beginning on page 38. nominees currently Each of the Director and was elected by the serves on the Board Annual Meeting of at the 2015 shareowners will If elected, each Director Shareowners. Annual Meeting of hold office until the 2017 and until his or her successor is Shareowners reason to be no We have elected and qualified. of the nominees will be unable that any lieve or unwilling to serve if elected. Source: The Coca-Cola Company. Source: Nominating Process—The Example 2.4: Nominating Process—The Statement 2016 Proxy Coca-Cola Company - can nom how shareholders explain should The report whether there board members—and inate or appoint major shareholders in the process for is a difference Where companies or minority shareholders. and small - creditor representa representatives, have employee on their boards, representatives or government tives, representatives and should identify these the report 2.4.) (See Example state how they are appointed. clearly the report should For all board members, came onto the board and whenindicate when they have been Board members who their terms will end. terms may not always bereappointed for multiple on the next In Example 2.5 considered independent. mining com- Anglo-Australian an BHP Billiton, page, members who provides justi cation for board pany, periods. have served for extensive all direc- Regardless of how a director is nominated, interests oftors have a responsibility to act in the best the company. Beyond the Balance Sheet | Beyond
Board Nomination Procedure—Siam Procedure—Siam Nomination Board The report should describe the criteria used to select should describe the The report for the requirements including of the board, members directors. independent Nomination and Appointment the process of nominatingThe report should describe the It should also summarize and appointing directors. (if any), the nomination committee roles of the board, nominating and appointing boardand shareholders in (See Example 2.3.) members. 2.2.1. Board Qualifications and Qualifications 2.2.1. Board Independence Example 2.3: Commercial Bank Annual Report 2016 Bank Commercial Source: Siam Commercial Bank. Siam Commercial Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 60 Part I: Disclosure Framework 62
Beyond the BalanceSheet| 2. Corporate Governance aligned withtheorganization’s currentand futureneeds. plan tomaximizeaboard’s skillsetsandensurethat it is Board Blue RibbonCommissionon BuildingtheStrategic-Asset The NACD (National Association ofCorporate Directors) Strategic-Asset Board BEST-PRACTICE RESOURCES: Buildinga provides guidance on a continuous-improvement provides guidanceonacontinuous-improvement of thecompany. This canbedonefortheboardas a It shouldalsolinktothewiderstrategyandpurpose tion, such aslegal, nancial, market, andriskskills. to theskillsneededforboardcarryoutitsfunc- The reportshouldlinkboardmembers’quali cations for anycommitteestheyserveon. are particularlyrelevantintheirboardroles, including size elementsoftheboardmembers’backgroundsthat rently heldbyeachboardmember. Itshouldempha- experience, education, andotherboardpositionscur The reportshouldconciselypresenttherelevantwork Qualifications Annual Report 2016 Annual Report Director Example 2.5: Tenure—BHP Billiton Source: BHP Billiton. interests oftheCompany. independent judgementoractinthebest that mightcompromise hisabilitytoexercise associations withmanagement(or others) character andjudgementhasnotformed believes hehasretained independenceof the bestinterests oftheCompany. The Board materially interferes withhisabilitytoactin The Board tenure doesnotbelieve MrNasser’s need for progressive refreshing oftheBoard. rigorous review whichtookintoaccountthe appointment hasbeensubjecttoaparticularly termof rate Governance Code,MrNasser’s the Board. Inaccordance withtheUKCorpo- enhance theskillsandexperienceprofile of broad internationalexperiencematerially Director. and The Board believes hisexpertise June 2006asanindependentNon-executive Mr NasserwasfirstappointedtotheBoard in assessment. performance at the2016 AGMs, having undergone aformal years. JacNasserisstandingfor re-election ontheBoardeach served for more thannine had Directors, JacNasserandJohnSchubert, As attheendofyear underreview, two TENURE IFC Toolkit IFCfor Disclosure and Transparency
- including expertiseonESGissues. align withthecoreskillsforboardofdirectors, Prudential, aU.S. insurancecompany, andhowthey quali cations andexperienceofboardmembers Example 2.6showsadetailedsummaryofthe in-depth knowledgeofE&Srisks. tices suggestthatatleastoneboarddirectorhavean production orprocessing), goodinternationalprac- chemical manufacturers, andlargeagro-commodity E&S risks(suchasoil, gas, mining, heavyindustry, E&S riskissues. In industries thataremoreproneto Level 2)suggestthattheboardbetrainedongeneral the industrysector. Intermediatepractices(Matrix receive trainingonESGissuesgenerallyaswellfor sustainability mattersandwhetherboardmembers The reportshoulddescribetheboard’s expertiseon systems andunderstandESGrisks. the expertiserequiredtoevaluateE&Smanagement communication. This meansthattheboardmusthave dialogue withkeystakeholdersandensureeffective view performance. The boardshouldalsooverseethe approve E&Spoliciesandstrategyroutinelyre- regular agendaofboardmeetings, andthatitshould of environmentalandsocialmattersaspartthe (Matrix Level3)suggestthattheboardhaveoversight Sustainability expertise: Goodinternationalpractices quired quali cationsofdirectors. are alignedwiththecompany’s strategyandthere- that thecompositionandquali cationsofboard place alonger-term boardsuccessionplanthatensures gic-asset board”)suggeststhatcompanieshavein BEST PRACTICE (andtheconceptof “strate - the onboardingprocessandonanongoingbasis. ment andtrainingforboardmembers, bothaspartof The reportshouldalsodescribeprofessionaldevelop- rience againstkeyfunctionsoftheboard. as amatrixofcurrentboardmembers’skillsandexpe- be doneforeachboardmember. Itmaybepresented whole, andBESTPRACTICE suggeststhatitalsocan membership. Itshouldidentifythefollowing: directors andlevelsofindependenceregardingboard The reportshouldclearlyde nethedifferenttypesof Independence • •
suppliers orcustomers; shareholders orseniormanagement, orcompany family relationshipstoboard members, major cant linktoit, typicallythroughownership or for thecompanybuthavesome othersigni - bers: boardmemberswhodonotworkfulltime Non-independent non-executive boardmem- have fulltime(usuallyC-level)positions; Executive boardmembers: boardmemberswho
Part I: Disclosure Framework
2. Corporate Governance 63 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit board must have a level of independent directors that or codes. regulations, is in accordance with local laws, Good international practice (Matrix Level 3) recom- mends that independent directors meet separately from other board members at least once a year. Example 2.7 on the next page provides a breakdown of independent and non-independent directors for a Mexican mining company. Fresnillo, The report should clearly present the links between the brief- company and non-independent board members, ly noting why an independent member is considered to Sometimes more justi cation may be necessary be so.
Beyond the Balance Sheet | Beyond
board members who are not major sharehold- ers and do not otherwise work for the company formal or have relationships or business links, that enable signi cant in uence on or informal, company decisions—and therefore are indepen- dent of management and controlling or major shareholders. Independent non-executive board members: Independent non-executive Director Qualifications—Prudential Proxy Statement 2016 Statement 2.6:Example Proxy Qualifications—Prudential Director Source: Prudential. Source:
• It is considered good practice (Matrix Level 3) for companies to have a board composed of at least and companies are one-third independent directors, encouraged to move toward having a majority of the the At a minimum, board be independent directors. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 62 Part I: Disclosure Framework 64
Beyond the BalanceSheet| 2. Corporate Governance Source: BHPBilliton. Example 2.8: best practice. consistent withlocalrequirementsorinternational as longasubstantiveexplanationisgivenandit may stilldeterminethatthememberisindependent, some part-timeworkforthecompany. The board relative employedbythecompany, ormayhavedone a boardmemberfornineormoreyears, mayhavea a supplierorcustomerofthecompany, mayhavebeen For example, aboard membermayhavesomelinkto in situationswhereindependenceseemscompromised. Example 2.7: Board CompositionandIndependence—Fresnillo 2015 Annual Report Source: Fresnillo Plc. • • • that: The Board notesinparticular determined, consistentwithitspolicyontheindependenceofDirectors, thatMrMaxsted isindependent. or independentjudgement,hisabilitytoactinthebestinterests ofBHPBilliton. The Board has relationship withKPMGdoesnotmateriallyinterfere withMrMaxsted’s exercise ofobjective, unfettered Lindsay Maxsted wastheCEOofKPMGin Australia from 2001until2007. The Board believes thisprior RELATIONSHIPS ANDASSOCIATIONS anddesirable. andChairmanshipofthe Riskand Audit Committeeare considered bytheBoard tobeappropriate inthedischarge oftheBoard’s fieldtobeimportant responsibilities. HismembershipoftheBoard believes MrMaxsted’s financialacumenandextensive experienceinthecorporate restructuring way involved in,orabletoinfluence, any auditactivity associatedwithBHPBilliton. TheBoard withKPMG; periodfor former auditfirmpartners; years asthebenchmark‘cooling off’ Company—which are acombinationof Australian, UKandUSrulesguidelines-allusethree retirement from KPMG. The Director independencerulesandguidelinesthatapplytothe Jaime Lomelín (Chair ofHSECRCommittee) Rafael MacGregor Fernández Arturo Juan Bordes Alejandro Baillères Committee) (Chairman andChairmanofNominations Baillères Alberto NON-INDEPENDENT Non-executive Directors whoare considered tobenon-independent,asshowninthediagram below. The Board iscomprisedofsixNon-executive Directors whoare considered tobeindependent andsix BOARD COMPOSITION AND INDEPENDENCE Mr Maxsted was not part oftheKPMG auditpractice after1980,andwhileatKPMGwasnotinany Mr Maxsted wasnotpart Mr Maxsted hasnofinancial(e.g.pension, fee) orconsulting arrangementsretainer oradvisory at thetimeofhisappointmenttoBoard, more thanthree years hadelapsedsinceMrMaxsted’s Explanation of Director Independence—BHP Billiton 2016 Annual Report IFC Toolkit IFCfor Disclosure and Transparency auditors, isacceptableasanindependentdirector. because ofapriorrolewithonethecompany’s member, whoseindependencecouldbequestioned In Example2.8, BHPBillitonexplainswhyaboard background, includingrelevantexperienceorexper of differentages, ethnicities, andotherdifferencesin candidates. Beyond gender, thiscaninclude candidates der balanceanddrawfromawiderpoolofpotential Boards areincreasinglyexpectedtoachievebettergen- Diversity Jaime Serra Fernando Ruiz (Chair ofRemuneration Committee) Charles Jacobs Bárbara GarzaLagüera María AsunciónAramburuzabala Committee) of Audit (Senior IndependentDirector andChair Guy Wilson INDEPENDENT - Part I: Disclosure Framework
2. Corporate Governance 65
calls for board skills and diversity, calls for board skills and diversity, IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Principle 7: The governing body should compriseThe governing Principle 7: Setting strategy and vision of the company; Selection of the chief executive of cer and senior management;
• • Roles and Responsibilities and Responsibilities Roles and activities the main describe should The report on major focusing of the board, responsibilities a should also include It and decisions. responsibilities the are disclosed on committee charters link to where explain howThe report should website. company’s providing guidance serves classic functions: the board performance of senior manage- to and monitoring the should also It of all shareholders. ment for the bene t The board of board meetings. indicate the frequency should be given and its members should meet regularly, to exercise their duties. suf cient time and information Team Management The Board and the the division of responsi- The report should describe board and senior management, bilities between the are also members of theincluding whether executives the board routinely attend If executives on board. should indicate whether the the report board meetings, without the presence “executive sessions” board holds of management. of the board inThe report also should address the role it should describe Speci cally, relation to management. the role of the board in the following areas: including a range of backgrounds and gender. Governance for South King IV Report on Corporate The and independence for it to discharge its governance diversity, role and responsibilities objectively and effectively. Africa, 2016, Africa, experience, skills, the appropriate balance of knowledge,
“The board of directors“The board call for disclosure of the following: tise. Good international practice (Matrix Level 3) Good international tise. including but not diversity, recommends that board in all respects. be achieved limited to gender, was con- The report should explain how diversity any policysidered in recent board nominations and a Natura, In Example 2.9, of the board in this area. illustrates the composi- Brazilian cosmetics company, and number age, tion of its board in terms of gender, of terms served. Board Diversity—Natura 2016 Annual Report 2016 Diversity—Natura Board Example 2.9: 2.2.2. and Committees Work Board its work, The report should describe the board’s its relationships within and and committee structure, outside the company. Source: Natura. Source: Board member quali cations, their board (and other) Board member quali cations, positions; it matters; Board member independence—and why Board selection process.
• • • BEST-PRACTICE RESOURCES: RESOURCES: BEST-PRACTICE Independent Directors Directors Independent (ICGN) Network Governance International Corporate The Principles: Global Governance should identify in the annual report the names of the direc- report the names of in the annual should identify board to be independent and whotors considered by the independent judgment free from anyare able to exercise board should state its reasons if itThe external in uence. is independent notwithstandingdetermines that a director or circumstances which maythe existence of relationships .” . . determination. appear relevant to its BEST-PRACTICE RESOURCES: Board Diversity Diversity Board RESOURCES: BEST-PRACTICE G20/OECD Principles The IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 64 Part I: Disclosure Framework 66
Beyond the BalanceSheet| 2. Corporate Governance strategic decisions, andinnovation. ance anddecisionmakingarelinkedtovaluecreation, The
Oversight ofhumanresourcespolicy. tions, suchasrelated-partytransactions; large-value transactions, andcon ictedtransac- Authorization ofmajorcapitalexpenditures, statements; external audit, andpreparationof nancial Oversight ofinternalcontrols, internaland Risk management; IFC Toolkit IFCfor Disclosure and Transparency call for disclosure on division call fordisclosureondivision
Level 4), thecompensationcommitteeshouldensure According toLEADERSHIPPRACTICES (Matrix ofthis 71 Audit ,Toolkit.) page of theauditcommittee, see2.3.1. InternalControlsand risk. (Forfurtherguidanceontheroleanddeliberations with amajorityofmembersexperiencedinmanaging tices alsosuggestthatcompanieshaveariskcommittee 4) suggest100percentindependence. directors. tee shouldbecomposedofamajorityindependent In goodpractice(MatrixLevel3), theauditcommit- focus orpolicyofaparticularcommittee. committee addressedaswellanychangesinthe committee’s work, highlightingimportantareasthe The reportalsoshouldincludeareviewofeach The reportshoulddescribethefollowing: an independentchair. independent directors, andthateachcommitteehave that amajorityofmembersallcommitteesbe cable. Leadershippractices(MatrixLevel4)suggest structures andcharters. The G20/OECDPrinciplescallfordisclosureoncommittee Board CommitteeStructure BEST-PRACTICE RESOURCES: • • •
the committees’charters. dence andquali cations)awebsitelinkto Committees’ composition(includingindepen- with theboard); Committees’ roles(includingcommunication ance, sustainability, andriskmanagement; nomination, remuneration, corporategovern- The typesofcommittees—audit, risk, nance, LEADERSHIP PRACTICES (MatrixLevel Leadership prac-
Part I: Disclosure Framework
2. Corporate Governance 67 -
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit frequency and who conducts the evaluation); and who conducts frequency was based on; that the evaluation Key indicators Results/areas of improvement; on the results; Action plans based board the previous period’s Actions taken after evaluation. A description of the process (includingA description
• • • • • individually, and of the board committees. It should committees. the board and of individually, following: include the Beyond the Balance Sheet | Beyond
compensation for the Chief Executive Offi cer, Financial Director, and other Executive and other Executive Financial Director, Offi cer, the Chief Executive compensation for and unit employees; unit and non-bargaining the salary bargaining mandate for report report inclusion in the integrated the remuneration 2014. for for 2015 total compensation pools, projected 2015 incentive proposed pools. final 2014 incentive reports on subsidiary entities pertaining and benefi ts; and pay to and industry in compensation practices reports trends ap an external adviser on from and further disclosures on our remuneration our remunera- enhanced feedback investor at plan which was approved plan to an equity share phantom share of the the conversion and mid-2015) (vesting awards incentive the 2012 long-term outcomes for vesting proposals from the Group Chairman on the performance of the Chief Executive Offi cer, Offi cer, Chairman on the performance of the Chief Executive the Group from proposals where approval and terminations, and provided to senior hires relating proposals management’s Review Panel (RRP) on conduct-related Remuneration updates from and certain European risk taker’, the defi nition of ‘material updates on role-based pay, the Group; updates on pensions and benefi ts across and in general the Group for and philosophy policy structure, remuneration 2015/2016 the executive team in particular;the executive Reviewed: Committee members; Recommended to the Board: and and compensation ratios; expenditure The in the Group. and incentives remuneration is satisfi ed with the status of The GRHRC and performance, and will pay between ning the link time in refi spent considerable GRHRC 2016. continue on this journey through proaches. Responded to: in line with best practice. tion disclosure Approved: meeting; the 2015 annual general in mid-2016); (vesting reports awards of the 2013 on the prognosis received and proposals from the Chief Executive Offi cer on the performance Offi cer on the the Chief Executive of the Financial from and proposals Committee members; and other Executive Director as per the Committee mandate; required incidents and the impact on compensation; Authority guidelines and policy statements Association and Prudential Regulatory Banking on compensation; l l l l l l l l l l l l l l l l Board Evaluation the process of annualThe report should describe members of board as a whole, evaluation of the board that executive compensation is based on is based compensation that executive so as to non nancial performance nancial and incentives. provide long-term re- report for the provides an activity Example 2.11 Absa committee of and human resources muneration African a South Africa), Barclays Group (formerly bank. Mohamed Husain (Chairman) Patrick Clackson Cuba Yolanda Alex Darko Lucas-Bull Wendy Munday Trevor Attendees: Maria Ramos Chief: Human Executive Resources Head of Reward Group Remuneration and Human Resources Committee Human Resources and Remuneration Group Source: Absa Group (formerly Barclays Africa). Barclays (formerly Absa Group Source: Committee Description—Absa Group (formerly Barclays Africa) 2015 Barclays (formerly Group Committee Description—Absa Example 2.11: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 66 LEADERSHIP PRACTICES (Matrix Level 4) suggest 2.3. Control Environment that evaluations of the board and its committees be The control environment refers to an interconnected conducted by an independent third party. Board evalu- system of internal control and risk management ation should link to succession planning for the board structures, processes, and activities that are designed and for senior management. to provide reasonable assurance that the company can deliver on its strategic objectives and is operat- Governance of Sustainability ing ef ciently and effectively. The control environ- The report should address whether the company has ment should ensure coverage of the entire enterprise set up a process for oversight of environmental and in a holistic manner. social issues at the board level. If relevant, it should
2. Governance Corporate also describe the following: Internal control systems, including the internal • Board approval of sustainability strategy and audit, are designed to ensure the integrity and Part Framework I: Disclosure policies; reliability of nancial statements and non nancial reporting as well as compliance with the law and • Whether ESG is on the board agenda; with internal standards and policies. This includes • Board approach to overseeing E&S issues, in- the governance of subsidiaries. cluding any special committee and stakeholder dialogue; Risk management supports the company strategy by assessing and managing risks and opportuni- • A review of the effectiveness of E&S management ties for the business. It includes risk identi cation, processes, including a grievance mechanism. assessments, integration, and responses and The report should describe the structure and processes monitoring. in place to ensure that ESG issues are periodically re- viewed and addressed. It should include the following: CONSULT THE MATRIX • Oversight over E&S issues at the board level; The Matrix can be used to gauge a company’s • Corporate governance committee; level of progress with its control environment. The Toolkit recommends the disclosure of information • Committee or subcommittee to review sustain- related to Levels 1–3 of the Matrix, which corre- ability issues. sponds to good international practices. Guidance Example 2.12 describes BHP Billiton’s approach to is also provided for disclosure of leadership governance of sustainability, including the sustain- practices, consistent with Level 4 of the Matrix. ability committees. (See Table 2.3.)
Example 2.12: Board Sustainability Committees—BHP Billiton Annual Report 2016
1.11.1 Our sustainability approach Our approach to sustainability is led by a sustainability framework that guides our investments in our host countries and local communities, as well as directly at our operated assets. The framework applies a risk-based approach to sustainability, and assesses sustainability risks deemed materi- al to our business with consideration of the potential health, safety,environmental, community, reputational, legal and financial impacts. Risk severity is assessed according to the most severe associated impact, which allows us to understand the potential causes and impacts in the context of business plans. We also have public sustainability performance targets and mandatory minimum performance requirements, as articulated in Our Requirements standards. These standards are the foundation for developing and implementing management systems at our operated assets. We seek to influence the application of our standards at our non-operated joint ventures. Our Board oversees our sustainability approach, with the Sustainability Committee overseeing Our approach to sustainability is led health, safety, environment and community by a sustainability framework that (HSEC) matters, including climate change, human guides our investments in our host rights, HSEC-related risk control, and legal and countries and local communities. regulatory compliance, sustainability reporting and overall HSEC performance.
Source: BHP Billiton.
68 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency
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continued on next page) COSO, ISO 31000, ( b 19600, 37001, and 27001. 19600, 37001, structure The organizational adopted by management has a on performance, effect positive and leadership productivity, effectiveness. Control environment in accor environment Control dance with highest international including but not standards, limited to IIA, Audit committee reviews longAudit committee reviews association of EA. Audit committee ensures that theAudit committee ensures internal audit function is subject to periodic quality assessment by party. third
2. 1. 4. 4. Leadership 4. 3. +
- a -
Internal audit function is indepen - and has risk-based, dent, objective, unlimited scope of activity. Head of internal audit reports to the audit committee and adminis - to management. tratively internal audit has been adopted. management, internal control and management, internal control “Three model of risk lines of defense” management and compliance with policies and procedures. risk reports to board-level CRO management committee or equivalent. Board routinely monitors risk routinely Board Chief compliance officer reportsChief compliance officer to the audit committee or equivalent to manage and administratively ment. takes a periodic quality assessment Audit Quality of EA, using relevant Indicators. has established CFOCompany function. Audit committee owns relationship with external auditor (EA); agrees and under on scope and audit fees,
3. Good International Practices 2. 3. 1. 5. 4. 6. 8. 7. +
Board approves risk appetite. approves Board has establishedCompany framework risk-management or (CRO) with a chief risk officer access with unfettered equivalent to the board. Comprehensive compliance Comprehensive with annually reviewed, program mechanisms to report wrongdoing and misconduct. Audit committee ensures actions on control corrective deficiencies identified in Man - agement Letters.
2. 3. 4. 2. Intermediate Practices 1. +
IFC Corporate Governance—Control Environment (Internal Control System, Internal Audit Function, Risk Governance and Compliance) Audit Function, Risk Governance Internal System, (Internal Control Environment Governance—Control IFC Corporate policies and procedures. Company has establishedCompany documented internal control Internal audit function regularly interfaces with external audi - tors and is accountable to the board. Written Management Letters Written by external auditor. provided
1. 1. Basic Practices 1.
2. 3.
Audit Audit
Internal Controls Controls Internal Audit External Risk Governance Governance Risk Compliance
Internal Table 2.3:Table
68 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 69
S S/ continued from previous page) ( Board exercises oversight over oversight exercises Board and structure the organizational the activities of its subsidiaries. Board or sustainability committee Board actions on E & corrective ensures issues. Head of ESG reportsE & to board sustainability committee. ESMS is consistent with interna - (e.g., ISO 14001). tional standards
8. 5. 6. 7. 4. Leadership 4. + -
S risks are partS risks are of establishing - head has unfet S/sustainability & & Company has a centralized sub has a centralized Company sidiary function and governance categorized basedsubsidiaries are on complexity and an appropriate applied to framework governance each category. ESG activities are highly integrated, ESG activities are and efficient supporteffective, and operationalthe strategic business objectives, and controls business objectives, support objectives. and Information Periodic ESG, IT, Security internal audits. in ESMS integrated Comprehensive and framework, risk-management E the risk appetite. access to senior managementtered and CRO.
13. 3. Good International Practices 9. 10. 11. 12. E + - S
Company has policies and pro Company the creation to control cedures and dissolution of subsidiaries. Company has establishedCompany industry in its E & practices practices. risk-management
2. Intermediate Practices 7. 6. +
subsidiaries. Company can identify itsCompany
Namely, management is the first line of defense, risk management and compliance function are the second line of defense, and internal and external audit as independent assurance providers are the third line of defense. the third are providers and internal external audit as independent assurance the second line of defense, risk management and compliance function are management is the first line of defense, Namely, The Institute of Internal Auditors standards and related promulgations. and related Auditors standards The Institute of Internal
a b 1. Basic Practices 1. 4.
Governance
& S E of Integrating
Subsidiary IFC Corporate Governance Matrix—Control Environment (Internal Control System, Internal Audit Function, Risk Governance and Compliance) Audit Function, Risk Governance Internal System, 2.3: (Internal Control Environment Table Matrix—Control Governance IFC Corporate
70 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part I: Disclosure Framework
2. Corporate Governance 71 -
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Whether the internal auditor reports to the au- whether that is its main or only dit committee, and the internal auditor’s line of reporting, relationship with senior management; and ndings of the challenges, Main activities, internal audit; If the company does not have a dedicated inter how this role is carried out, nal audit function, including by an external rm; compliance: code of ethics, whistleblower ethics, compliance: code of anticorruption measures. systems, Financial accounting and reporting controls; Financial accounting and reporting controls; Non nancial accounting including sustainability Operational controls, consumer, (worker, and stakeholder risks safety); community health and including ethics and Compliance controls,
• • • • • • • Internal Controls Internal au- of the board, the roles describe should The report in the internal and senior management dit committee, include Disclosure should the company. controls of it whether speci cally of internal controls, the scope following: covers the next page describes typicalExample 2.13 on the including internal controls, company’s a of elements and compliance controls and operational, nancial, risk management. Internal Audit is carryingThe report should describe how the board integrity ofout its responsibility to ensure the nancial and it the company and the integrity of its operations, the board andshould provide insight into the work of audit committee in this area. the Level 3), In good international practices (Matrix objec- internal audit function should be independent, and empowered with an unlimited risk-based, tive, scope of activities. 3) alsoGood international practice (Matrix Level functionsuggests that the head of the internal audit toreport to the audit committee and administratively management. functionIt is common practice for the internal audit It is also to meet regularly with the external auditors. common practice to have an internal audit function (either in-house or outsourced) that regularly tests and to ensure checks the effectiveness of internal controls, the nancial integrity of the company. (Matrix Level 4) suggest LEADERSHIP PRACTICES that the internal audit function be subject to periodic quality assessment by a third party. The report should include the following information:
Beyond the Balance Sheet | Beyond
(Matrix Level 4) suggest helps Internal Control Framework Control environment Risk assessment Control activities Information and communication Monitoring activities
• • • • • Together these cover an entity’s operations, report- operations, cover an entity’s these Together make speci c provisions and compliance and ing, operating unit, divisional, for issues at the entity, and functional levels. © 2013, Committee of Sponsoring Organizations of the© 2013, Committee of Sponsoring Organizations Treadway Commission (COSO). Used by permission. Commission (COSO). Treadway BEST-PRACTICE RESOURCES: RESOURCES: BEST-PRACTICE Internal Control The Committee 2013 COSO Framwork: The Treadway of Sponsoring Organizations of the Commission controlscompanies design and implement internal that adapt to changing business and operating risks to acceptable levels, mitigate environments, govern- and support sound decision making and ance. The Framework consists of 17 principles inThe Framework ance. 5 areas: 2.3.1. Internal Controls and Audit and Controls Internal 2.3.1. in process and structure should address the The report internal and external controls. place for the company’s LEADERSHIP PRACTICES be in accordance withthat the control environment as those set such standards, the highest international and ISO COSO, Auditors, by the Institute of Internal and 27001. 37001, 31000, There are several internationally recognized frame - recognized internationally are several There set by as those such such control systems, works for and ISO COSO, Auditors, of Internal the Institute 31000. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 70 Part I: Disclosure Framework 72
Beyond the BalanceSheet| 2. Corporate Governance Source: NedbankGroup. Example 2.14: Internal Audit—Nedbank Group 2014Integrated Report Example 2.13: InternalControls—Fresnillo 2015 Annual Report Source: Fresnillo Plc. ments inaccordance withIFRS. and transactions are recorded accurately andfairly topermitthepreparation offinancialstate systems includepoliciesandprocedures toensure thatadequateaccountingrecords are maintained process andtheGroup’sfinancial reporting process for preparing consolidatedaccounts. These The Group hasinplaceinternalcontrols andriskmanagementsystems inrelation totheGroup’s Committee andtheexecutive management ontheGroup’s system ofinternalcontrol. controls. The Internal obtainedlettersofrepresentation fromAudit department theExecutive were usedasthebasisfor theprocess ofreviewing theeffectiveness ofthesystem ofinternal reviewed timeframe. atleastonceover athree-year The riskcategoriessetoutinthematrix approved bythe Audit Committee,ensures thatinternalcontrols over alloftheoperations are all inthistaskbytheInternal supported Audit department. The annualInternal Audit programme, of internalcontrol iscollectively assumedbytheExecutive Committee. The Executive Committeeis al basis. The day-to-day responsibility for managingriskandthemaintenanceofGroup’s system Fresnillo’s internalcontrols. The Audit Committeereviews thesystem ofinternalcontrol onanannu- The Board hasdelegatedtothe Audit Committeeitsresponsibility for reviewing theeffectiveness of against materialmisstatementorloss. eliminate riskaltogether. Consequentlyitcanonlyprovide reasonable andnotabsoluteassurance needsandtheriskstowhichitisexposed.Itdesigned tomanageriskrather than particular the limitationsinherent inany system ofinternalcontrol, theGroup’ssystem isdesignedtomeetits and managesignificantrisksassociatedwiththeachievement oftheGroup’s objectives. Becauseof ment, andreviewing itseffectiveness. The system ofinternalcontrol isdesignedtoidentify, evaluate terial controls, includingfinancial, operational andcompliancecontrols and related riskmanage The Board hasoverall responsibility for theGroup’s system ofinternalcontrol, whichincludesallma- Internal controls control concernsidentifiedbymanagementandthe board. Thisplanisapproved bytheGAC. tointernalaudit,includinganyconsideration risksor specific requirementsregulatory pertaining sible for developing a12-monthrolling-audit plan,usingarisk-based methodologyandtaking into the group’s objectives, andinsodoinghelpimprove thecontrol culture ofthegroup. Itisrespon- mitigate themostsignificantrisks,bothcurrent andemerging, thatthreaten theachievement of processes, managementofriskandsystems ofinternalcontrol are adequateandeffective to purpose ofGIAistoprovide independent,objective assurance totheboard thatthegovernance ofthe EnterprisewideRiskManagementFramework asathirdGIA forms lineofdefence. part The approved bytheGroupcharter Audit Committee(GAC). authority andresponsibilities setoutintheBanks Act andregulations andformally definedina in termsoftheBanks Act, 94of1990(asamended)andtheregulations thereto, withitspurpose, Group Internal Audit (GIA) isacentralised, independentassurance function.Itwasconstituted AUDIT INTERNAL • •
action oncontrolde ciencies, especiallythose How theauditcommitteeensurescorrective systems; tices andoftheITinformationsecurity and effectivenessofESGpoliciesprac- Whether internalauditassessestheadequacy IFC Toolkit IFCfor Disclosure and Transparency line ofdefense. part oftheriskmanagementframework—asathird Nedbank, aSouth African bank, andhowitforms Example 2.14describestheinternalauditprocessfor ment letter. highlighted intheexternalauditor’s manage- - - Part I: Disclosure Framework
2. Corporate Governance 73 -
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit statements. It also typically oversees the internal oversees typically It also statements. external and the audit, the external audit process, may also oversee related-par The committee auditor. risk risk committee, if there is no and, ty transactions and management. oversight audit commit- Aggreko’s introduces Example 2.15 of and areas key achievements, its members, tee, interesting for its futureThis example is also focus. (Matrix Level 3) that helpsfocus—a good practice accountable. hold the audit committee External Audit quali cations, the tenure, The report should describe the external auditor. and independence of Beyond the Balance Sheet | Beyond
Source: Aggreko. Source: Audit Committee—Aggreko Audit Committee—Aggreko Example 2.15: Annual Report 2015 Audit Committee the role and deliberationsThe report should describe typicallyThis committee of the audit committee. accounting and auditingensures that appropriate true and accurate nancialare in place to produce BEST-PRACTICE RESOURCES: Financial Reporting, Financial RESOURCES: BEST-PRACTICE Controls Audit, and in of the board note the primacy G20/OECD Principles The nancial reporting board’s effectiveness of the ensuring the controls. and internal audit, internal systems, IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 72 Part I: Disclosure Framework 74 74
Beyond the BalanceSheet| 2. Corporate Governance auditor, usingrelevantauditqualityindicators. undertake aperiodicqualityassessmentoftheexternal external auditor, agreeonscopeandauditfees, and that theauditcommitteeownrelationshipwith Good internationalpractice(MatrixLevel3)suggests audit. with theexternalauditorbefore, during, andafterthe committee’s oversightandregularrelations/meetings role inagreeingtotheauditplanaswell The reportshouldalsoaddresstheauditcommittee’s provide thefollowinginformation: (See Example2.16.)Speci cally, thereportshould Source: CLPGroup. Example 2.16: External Auditor—CLP Group 2015 Annual Report • • • • • related non-audit services totheGroup:related non-auditservices of theauditfirmnationallyorinternationally)providing the following auditandpermissible havinginformed third knowledgeofallrelevant party information wouldreasonably concludeaspart control, ownershipormanagementwiththeexternalauditorany entitythatareasonable and During theyear, theexternalauditor(whichfor thesepurposesincludesany entityundercommon or theperception ofsuchindependence. bytheexternalauditor,undertaken withnoadverse effect ontheindependenceoftheirauditwork, benefitstoCLP In addition,therefrom thatworkbeing mustbeclearefficienciesand value-added criteria suggestedintheListingRulesandhasbeenpre-approved bythe Audit Committee. independence, PwCwillnotbeemployed for non-auditworkunlessthemeets Company whichmay reasonably bethoughttobearontheirindependence.Inorder tomaintaintheir are independentwithrespect totheCompany andthatthere is norelationship between PwCandthe The Group’s PwChaswrittentothe external auditorisPwC. Audit Committeeconfirmingthatthey EXTERNAL AUDITOR
management letter. raised intheauditreportorexternalauditor Subsequent actionsbymanagementonissues external audit; Periodic assessment of the quality of the Periodic assessmentofthequality con ict ofinterest); partner (thelongerthetenuremoreriskof Tenure androtationoftheaudit rm plus abreakdownofauditandnon-auditfees; impact, ifany, ontheindependenceofaudit, Non-audit workbytheexternalauditorandits tion onindependence; reengaged, andtheeffectofanylongassocia- auditor, whyaparticular auditorisengagedor Independence andquali cationsoftheexternal Total Otherservices relating to services Accounting/tax advisory businessdevelopment Permissible auditrelated andnon-auditservices Audit IFC Toolkit IFCfor Disclosure and Transparency
consolidated intotheparent’s nancialresults. percent ownedbytheparent, their nancialresultsare Furthermore, sincetheygenerallyaremorethan50 represent alargeshareoftheparentcompany’s value. to setupalocallyincorporatedentity, andtheycan optimization, limitationofliability, orrequirements sidiaries aresetupforvariousreasons, includingtax an organization’s riskmanagementframework. Sub- Strong subsidiarygovernancecanbeacriticaltoolin Subsidiary GovernanceFramework audit processandcommitteeoversight. South African miningcompany, aspartofitsinternal assurance ofkeysustainabilitydataforGold eld, a Example 2.17illustratestheprocessandresultsof independent provider. that ESGdatabesubjecttoanannualauditby LEADERSHIP PRACTICES (MatrixLevel4)suggest as nancialstatements. tion, includingsustainability, tobeofthesamequality PRACTICE forbusiness-criticalnon nancialinforma- For theboardtomakeinformeddecisions, itisBEST cial andsustainabilityinformation. audit committeeinensuringthequalityofnon nan- mittee. The reportshouldalsodescribetheroleof social issuesarewithinthescopeofauditcom- The reportshouldindicatewhetherenvironmentaland Integrating Sustainability 2015 HK$M 39 47 6 2 2014 HK$M 44 37 6 1 Part I: Disclosure Framework
2. Corporate Governance 75 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit The board exercises oversight over The company can identify its Basic Practices: subsidiaries. - The company has poli Intermediate Practices: cies and procedures to control the creation and dissolution of subsidiaries. The company Good International Practices: has a centralized subsidiary governance func- and subsidiaries are categorized based on tion, complexity with an appropriate governance framework applied to each category. Leadership: the organizational structure and the activities of its subsidiaries.
• • • • Following this approach, the annual report should Following this approach, provide organizational charts of the legal-entity struc- both holistically and based ture of the organization, -
Beyond the Balance Sheet | Beyond
Source: Gold Fields. Source: Assurance of Sustainability Data—Gold Fields Integrated Integrated Fields Data—Gold of Sustainability Assurance 2.17: Example Annual Report 2016 Although they are controlled by the parent company, Although they are controlled by the parent company, subsidiaries are separate legal entities with separate createsThis management and governance structure. especially in subsidiaries that are an inherent con ict, where the board of the less than 100 percent owned, subsidiary owes a duciary duty not only to the parent (controlling shareholder) but also to the subsidiary itself and all its shareholders. unlike public companies that are subject In addition, private companies to strict disclosure requirements, a robust subsidiary gov- Therefore, can be opaque. ernance framework provides the controls and infor mation ow that allow the parent company’s board mation ow that allow the parent company’s to exercise oversight over the organizational structure The Matrix provides and activities of subsidiaries. for escalating practices of a subsidiary governance framework: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 74 Part I: Disclosure Framework 76 King IVCodeofCorporate Governance: BEST-PRACTICE RESOURCES: HoldingCompanies have beenadoptedbysubsidiarycompaniesinthegroup.” governance andoperationalpoliciesoftheholdingcompany appropriate forthegroup, including. . .theextenttowhich governance frameworkaddressesmattersas of theholdingcompanyshould. . .ensurethatthegroup Beyond the BalanceSheet| 2. Corporate Governance appetite andoverseeingtherisk managementprocess. ing theroleofboardinsetting thecompany’s risk and governancestructurefor managing risks, includ- The reportshoulddescribethe companywidesystem RiskGovernance 2.3.2. the subsidiary. compliance ofthegovernancepracticesputinplaceby internal auditfunctiontoevaluatetherobustnessand periodic assessments, theparentcompanycanuseits BEST PRACTICES suggestthat, whenconducting control environment, coveringthefollowing: the subsidiarygovernanceframeworkaspartof The annualreportshouldalsoincludeadescriptionof representative of ces. of business, assets, revenue, regulators, branches, and organization’s footprint, includingjurisdiction, line on criteriathatwouldhelptheboarddetermine • • • • • •
or approval. quire escalationtotheparentboardforreview criteria usedtodeterminetransactionsthatre- Escalation procedures:informationonthe parent toensurecompliancebythesubsidiary; and otherinternalcontrolprocessesofthe Internal controlprocess:applicationofaudit sidiary entities; organizational structureandactivitiesofsub- the boardofparentcompanyoversees Subsidiary oversight attheboardlevel: how and complexity; on acategorizationofitsstrategicimportance governance isadaptedtoeachsubsidiary, based Subsidiary categorization: howthesubsidiary that serveonsubsidiaryboards; including independentnon-executivedirectors policy onthestructureofsubsidiaryboards, boards: Structure andcompositionofsubsidiary over thereportingperiod, andwhy; what entitieshavebeencreatedordissolved creation anddissolutionofnewlegalentities, mation ontheinternalapprovalprocessfor Creation anddissolutionoflegal entities:infor information ontheorganization’s IFC Toolkit IFCfor Disclosure and Transparency
“ The board The board
- Analysis andResponse, page 24 ofthis Toolkit.) more onriskassessmentandmitigation, see1.3. Risk board, whicheverisresponsibleforriskoversight. (For committee oftheboardoraudit that theCRO shouldreporttotheriskmanagement the board. Goodpractices(MatrixLevel3)suggest (CRO) orequivalentthathasunfetteredaccessto risk managementframework, withachiefriskof cer Common practicessuggestthatcompaniesestablisha measures ofriskappetiteforUBS, aSwissbank. pro ling criteria. Example2.19illustratesquantitative 2.18, CLPGroupdescribesitsriskappetiteand risk appetitewasapprovedbytheboard. InExample The reportshouldindicatewhethertheorganization’s information. disclosure includebothqualitativeandquantitative BEST PRACTICE suggeststhatriskappetite address thefollowing: and businessplans. Speci cally, thereportshould prepared toacceptinpursuitofitsstrategicobjectives gregate levelandtypeofriskthattheorganizationis The reportshouldincludeadescriptionoftheag- Risk Appetite whether additionalcontrolsare required. the organization’s riskappetite, andhowitdecides controls todeterminewhether theriskleveliswithin how thecompanyevaluates effectivenessofitsrisk mining theresponsetoriskevents. Itshouldaddress The reportshoulddescribethemethodologyfordeter information isused. trolled; howthelevelofriskisevaluated;andwhat process—how risksareidenti ed, monitored, andcon- The reportshoulddescribetheriskmanagement Risk Assessment andManagement decisions. of riskappetiteintolimits, structures, andmanagement formulation ofariskappetitestatement, andthetranslation cluding theroleofboardinsettingriskappetite, the Principles provideextensiveguidanceonriskappetite, in- Basel CommitteeonBankingSupervision: Corporate GovernancePrinciplesforBanks— Risk Appetite for Banks BEST-PRACTICE RESOURCES: • • • •
Quantitative andqualitativemeasuresused. How riskappetiteisdetermined; Maximum risktoleranceforeachmaterialrisk; pro le oftheorganization; Overall riskappetite, riskcapacity, andtherisk
The Basel The Basel
-
Part I: Disclosure Framework
2. Corporate Governance 77 - - IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: UBS. Source: Appetite Objectives— Risk Quantitative Example 2.19: Annual Report UBS 2016 business / supply interruption leading to severe impact on the community, and on the community, impact leading to severe business / supply interruption incidents. environmental severe material financial loss impacting ability to execute the Group’s business strategy and / or business strategy Group’s loss impacting ability to execute the material financial public, and the general contractors of our staff, and health safety incidents affecting / business leading to loss of critical operational of external regulations material breach name, and brand reputation damage of the Group’s
Based on the above, CLP has established its risk monitoring in the form of a risk assessment CLP has established its risk monitoring in the form Based on the above, Business units risks and prioritise risk management effortsmatrix to help rank level. at the Group to establish their own risk profiling, in order to adopt the same risk matrix structure required are materiality to their own reference of identified risks with determine consequence and likelihood as establishing risk mitigation strategies. as well and circumstances ongoing financial viability, the Group’s materially compromising fines, licence and / or substantial • • • • • • CLP’s Risk Appetite and Risk Profiling Criteria Profiling and Risk Appetite CLP’s Risk is willing to undertake CLP’s the Group the amount of risk in pursuit of its represents risk appetite of its stake and expectations Framework Value with CLP’s In line business objectives. and strategic holders, CLP will only take reasonable risks that (a) fit its strategy and capability, (b) can be under (b) and capability, fit its strategy risks that (a) take reasonable holders, CLP will only to: expose the Group do not and (c) stood and managed, Risk Appetite and Profiling—CLP Group 2015 Annual ReportAnnual 2015 Group Profiling—CLP and Appetite Risk 2.18: Example Source: CLP Group. Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 76 Part I: Disclosure Framework 78 78 Beyond the BalanceSheet| risk whenplanningnewstrategies, activities, and should alsoaddresshowmanagementincorporates appropriate responsesforeachriskidenti ed. It The reportshoulddescribethemethodtodetermine Source: Santova. RiskManagement—Santova Limited2016 Example 2.21: Annual Integrated Report RiskManagement—CPLGroup 2015 Example 2.20: Annual Report IFC Toolkit IFCfor Disclosure and Transparency Source: CPL Group. at eachleveloftherisksystem. ant toincludetheaccountabilityofspeci cindividuals products. (SeeExamples2.20and2.21.)Itisimport- Part I: Disclosure Framework
2. Corporate Governance 79
Regulator
External audit provides that the board should Audit
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Internal Integrating Sustainability Integrating and how environmental describe should The report - into the risk manage have been integrated social risks of a description This should include ment framework. - of ESG/sustainabil between the head the relationship management committee. and the risk board, the ity, and social describe how environmental It also should into account in the determi- considerations are taken nation of risk appetite. practices (Matrix Level 3) recom- Good international Environmental and Socialmend that a comprehensive be integrated into a company’s Management System risks be and that E&S risk management framework, establishing risk appetite. part of the process of Beyond the Balance Sheet | Beyond
Quality Security Inspection suggests the following practices for risk management disclosure: Compliance Governing Body / Board / Audit Committee / Governing Body / Board Financial Control Risk Management 2nd Line of Defense Defense Line of 3rd
Senior Management The Three Lines of Defense Model Lines of Defense Three The 2.1: Figure s Guidance on the 8th EU Company Law Directive, article 41 Guidance on the 8th EU Company Law Directive, ECIIA/FERMA Adapted from Controls Measure Management Internal Control Director statement that the board has carried out a robust risk assessment of the principal risksDirector statement that the board has carried out a robust risk assessment of the and and that it expects that the company will be able to continue in operation facing the company, meet its liabilities; or mitigating them; Description of the risks and an explanation of how the company is managing systems. Results of review of the effectiveness of risk management and internal control 1st Line of Defense
• • • Source: The Institute of Internal Auditors. Auditors. The Institute of Internal Source: ensure that there are processes in place to enable complete, timely, relevant, accurate, and accessible risk accurate, relevant, timely, ensure that there are processes in place to enable complete, disclosure to stakeholders. The King IV Report on Corporate Governance for South Africa, 2016, Africa, Governance for South King IV Report on Corporate The BEST-PRACTICE RESOURCES: RESOURCES: BEST-PRACTICE of Risk Management Disclosure Code Governance Corporate U.K. The Risk Oversight Risk of the the responsibility describe should The report of risk management, oversight and control board for committee a formal risk management either through the audit committee. or through (Matrix Level 3) suggest practices Good international “three lines of defense” the that companies adopt lines of de- in which the model of risk management, are 1) management control, fense in risk management and compliance oversight2) the various risk control 3) indepen- and by management, functions established The report should (See Figure 2.1.) dent assurance. model is adopted in companyindicate whether this practices. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 78 Part I: Disclosure Framework 80
Beyond the BalanceSheet| 2. Corporate Governance consequences.” rami cations ofsuchrisks), aswellanyreputational mental, andsocialrisks(includingpoliticallegal risk including nancial, strategic, operational, environ- oversight ofriskwhichincludesallmaterialaspects board shouldadoptacomprehensiveapproachtothe The ICGNGlobalGovernancePrinciples: “ BEST-PRACTICE RESOURCES: RiskOversight Toolkit.) ability OpportunitiesandRisks, guidance, see1.4.1. Assessment ofKeySustain - as creditriskandliabilities. (Forfurtherdisclosure only operationalriskbutalso nancialrisk, such of sustainabilityrisksareaddressed, includingnot The reportshoulddescribehowdifferentaspects management andthemostseniorriskof cer. ESG/sustainability haveunfetteredaccesstosenior Good practicealsorecommendsthattheheadof Source: Li& Compliance—Li&FungLimited2015 Example 2.22: Annual Report IFC Toolkit IFCfor Disclosure and Transparency FungLimited. page 28 of this this page 28 of The The associated withdifferentaspectsofriskgovernance. associated company, withaccountabilityandresponsibilities governance structureofLi&Fung, aChineselogistic wrongdoing ormisconduct.Example2.22showsthe such aswhistleblowingpoliciesandprocesses—toreport It shouldalsoprovideinformationonmechanisms— and corporategovernancepolicies, anditscodeofethics. ensure compliancewiththelaw, thecompany’s charter The reportshoulddescribethemanagementsystemto Management System of theboardandadministrativelytomanagement. compliance of cerwhoreportstotheauditcommittee that thecompliancefunctionbeledbyadesignated Good internationalpractice(MatrixLevel3)suggests action forviolations. for con ictsofinterest, andsanctionsdisciplinary company “hotline” for reporting violations, guidance employee training, auditingandmonitoringsystems, pany’s complianceprogramorprocedures, including The reportshouldincludeadiscussionofthecom- Compliance 2.3.3. Part I: Disclosure Framework
2. Corporate Governance 81 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit CONSULT THE MATRIX CONSULT level a company’s can be used to gauge The Matrix minority shareholders. in its treatment of of progress disclosure of information recommends the Toolkit The which corre- Levels 1–3 of the Matrix, related to Guidance is practices. good international sponds to leadership practices, for disclosure of also provided 2.4 Table (See 4 of the Matrix. consistent with Level on the next page.) and Control Ownership 2.4.1. a clear view of who ownsThe report should give own or can exert including those who the company, and thus over shares directly or indirectly, in uence, controlling and it should provide details on voting, associates and af liated entities. shareholders and their Owners) Significant Direct Shareholders (or Beneficial shareholdersThe annual report should list signi cant typically those with more than (or bene cial owners, and percentage of shares held, the 5 percent of shares), This should also include the percent of voting rights. share options. shareholdersThe report should note when signi cant for (or, are management personnel or board members It is board members). supervisory two-tier boards, ofgenerally good practice to disclose all shareholdings even when that board members and of management, represents less that 5 percent of shares. or con- If certain shareholders cannot be identi ed Example note that as well. the report should rmed, shareholders of2.23 details the ownership of the top 10 company. a telecommunications Thailand, Group True - Beyond the Balance Sheet | Beyond
Beneficial Ownership—True Group Thailand 2015 Annual Report Thailand 2015 Example 2.23: Group Beneficial Ownership—True Source: True True Source: Thailand. Group 2.4. Treatment of Minority of Minority Treatment 2.4. Shareholders are best protected if all share- Minority shareholders class of shares have equal voting, holders of the same are ef cient and transfer rights and there subscription, “major or voting mechanisms—such as supermajority Integrating Sustainability Integrating managing in central function is a compliance Internal facing companies. and social issues environmental and the environmental compliance with This includes of conduct or ethics, of internal codes social aspects in the supply chain. including compliance with rules andIt also includes regulatory with environmental and socialregulations associated and corruption and bribery, including pollution, issues, treatment of workers. voting practices—to protect them ity of the minority” of interestfrom concentrated ownership or con icts with controlling shareholders. for engagingThere should also be in place processes It is important that they with minority shareholders. for all share- receive adequate notice and the agenda encouraged toholder meetings and are permitted and All hold- participate and vote in shareholder meetings. have accessers of securities of the same class should The company to equal information (fair disclosure). policy. should have a publicly disclosed dividend - the company should have in place well-un Further, with minorityderstood policies and practices to deal that mayshareholder interests in material transactions affect their rights. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 80
a Related-party (over transactions 2.5% of net assets or $150,000) approval subject to shareholder or stricter requirements. Treatment of shareholders con - of shareholders Treatment sistent with best international market practices. compensation subjectExecutive approval. to shareholder at one vote is afforded Each share the AGM.
4. 4. Leadership 4. 1. 2. 3. + - - ity of minority” provisions). consulted on are Shareholders compensation. executive Effective shareholder voting shareholder Effective mechanisms to protect from minority shareholders ownership orconcentrated conflicts of interest strong shareholders with controlling (e.g., supermajority or “major Well-understood policy and Well-understood mate of company practices that couldrial transactions the rights ofpotentially affect minority shareholders. Annual report discloses material risks to minority associated withshareholders shareholders, controlling ownership concentration, and voting- cross-holdings, imbalances. power Investor relations functions relations Investor engaging for include program minority shareholders.
3. Good International Practices 2. 1. 3. 4. 5. + Well-understood policy and practice Well-understood toof full and timely disclosure of all material related- shareholders party and shareholder transactions agreements. Effective representation of minority representation Effective cumulative through shareholders or similar mechanisms; andvoting economic rights such as inspection rights, exit and tag-along rights. has a dividend policy. Company Clearly articulated and enforced of minoritypolicies on treatment in changes of control. shareholders
2. Intermediate Practices 4. 1. 2. 3. + Investor relations function relations Investor established. Holders of all securities the same access to equal type and class have (fair disclosure). information All shareholders of the same classAll shareholders subscription, and equal voting, have rights. transfer receive Minority shareholders adequate notice and the agenda for meetings; and are all shareholders’ permitted to participate at and vote meetings. shareholders’
Guide on Fighting Abusive Related Party Transactions in Asia (2009) 31. in Transactions Abusive Related Party limits. See OECD, Guide on Fighting the referenced the OECD has recommended in the listing jurisdiction; however, set by law/regulation are thresholds Often, requisite 1. Basic Practices 1.
4. 3. 1. 2. a
Voting Rights Rights Voting Investor Relations Relations Investor Protective Rights Rights Protective IFC Corporate Governance Matrix—Treatment of Minority Shareholders Matrix—Treatment 2.4: Governance IFC Corporate Table
82 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part I: Disclosure Framework
2. Corporate Governance 83 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit to vote shares in line agreements to vote shares Shareholder of a substantial shareholder; with those ; rights Special voting rights they and the voting shares Multivoting grant to major shareholders; - mecha or anti-takeover Control-enhancing and poison pills; such as voting caps nisms, rights (golden share) toSpecial shareholder decisions or to appoint oneblock certain major directly (common inor more board members state-owned enterprises).
• • • • • Deemed ownership also can include the following: can include also ownership Deemed bene cia- Malaysia’s Telekom Example 2.25 shows shares accounts and a spouse’s ries under nominee shares to determine his or added to a board member’s Box 2.1 on the next page lists interest.” “deemed her requirementsgenerally accepted ownership disclosure from around the world. Beyond the Balance Sheet | Beyond
“Deemed Interest”—Telekom Malaysia Annual Report 2015 Example 2.25: Malaysia “Deemed Interest”—Telekom Shareholdings Distribution—Telekom Malaysia Annual Report 2015 Malaysia Example 2.24: Distribution—Telekom Shareholdings Source: Telekom Telekom Source: Malaysia. Source: Telekom Telekom Source: Malaysia. Indirect or “Deemed” Ownership Indirect or “Deemed” and control should alsoDisclosure on ownership that provide indirect control orinclude arrangements example is trusts and similarAn deemed ownership. company held in a trust Shares of the arrangements. the bene cial ownership of ashould be reported under or bene ciary of the trust if theyfounder (or a trustee If con- trust). can in uence the voting on behalf of the or a foundation, trol is held primarily through a trust, should disclose the of cers in the report similar vehicle, is exercised. control of these vehicles and how control In many jurisdictions, the disclosure of ownership is of ownership disclosure the jurisdictions, In many compa - require also Some countries strictly prescribed. with of shareholdings, the distribution nies to disclose shareholders in a range the number of bands showing 5 more than example, percentage (for of ownership An indi- so on). and than 50 percent, more percent, also shareholders is versus domestic cation of foreign the distribu- Example 2.24 shows sometimes required. Malaysia. Telekom for tion of shareholdings IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 82 Part I: Disclosure Framework 84
Beyond the BalanceSheet| 2. Corporate Governance Source: ItauUnibancoBrazil. United States. India, Singapore, South Africa, theUnitedKingdom,and Source: IFCinternalanalysis ofregulations in Australia, Brazil, Requirements Box 2.1: NationalOwnership-Disclosure Control Chains—ItauUnibancoBrazil 2014 Example 2.26: Annual Reports ownership disclosure: reveals generallyacceptedrequirementsfor An analysisofmajormarketsaroundtheworld • • • • • • •
Rights attached to shares Rights attachedtoshares Other controldevices Includes trusts Includes derivatives Directors andexecutives Bene cial owners 5 percentowners IFC Toolkit IFCfor Disclosure and Transparency
bank. Brazil anddescribesthemajorsubsidiariesof ple 2.26showshowcontrolisheldinItauUnibanco which acontrollingshareholderholdscontrol. Exam- disclose thevariousintermediaries, ifany, through part ofagroupand, ifso, howit tsin. Itshouldalso The reportshouldindicatewhetherthecompanyis Groups andControlChains interests inassociatesandjointventures(IAS28, IAS31). and subsidiaries(IAS24)aswelltheirinvestments IFRS: Parents, Investments, andJoint Ventures BEST-PRACTICE RESOURCES: Subsidiaries, Companies are expected to disclose their parent Companies areexpectedtodisclosetheirparent
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IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Direct and indirect holdings of majorDirect and indirect shareholders; members andShareholdings of board senior executives; other corporateCompany groups and control. Have a de nition of “bene cial owner” that “bene cial owner” Have a de nition of captures the natural person(s) who ultimately owns the shares or controls the legal person; Ensure that bene cial ownership and control and current, accurate, information is adequate, accessible; Have a legal framework that enables national authorities to participate in information exchange on bene cial ownership domestically and internationally.
• • • • • • BEST-PRACTICE RESOURCES: RESOURCES: BEST-PRACTICE Ownership Disclosure on a call for disclosure G20/OECD Principles The information, and control range of ownership the following: including The Financial Action Task Force Principles Force Task Action Financial The laundering and terrorism nance)(focused on money to do the following: encourage countries Beyond the Balance Sheet | Beyond
The Company is backed by the Charoen Pokphand Group (“CP Group”), Asia’s largest agro- largest Asia’s (“CP Group”), Pokphand Group is backed by the Charoen The Company of 51% and with shareholding mobile operator, largest and China Mobile, the world’s conglomerate, Group’s True 2015, As of 31 December respectively. total number of issued shares, 18% of the Group’s The Company’s are main operations million. and paid-up capital was Baht 98,432 total registered in some It only has minor transactions to its major shareholders. related and materially not directly occasions with its major shareholders. stake in the than a 50-percent holding more majority shareholders having Risks from Company and comprises CP Group Group True in of majority shareholders the group As at September 5, 2014, In this of the total allocated shares. of 51.3 percent affiliated companies which hold combined shares in which majority shareholders circumstance the be exposed to a risk from may investors regard, of majority shareholders This is because the group Group. True in stake than a 50-percent hold more Therefore, such as appointments of directors. majority votes, agendas which require control may votes to check and balance agendas not be able to accumulate sufficient may shareholders retail the on operating focuses of Directors the Board However, by the majority shareholders. proposed the oppor- has provided The Company governance. business guided by the principles of corporate agenda and nominate Meeting’s Annual General the to propose minority shareholders tunity for to In regard Meeting. Annual General prior to the of the Board candidates to be selected as directors with a conflict of interest in result that may and transactions to major shareholders matters related set forth in the with procedures the matter in accordance processes the Company the Company, the legal framework. Regulation” which strictly follows Transaction “Connected Controlling Shareholders Controlling the should disclose report The and Position. Identity family, (individual, controlling shareholders identity of shares they much of the company’s how or group), and wheth- is held, how control control, ultimately position to effectively are in a er such shareholders any material risks is, the company—that dominate associated with controllingto minority shareholders cross holdings, ownership concentration, shareholders, and voting-power imbalances. report should address the role of controllingThe Role. providing such as founding the company, shareholders, the company. or other role in the management of capital, policies Disclosure of succession Succession Policy. A in controlled companies. is particularly important plan orcontrolling shareholder may have a speci c through inheritance or a including process in mind, or through the policies of family governance body, to state-con- the corporate group or those applicable The absence of succession policies trolled companies. challenge andin controlled companies can be a major should also be disclosed. the mainExample 2.27 offers a clear statement of of the risks associated with a description shareholders, and how the company a single dominant shareholder, protects other shareholders. Controlling Shareholders—True Group Thailand 2015 Annual Report 2015 Thailand Group Example 2.27: Shareholders—True Controlling Source: True True Source: Thailand. Group IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 84 Part I: Disclosure Framework 86
Beyond the BalanceSheet| 2. Corporate Governance of Türk Telekom. describes therightsattachedtovarioustypesofshares were exercisedinthepastyear. Example2.28 The reportshouldalsomentionwhethersuchrights bers oftheboard. These includethefollowing: that allowminorityshareholderstonominatemem- The reportshouldincludeinformationonmechanisms Shareholder Rights Board NominationandOtherMinority how toexercisesuchrights. transactions. Itshouldalsodiscloseinformationon those relatedtochangeofcontrolandrelated-party and allotherrightsofminorityshareholders, including The reportshouldspelloutvoting, boardnomination, RightsofMinorityShareholders 2.4.2. Source: Türk Telekom. along rights, wherethenewcontrollermustmakean change ofcontrolthecompany. This includestag- treatment ofminorityshareholdersintheeventa The reportshoulddescribethecompanypolicyon Change ofControl Voting andMinorityRights—TürkExample 2.28: Telekom 2015 Annual Report incapital increases. member representing thePrivilegedShare. The CGroup PrivilegedShare ownercannotparticipate Pursuant tothe of Articles Association, theholderofCGroup PrivilegedShare appointsone Theregistration ofany transfer ofregistered shares shareholders’ intheCompany’s ledger c) managementcontrol oftheCompany; The transfer ofany registered Shares intheCompany whichwouldresult inachange inthe b) Any proposed amendmentstothe of Articles Association; a) Otherwise, suchtransactions shallbedeemedinvalid. the CGroup PrivilegedShare ateitherameetingoftheboard ofdirectors ortheGeneral Assembly. the following actionsandresolutions cannotbetaken withouttheaffirmative vote oftheholder For thepurposeofprotecting thenationalinterest inissuesofnationalsecurity andtheeconomy, All Shares of Türk Telekom canbetransferred exceptfor oneprivileged(golden)share ofGroup C. Voting andMinorityRights • • • •
minority shareholders. tions requireapprovalfromthemajorityof Majority ofminority, wherecertaintransac- holders; require approvalbyalargemajorityofshare- Super majority, wherecertaintransactions holders votetheirsharesinasingleblock; Block voting, wherealargenumberofshare- openings; the boardwhencompanyhasmultiple cast alltheirvotesforasinglenominee Cumulative voting, whereshareholderscan IFC Toolkit IFCfor Disclosure and Transparency
in Türk Telekom. change-of-control processforvarioustypesofshares Example 2.29providesadetailedexplanationofthe or followingthechangeofcontrolcompany. controller mustmakeatenderofferconcurrentwith or meetotherrequirements—forexample, thatanew offer topurchasethesharesofminorityshareholders ments orrulesapplicabletothedeterminationofprice.” made toallshareholders, thereareminimumpricerequire- shareholders. . . . [W]henageneralofferisrequiredtobe out triggeringanyobligationto, orprotectionof, minority trol blockcannotbesoldtoathirdpartyatpremiumwith- “In [most]jurisdictions, asubstantialshareholdingorcon- . 20% to75%], dependingonthejurisdiction. that triggersthemandatoryofferrequirement[rangesfrom of theissuer’s votingshares. The percentageofvotingshares acquires controlofanissueroracertainpercentage purchase itsshareswhenthatshareholderorthirdparty is requiredtomakeageneralofferallshareholders In virtuallyalljurisdictions, ashareholderorthirdparty minority shareholdersinachangeofcontroltransaction. and regulationsthatprotectorhavetheeffectofprotecting holders inListedIssuers:“ IOSCO Final ReportonProtectionofMinorityShare- Minority Shareholders BEST-PRACTICE RESOURCES: Protection of land, Turkey, theUnitedKingdom, andtheUnitedStates.] Mexico, theNetherlands, Poland, Portugal, Spain, Switzerland, Thai- in Australia, Brazil, Canada, Germany, HongKong, Israel, Italy, Japan, [Note: This June25, 2009, reportisbasedonananalysisofregulation In alljurisdictions, therearerules
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- IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Salary: Pay earned during the year includes fees paid to board members as well as sala- Supplemental information ry for executives. should break down board member fees for and serving on particular attendance, chairing, committees.
• BEST-PRACTICE RESOURCES: Integrating ESG Integrating RESOURCES: BEST-PRACTICE Pay Issues into Executive the UN Global Compact and PRI provides a Guidance by tangible engagement tool to guide dialogue between share- ESG Issues holders and investee companies on Integrating and to help improve corporate boards’ Into Executive Pay practices to the bene t of companies and their investors. Actual Remuneration The report should contain actual remuneration data, the chief for each board member, in tabular form, The table and other key executives. executive of cer, should present the following information: to use KPIs to de- It is considered BEST PRACTICE They should be 1) non nancial termine remuneration. objectivesas well as nancial and 2) linked to strategic targets. and include next year’s also suggests integrating ESG con- BEST PRACTICE remunerationsiderations into criteria for determining of executives. - - Beyond the Balance Sheet | Beyond
ing Period, or after the date of full payment of the amount payable by the holder of Class A shares A shares by the holder of Class of the amount payable the date of full payment ing Period, or after occurs later. whichever in the Company, its shares for its institution over of a financial in favor or encumbrance pledge create may A shares Holder of Class for money borrowed for in time, as guarantee shares which will not be subject to pledge of shares is cashed that such pledge or encumbrance the event or otherwise. In such shares the acquisition of A shareholder’s the Class transfer be able to may financial institution, the same by the relevant which Treasure, of the only upon prior written consent subject to pledge an encumbrance shares withheld. consent will not be unreasonably not transfer may of Class B shares holder two paragraphs, of the following Subject to the provisions partyto a third all or part Undertaking during the course of the Strategic of its shares Period will not be unreasonably which consent A shares, of Class without the prior consent of the holder withheld. Transfer of Shares Transfer as are of shares transfer restricting Association Articles of Company’s in the The provisions follows: all or share, by the Class C golden subject to vetoing always transfer, may A shares Holder of Class partypart Undertak of the Strategic to a third either the expiration time after at any of its shares Change of Control—Türk Telekom 2015 Annual ReportAnnual 2015 Telekom 2.29:Example of Control—Türk Change ation and contractual details regarding compensation. ation and contractual details regarding compensation. for keyIt should also disclose actual compensation shareholders’executives and directors and explain the role in the approval of executive compensation. Remuneration Policy policy on The report should describe the company’s provide when applicable, executive compensation and, including the plans, details on pay-for-performance sustain- operational, areas of performance ( nancial, ability) and whether compensation is delayed or con- (recovery of money “claw back” ditional or subject to addressThe report should also already disbursed). the role of the board (or specialized committee) and shareholders in reviewing and approving executive compensation. Example 2.30 on the next page describes the remuner Absa Group (formerly Barclays ation policy for and performance African bank, a South Africa), and sustainability. risk, criteria on nance, The report should describe the process to establish the and it should describe the role of remuneration policy, the board (or specialized committee) and shareholders It in reviewing and approving executive compensation. should also disclose any discretion used by the remu- neration or another board committee in setting actual compensation. Source: Türk Telekom. Türk Source: 2.4.3. Remuneration policy on exec- The report should describe the company components of remuner including utive compensation, IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 86 Part I: Disclosure Framework 88
Beyond the BalanceSheet| 2. Corporate Governance Integrated Report Remuneration Policy—Absa Group (formerly Barclays Example 2.30: Africa) 2015 Source: Absa Group (formerly Barclays Africa). of cer insurance, fringebene tsand termsofseverancepackagesifany.” company’s underlyingperformanceinany givenyear. This extends tonon-cashitemssuchasdirectorand ed toindividualdirectors andtheCEOweredetermineddeemedappropriate inthecontextof The ICGN GlobalGovernancePrinciples: IAS 24 and showthelinkwithperformance. The G20/OECDPrinciplescallforcompaniestodiscloseremuneration, preferably onanindividualbasis, BEST-PRACTICE RESOURCES: Remuneration Disclosure The performance metricsoftheschemeare:The performance years, subjecttothree metricsbasedonthe2013to2015medium-termplans. specificperformance arrangement andwillvest inOctober2016. planwithawardsThis isashare-based vesting afterthree The Barclays Africa Long-Term Incentive Plan2013–2015isthelastremaining long-termincentive Vesting: 55%ofthemaximum vests, Basedonactual2013–2015performance, asdetailedbelow: • • •
l l l l l l plan. For de nedbene tplans, itincludesany tribution totherecipient’s de nedcontribution Pension accruals:Thesearethecompany’s con- should beexplained. As withcashbonuses, thelinktoperformance valuation presentedinsupportinginformation. the typeandvalue, withanexplanationof market value. Foroptions, itshoulddescribe the tableshoulddescribenumber, type, and or long-termperformanceawards. Forshares, presented separatelyoraspartofshort-term Stock andstock-based awards: Thesemaybe achievements. such asmeetingaspeci ctargetorother should includetherationaleforbonus, performance) bonuses. Supportinginformation nual”) and “long-term” (basedonmultiyear between “short-term”(or“an- distinguish linked toperformance. Somejurisdictions Cash bonuses: These areadditionalpayments performance againstourBalancedScorecard.performance Sustainability: Upto10%ofawards canvest, atthediscretion oftheGRHRC considering impairment ratio of1.55% (atthreshold) to1.13% (atmaximum) onastraight-line basis. Risk: From 5%toamaximum of30%canvest, againsttheannual subjecttoperformance assets of1.99% (atthreshold) to2.99% (atmaximum) onastraight-line basis. Finance: From 10%toamaximum of60%canvest, subjecttoaverage return onrisk-weighted Sustainability: TheGRHRC assessedanddeterminedthat5%ofthemaximum vests. Risk: Average impairmentratio is1.09%, therefore 30%ofthemaximum vests. Finance: Average return onrisk-weighted assetsis2.19%, therefore 20%ofthemaximum vests. requires disclosureofcompensationfor “key managementpersonnel.” IFC Toolkit IFCfor Disclosure and Transparency “The remuneration reportshould. .“The .describehowawards grant-
is indicatedinthesupportinginformation. are met)isnotincludedincompensationtotals, butit compensation (forinstance, ifcertainfutureconditions a noteexplainingwhentheawardvests. Conditional based) isgenerallyaccountedforwhengranted, with Note: retirement. incentives, long-termincentives, andcontributionto company’s main executives, includingcash, short-term pany, detailsallcomponentsofremunerationforthe In example2.31, Fresnillo, aMexicanminingcom- •
Delayed compensation(forexample, share- and bene tsthatonlysomeemployeesreceive. allowances, personal travel, medicalbene ts, includes companycars, housingor Other monetaryandin-kindbene ts:This retirement ageanddate. received atretirementaswellexpected Disclosure shouldalsoincludeotherbene ts increase intherecipient’s annualpayments. Part I: Disclosure Framework
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IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Existence of a policy on RPTs; are identi ed and then How potential RPTs vetted; especially Role of the board and committees, independent directors and other noncon icted in including the audit committee, board members, and of shareholders in approving approving RPTs, material RPTs; How to handle a situation where a board member is con icted; Whether different transactions have different approval procedures; Shareholder approval and third-party evaluations; how and Con icts of interest resulting from RPTs, they are managed. Provision, receipt, or guarantee of nancial services receipt, Provision, (including loans and deposit services).
• • • • • • • • Policy and Management Process oversight The report should describe the company’s and management systems, policies, and processes for policies, and management systems, This can include the related-party transactions. following: Example 2.32 on the following page shows how Fresnillo, mon- through manages RPTs a Mexican mining company, executivethe negotiations by interests, directors’ of itoring and approval by independent directors. committee, Beyond the Balance Sheet | Beyond
Actual Remuneration—Fresnillo 2015 Annual ReportAnnual 2.31:Example 2015 Remuneration—Fresnillo Actual Source: Fresnillo Plc. Fresnillo Source: Transfer of intangible items (for example, items (for example, of intangible Transfer license trademarks, research and development, agreements); Provision or receipt of services; Lease of property and/or assets; Sale or disposal of or purchase of property and/ or assets; Sale, purchase, or supply of goods or materials; purchase, Sale, A company where a board member or senior ex- ecutive has joint control or signi cant in uence. A company pension plan or entity linked to the company pension plan; Another company linked by ownership or other including joint venture; investment, A board member, chief executive of cer, con- chief executive of cer, A board member, or their senior executive, trolling shareholder, broadly de ned to immediate family members, in-laws, aunts, uncles, siblings, include parents, and step-children; cousins,
• • • • Related-party transactions include the following: • • • • • 2.4.4. 2.4.4. Related-Party Transactions “a related-party transaction is a According to IAS 24, or obligations between services, transfer of resources, of whether a price is charged.” regardless related parties, is related toA related party is a person or an entity that such as the following: the reporting entity, IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 88 Part I: Disclosure Framework 90
Beyond the BalanceSheet| 2. Corporate Governance following information: during thepastyear, thereportshoulddisclose For allmaterialRPTs concludedorcontemplated Details onRPTs • • • •
provision ofservices, loan, andsoforth); General typeofthetransaction (saleofgoods, Amount ofthetransaction; management personnel, otherrelated parties); pany, subsidiary, associate, jointventure, key control oforsigni cantin uenceoverthecom- Type ofrelatedparty(parent, entity withjoint Name oftherelatedparty; IFC Toolkit IFCfor Disclosure and Transparency ManagingRPTs—Fresnillo 2015 Example 2.32: Annula Report Source: Fresnillo. additional details: For signi canttransactions, itmightbeusefultoinclude • • • •
Third-party evaluationofthe transaction, ifany. tion processsuchascompetitive tender); Reasonableness (marketbenchmarks, transac- of consulting); duration foraloan, cost perhour, andhours Terms ofthetransaction(interestrateand transaction. bad debtsorimpairmentsinvolvingthe Any outstandingbalances, contingencies, or
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IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit potential con ict of interest it creates with keypotential con ict of interest it creates with of cers or directors in the company. summary informa- Although not suf cient by itself, thetion can be useful to help the reader understand It can be total amount and broad nature of RPTs. andused to aggregate the same type of transactions relatedsummarize small transactions with the same Example 2.34 on the next page provides sum- party. for Reliance Industries, mary information on RPTs an Indian conglomerate.
Beyond the Balance Sheet | Beyond
requires disclosure of the nature of the related-party relationship as well relationship as of the related-party of the nature requires disclosure “The process for reviewing and monitoring related party transactions“The process for reviewing Details on RPTs—Sappi Group 2016 Annual Financial Statements Annual Financial Example 2.33: 2016 Group Details on RPTs—Sappi Source: Sappi Group. Source: all RPTs of Sappi Group, a South African pulp andAfrican a South of Sappi Group, all RPTs including counterparts and type of paper company, transaction. the transactionThe report should describe the effect of and/or theon the nancial situation of the company (Matrix Level 4) suggest LEADERSHIP PRACTICES percent of netthat related-party transactions over 2.5 assets or over $150,000 are subject to shareholder approval or stricter requirements. onExample 2.33 presents summary information should be disclosed. For signi cant transactions, a committee of independent directors should be established to vet of independent directors should be established a committee For signi cant transactions, should be disclosed. of independent or an existing committee comprised This can be a separate committee and approve the transaction. related party transactions to committee should review signi cant The for example the audit committee. directors, determine what terms are fair and to if so, and, they are in the best interests of the company determine whether in disclosed be should transactions party on signi cant related The conclusion of committee deliberations reasonable. shareholders.” annual report to company’s the The ICGN Global Governance Principles: ICGN Global Governance The BEST-PRACTICE RESOURCES: RPT Disclosure RPT Disclosure RESOURCES: BEST-PRACTICE Disclosures Party IFRS IAS 24 Related The and the related party transactions all material “essential to fully disclose it is state that G20/OECD Principles The “the policy/criteria also suggest disclosing The Principles to the market individually.” terms of such transactions material related party transactions.” adopted for determining as information about those transactions and outstanding balances, including commitments, necessary for users to necessary for users commitments, including balances, and outstanding about those transactions as information on the nancial statements. of the relationship the potential effect understand IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 90 Part I: Disclosure Framework 92
Beyond the BalanceSheet| 2. Corporate Governance following: strategy forstakeholderengagement, includingthe The reportshoulddescribethecompany’s policyand 2.5.1. Commitment,Policy, andStrategy consistent withLevel4oftheMatrix. (See Table 2.5.) is alsoprovidedfordisclosureofleadershippractices, corresponds togoodinternationalpractices. Guidance information relatedtoLevels1–3oftheMatrix, which ment. The Toolkit recommendsthedisclosureof of progresswithitsgovernancestakeholderengage- The Matrixcanbeusedtogaugeacompany’s level CONSULT THE MATRIX practices ingovernanceofengagementwithstakeholders. The IFCCorporateGovernanceMatrixincludesbest Engagement Governance ofStakeholder 2.5. Source: Reliance IndustriesLimited. Summary Information onRPTs—Reliance Summary Limited2015 Example 2.34: Annual Report • • • • • •
resolve consistentstakeholder issues. Management-level mechanisms toraiseand Grievance mechanismandreporting; Iterative disclosureandconsultation; Differentiated approachesforprioritygroups; interests ofdiversestakeholders; Stakeholder analysistoidentifytheneedsand Stakeholder identi cation; IFC Toolkit IFCfor Disclosure and Transparency
companies shouldadoptaformal stakeholder-mapping In goodinternationalpractices (MatrixLevel3), company, stakeholderstypicallyincludethefollowing: terial stakeholders. Basedonthesizeandimpactof should alsodescribetheprocessofidenti cationma- been identi edaskeystakeholdersofthecompany. It The reportshoulddescribetheconstituenciesthathave StakeholderIdentification 2.5.2. should mentiontheexistenceofsuchacode. stakeholder engagementandhumanrights. The report disclosed codeofconductsettingoutexpectationsfor tractors, suppliers, andcollaboratorsthroughapublicly that stakeholderengagementbevisibletostaff, con- LEADERSHIP PRACTICES (MatrixLevel4)suggest through itspoliciesortenderrequirements. engagement extendstosuppliersandcontractors The reportshouldalsonotewhetherstakeholder • • • • •
International NGOsandCSOs. Neighboring projects; workers; Workers, contractors, andprimary-supply-chain Customers andregulators; company; Local communitiesdirectlyaffectedbythe
Issues raised through grievance through Issues raised anal- workers are mechanism for with the particiyzed and resolved - pation of a worker representative. about is informed The board on outcomes and trends grievance basis.a regular Commitment to SE visible to staff, Commitment to SE visible staff, suppliers, and collab-contractors, via codes of conduct settingorators stakeholderout expectations for and human rights.interactions into incorporated SE practices primary for suppliers. requirements SE activities and outcomes included decision making andin board external reporting procedures. Periodic analysis of grievancesPeriodic analysis and root to identify trends causes is conducted by senior management. Senior management participate in international industryactively topics. discussions on related SE and reporting consistent (AA with international standards on Stakeholder 1000 Standards Engagement and Accountability Principles and ISO 26000). Senior executive responsible for responsible Senior executive includ - stakeholder relationships, withing ensuring integration setting. and target strategy
5. 6. 2. 3. 4. 7. 8. 9. 1. 4. Leadership 4. + - b a ments for contractors. ments for stakeholder issues Unresolved a management action plan. require External and publicly accessible communication procedure. mechanism facilitatesGrievance of concerns from the resolution Communities. Affected Designated Affected Communities clearly engagement personnel have responsibilities, training, defined and reporting lines to senior man - agement and the board. into require SE policy incorporated Management responds to griev - Management responds workers and contracted ances from basis. workers on a regular Formal stakeholder-mapping Formal stakeholder-mapping and expanded definition of process stakeholders includes contracted workers, primary- supply-chain and workers, neighboring projects, international NGOs and CSOs. SE policy and strategy includesSE policy and strategy with stakeholder anal - procedures for approaches differentiated ysis, disclosure iterative priority groups, and and consultation requirements, reporting.
3. Good International Practices 8. 4. 5. 6. 7. 3. 1. 2. + - - Key stakeholders identified also or include local nongovernmental ganizations (NGOs) and civil society (CSOs). organizations Established Stakeholder Engage ment (SE) policy and procedures. External Communications Mech - stakeholder questionsanism for are and complaints, if there Communities, a grievance Affected mechanism is established. Basic grievance mechanism forBasic grievance workers.
2. Intermediate Practices 1. 2. 4. 3. +
IFC Corporate Governance Matrix—Governance of Stakeholder Engagement Matrix—Governance Governance IFC Corporate Ad hoc stakeholder-identification, Ad hoc stakeholder-identification, including workers, customers, Affected and the locally regulators, Community. HR policy and procedures for worker for HR policy and procedures engagement. Informal response to stakeholder response Informal and concerns. requests
ion procedure is adequate to (a) receive and register external communication from the public; (b) assess issues raised and determine assess issues raised the public; (b) external communication from and register is adequate to (a) receive Consult with Social Specialist to determine whether communicat ion procedure policy, strategy, and procedures, if applicable. and procedures, strategy, Consult with Social Specialist to determine quality of SE policy,
1. Basic Practices 1. 1.
a b response; (c) provide and document responses, if any; and (d) adjust the management program, as appropriate and if applicable. as appropriate adjust the management program, and (d) if any; and document responses, provide (c) response;
2. 3.
Mechanism Mechanism
Mechanism Mechanism Engagement Policy Policy Engagement Mapping
Worker Grievance Grievance Worker Grievance Communities Affected Stakeholder Stakeholder Stakeholder
Table 2.5: Table
92 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 93 Part I: Disclosure Framework 94
Beyond the BalanceSheet| 2. Corporate Governance them. its keystakeholdersandthetypesofissuesthataffect Vopak, aDutchtransportationcompany, describes with eachcategoryofstakeholders. InExample2.35, The reportshouldalsoexplaintheissuesassociated gy andtargetsetting. relationships andshouldensureintegrationwithstrate- senior executiveshouldberesponsibleforstakeholder In international NGOsandCSOs. ry-supply-chain workers, neighboringprojects, and of stakeholderstoincludecontractedworkers, prima- process. They alsoshouldadoptanexpandedde nition Source: Vopak. StakeholderIdentification—VopakExample 2.35: 2016 AnnualReport LEADERSHIP PRACTICES IFC Toolkit IFCfor Disclosure and Transparency (Matrix Level4), a with usingthesemechanisms. how comfortableworkersorotherstakeholdersare grievances re ectsactualincidentsratherthanjust that thereisnoretaliation, andthatthenumberof ensuring thatthegrievancemechanismsareeffective, pany dialoguewithkeystakeholders. This includes ment, includinggrievancemechanismsandcom- in overseeingthemanagementofstakeholderengage- The reportshoulddescribetheroleofboard outcomes. ment, includingstakeholderengagementactivitiesand tives, orboth, areresponsibleforstakeholderengage- The reportshouldnotewhetheremployeesorexecu- ManagementandGovernance 2.5.3.
Part I: Disclosure Framework
2. Corporate Governance 95 -
suggest that stakeholder interests IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit (Matrix Level 4), exter (Matrix Level 4), LEADERSHIP PRACTICES 2.5.5. Sustainability Integrating ensure thatRegular stakeholder engagement can help and thatsustainability targets are suf ciently ambitious and appro- emerging issues are properly understood This interaction with stakeholders priately managed. is complete andhelps companies produce reporting that credible. BEST PRACTICES should be factored into the setting of sustainability strategies or integrated into management strategies and management priorities and processes. In shouldnal communication and stakeholder engagement standards, be consistent with internationally accepted Ac- AA1000 Stakeholder Engagement Standard, such as Communication or ISO 26000. countability Principles, language. should be in an understandable format and the manage- Example 2.36 on the next page describes an Motors, Tata ment of stakeholder engagement at It provides details on engage- Indian auto company. method ofment mechanisms as well as frequency and engagement for key stakeholder groups. to identify periodic analyses of grievances In general, by seniortrends and root causes should be conducted in- management who are well versed in international and topics. dustry stakeholder engagement practices Beyond the Balance Sheet | Beyond
incorporates stakeholder engagement as the basis for as the basis stakeholder engagement incorporates External grievance mechanisms must be established to receive and facilitate mechanisms External grievance about the client’s Affected Communities’ concerns and grievances resolution of environmental and social performance (Performance Standard 1). must be provided for workers—including mechanisms Internal grievance contracted workers—to raise workplace concerns without retribution (Performance Standard 2). • • incorporate external and internal grievance mechanisms: Standards IFC Performance The BEST-PRACTICE RESOURCES: Grievance Mechanisms Grievance RESOURCES: BEST-PRACTICE is a framework for assessing, designing, designing, for assessing, is a framework Engagement Standard AA1000 Stakeholder The of the standardThe purpose stakeholder engagement. and communicating implementing, engagement. for good-quality stakeholder the benchmark is to establish 1 Standard IFC Performance are essential for the and responsive relationships that constructive, building strong, and social impacts. environmental (or company’s) of a project’s successful management other process than many and extensive stakeholder-engagement It requires a more robust constructive relationship with standards to establish and maintain a management system directly affected by the particularly local communities stakeholders, a variety of external project. BEST-PRACTICE RESOURCES: Stakeholder Engagement Stakeholder RESOURCES: BEST-PRACTICE The report should describe the mechanisms that theThe report should describe the mechanisms ques- company has in place to respond to stakeholders’ This includes tions or complaints in a timely fashion. for bothgrievance and whistleblowing mechanisms external and internal stakeholders. policies andThe report should describe whistleblowing and out- received, types of complaints mechanisms, be useful to have KPIs for the It can standing matters. many werenumber of complaints submitted and how resolved. 3) sug- Good international practices (Matrix Level grievancegest that issues raised by workers through of amechanisms be resolved with the participation as Grievances and complaints, worker representative. should be documented responses, well as the company’s issues especially for to ensure resolution of concerns, - and this documen Affected Communities, related to Unresolved tation should be updated at least annually. stakeholder issues should require a management action plan. (Matrix Level 4) suggest LEADERSHIP PRACTICES proceduresthat stakeholder engagement policies and andbe integrated into requirements for contractors primary suppliers. External Communication and Griev- 2.5.4. ance Mechanisms IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 94 Part I: Disclosure Framework 96
Beyond the BalanceSheet| 2. Corporate Governance Example 2.36: StakeholdersandSustainability—Tata Motors2015–2016 Example 2.36: Annual Report Source: Tata Motors. Source: Tata Authorities Government Shareholders and Investors Customers Station and Service Dealers Media Leaders Opinion Providers Service Suppliers/ Communities Employees Stakeholder Groups Meeting in Industry Forums Meeting inIndustry meetings; One-to-one Committee Grievance Forum,Ethics Shareholder /Investor calls; RoadShows, Investor meets;Investor Forums; Direct Visits calls, Training Feedback account process; Surveys; Customer meets;Key Audits Council; Dealervisits; Programmes; Dealers analysis, Specialtraining NPI, Competitordataand inQFDand Participation programmes, Kaizenevents, Dealer meets.Joint Regular interactions meetings One-to-one Vendor mentoring analysis; Vendor Council; in NPI,Competitordataand Kaizen events, Participation meets, Jointprogrammes, Technology Days, Supplier community; publichearing Meetings withlocal Focused Group Discussions Level Meets; Town Halls; HR Forum;Q12 Tool; Skip improvements; Displays; Weekly/Monthly reviews Horizontal deployment; Communications; meetings; Horizontal Sunrise andSunset IFC Toolkit IFCfor Disclosure and Transparency Engagement Mechanisms Stakeholder Engagementat TML Frequency of Engagmeent Need based based Need Quarterly; Annual; Need based Daily Quarterly; Annual; Ongoing Need based Quarterly Annual; Daily Quarterly; Weekly Monthly; Quarterly; Annual; forward discussions onway constraints; industry government on appraising the Relationship building; of concerns feedback andaddressal broad future strategies; Financial performance; development; suggestions onproduct complaints; feedback; redress Understanding product response tocustomers; delivering better improving and technical know-how; Building capacityand and seekingfeedback performance company’s Communicating standards with theindustry regulations, complying Following the and otherpolicies; codeofconduct Motor’s to Tata compliance management; products; time Delivering quality concerns capturing societal communication; development initiatives Community LabourIssues Reports, Media performance; communicating seeking feedback; policy decisionsand Communicating Concerns Key action plans meeting; Minutes of action plans meeting; Minutes of Survery Index; JDPower Satisfaction Customer Survery Satisfaction Dealer action plans meeting, Minutes of action plans meeting, Minutes of Surveys Satisfaction Vendor Board reviews; Vendor rating; letters plans; feedback meeting; action Minutes of Surveys Internal Appraisels; survery; satisfaction Employee assessment Feedback Part I: Disclosure Framework
3. Financial Position and Performance 97
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit 3.1.1. Discussion of Financial and 3.1.1. Sustainability Performance The report should include a management discussion a clear performance and establish of the company’s In good international practice (Matrix Level 3), the Level 3), In good international practice (Matrix nancialaudit committee of the board should oversee This includes any annual and non nancial reporting. social, report information related to environmental, or to aand governance matters and sustainability Performance Report 3.1. The performance report presents an analysis of annual nancial and non- performance and the company’s including sustainability position, nancial year-end of It includes a management discussion performance. how the company has performed and a presentation It provides an intro- of key performance indicators. duction and context for the nancial and sustainability year- which formally present the company’s statements, end position and performance. separate sustainability report if there is one. Or an separate sustainability report if there is one. E&S/sustainability committee of the board can review the ESG information in the annual report. Beyond the Balance Sheet | Beyond
to ESG of Directors Board Engagement Indicators • Performance Report • Financial Statements • Sustainability Statements • of the and Functioning Structure • Environment Control • of Minority Shareholders Treatment • of Stakeholder Governance • Commitment Leadership and Culture: • Business Model and Environment • Objectives Strategic • and Response Analysis Risk • Opportunities Sustainability and Risks • Key Performance Introducing 2. Governance Corporate 3. Financial Position and Performance 1. Strategy 1. The performance report presents a broad range of financial, operational, and sustainability and sustainability of financial, operational, range The performance report a broad presents value creates linking performance and how the company the wider strategy information, to going forward. of the financial activities and the position record a historical The financial statements provide assets, liabilities, and flow, on income, cash point, with information of a business at a given to the International Financial Reporting according developed Stan- These are owners’ equity. national standards. (IFRS) or other prescribed dards a summary mostly voluntary view of performance and provide Sustainability statements are as part tracks indicators that the company issues. of its management of key sustainability 3. Financial Position and Performance Position and 3. Financial Model Structure of Annual Report of Model Structure IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 96 Part I: Disclosure Framework 98 pany’s business, include: of thedevelopment, performanceorpositionofthecom- review “must, totheextentnecessaryforanunderstanding The UKCompanies Act of2006 the UnitedStates. Kingdom andthe agement—for example, theStrategic ReportintheUnited tance ofnarrativereportingthatrepresentsthevoiceman- International disclosurerequirementsemphasizetheimpor andKPIs Management Reports BEST-PRACTICE RESOURCES: Beyond the BalanceSheet| 3. Financial Position and Performance • •
environmental mattersandemployeematters.” formance indicators, includinginformationrelatingto where appropriate, analysisusingotherkeyper and and analysis using nancialkeyperformanceindicators, ability information. drivers relationship between nancialperformanceandthe decreases intheuseofoutside nancing. implications ofcurrentplans, includingincreasesor ows throughtheorganizationaswell nancing More generally, itcanbeusefultopresenthowcash capital-expenditure requirementsforthecomingyear. needs, plans, andpractices, includingliquidityand The reportshouldcontaininformationon nancing Financing Needs business environment, andbusinesssegments. relative tothecompany’s strategy, businessmodel, include narrativetextthatexplains nancialresults nancial resultsthatunderlietheKPIs. Italsoshould against keyperformanceindicatorsandmoredetailed discussion of nancialresults, includingperformance The performancereportshouldincludeanin-depth Financial Results performance. investments followthegeneral discussionof more detaileddescriptionsofcertain keyprojectsor activity, andhow theywillberesolved. Sometimes, challenges orrisksassociated with theinvestmentor Performance reportingcanalsobeusefulfordiscussing ts intothewiderstrategy. in pastyears, howitisnowpayingoff, andhowit hoped for)oftheinvestmentoractivity—performance information, includingtheachievements(actualand performance reportcanprovidemorein-depth introduced inthestrategysectionofreport, the While majoractivitiesandinvestmentsareusually Investments andInitiatives of nancialperformance, includingsustain- Management Discussionsand Analysis IFC Toolkit IFCfor Disclosure and Transparency provides that the business provides thatthebusiness
-
in in
-
plans toaddvalueinthefuture. InExample3.1, on howthecompanywillperformandit The reportshouldprovideforward-lookingguidance Forward-Looking Information the drivingforcesinquantitativeterms. quantitative results, itcanbehelpfultoalsopresent event oralong-termtrend. When discussingnotable changed, andwhetherthechangeisduetoanunusual of ESGmattersandKPIs—whatchanged, whyit changes inthe nancialsituationorimpact The reportshouldincludeadiscussionofmaterial Material Changesor Trends copyrights, andtrademarks. intellectual capitalandproperty, includingpatents, es, researchanddevelopment, marketposition, and and reputation, naturalresources, humanresourc- performance. These canincludethecompany’s brand nancial resourcesthathavehadamaterialimpacton 2015). Performancereportingshouldnoteanynon- companies isattributedtointangibles(Ocean Tomo ments. Infact, muchofthemarketvaluetoday’s resources thatarenotfoundinthe nancialstate- Much ofthecompany’s performancemaydependon Intangibles report ofaU.K. company, includesthefollowing: The ICSAGuidanceNote, elements, amongothers: Guidance ontheStrategic Report The Financial ReportingCouncil(UnitedKingdom) of non nancialperformance. discussion ofthat nancialinformationandsomemeasures with nancialinformation, andtheyencourageprovidinga note thatcompanyobjectivesshouldbedisclosedtogether future performanceoftheenterprise.” The Principlesalso ularly interestedininformationthatmayshedlightonthe The G20/OECDPrinciples Standards International Reporting BEST-PRACTICE RESOURCES: • • • •
extent necessaryforanunderstanding ofthebusiness. ment, performance, orpositionofthebusiness, tothe Trends and factors Analysis the futureperformance. facing thecompany, trends, andfactorslikelytoaffect A descriptionoftheprincipalrisksanduncertainties KPIs, both nancialandnon nancial; Analysis ofannualperformance, positionatyearend, -The position of the company at the end of the year; -Thepositionofthecompany attheendofyear; -Developmentandperformanceofthecompany’s business duringthe nancialyear, of l in its contents for the annual initscontentsfortheannual ikely toaffectthefuturedevelop - sstate that “investors arepartic- includes the following includes thefollowing
3. Financial Position and Performance I: Disclosure Framework Part Example 3.1: Forward-Looking Guidance—Novo Nordisk Annual Report 2016 OUTLOOK 2017 The current expectations for 2017 are summarised in the table below:
EXPECTATIONS ARE AS REPORTED, EXPECTATIONS IF NOT OTHERWISE STATED 2 FEBRUARY 2017
Sales growth • in local currencies -1% to 4% • as reported Around 2 percentage points higher Operating pro t growth • in local currencies -2% to 3% • as reported Around 2 precentage points higher Net nancials Loss of around DKK 2.4 billion E ective tax rate 21% - 23% Captial expenditure Around DKK 10.0 billion Depreciation, amortisation and impairment losses Around DKK 3.0 billion
Free cash ow DKK 29 - 33 billion
Source: Novo Nordisk.
Novo Nordisk, a Danish pharmaceutical company, performance cannot be quanti ed, the report should presents its 2017 outlook for nancial key perform- provide a description of efforts and results. ance indicators. In good international practice (Matrix Level 3), the audit committee or E&S/sustainability committee of Sustainability Performance the board should oversee nancial and non nancial Reporting on sustainability performance should pro- reporting and audit, including the ESG information in vide a context for how well the company is meeting the annual report. sustainability objectives, including managing environ- mental and social opportunities and risks and its LEADERSHIP PRACTICES (Matrix Level 4) demand relationships with key stakeholders. that non nancial disclosure be in accordance with the highest international standards, such as GRI, IIRC, The report should provide information on the results and SASB standards, and that ESG information has of its management of core E&S issues, including been independently reviewed. efforts to mitigate their impact. For example, if the company is involved in land acquisition and involun- 3.1.2. Key Performance Indicators tary resettlement, the report should describe steps to The performance report should present the company’s avoid long-term hardship and impoverishment for the results on its KPIs (introduced in the strategy section of Affected Communities. It should also describe envi- the report) over the past three completed scal years. ronmental damage and adverse socioeconomic effects The scope of the reported information should be clear, in areas where communities have been displaced. especially if it differs from year to year. Any changes to the coverage of information should be explained. If the company has determined that it faces speci c sustainability issues in environmentally or socially Reporting on KPIs that are set during the strategy-set- sensitive areas, the performance report should provide ting process creates a performance report that is highly a qualitative description of the steps the company has relevant and unique to the company’s business model taken to avoid or minimize those speci c risks. and context, its strategy, and the material risks that it faces. (See “Using KPIs in the Strategy-Setting Process” Performance information should be based as much as in 1.2. Strategic Objectives, page 22 of this Toolkit.) possible on quantitative measures (or KPIs), either of the company’s impact or its efforts to avoid, reduce, Financial KPIs or mitigate the impact. It should be complemented by Financial KPIs are ratios and other measures of the qualitative information to explain the context, trends, performance of a company in managing its nan- and information not conveyed by numbers. When cial capital and creating a pro t for investors. These
98 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 99 Part I: Disclosure Framework 100 3. Financial Position and Performance Beyond the BalanceSheet| returns). (price-to-earnings) ratioand TSR (totalshareholder used nancialmeasuresorratios, suchasP/E EPS (earningspershare), aswellothercommonly depreciation, andamortization), freecash ows, and including sales, EBITDA (earningsbeforeinterest, cover someofthelineitems nancialstatements, Source: Rio Tinto. Source: Example 3.2: FinancialKPIs—Rio Example 3.2: Tinto 2017 Annual Report IFC Toolkit IFCfor Disclosure and Transparency
relation tostrategy. detailed explanationofthemethodcalculationand Tinto, the Anglo-Australian miningcompany, witha Example 3.2showsreportingon nancialKPIsbyRio performance—that is, howef cientlyitconductsits Operational KPIsmeasurethecompany’s operational Operational KPIs Part I: Disclosure Framework
3. Financial Position and Performance 101 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit of this Toolkit.) Sustainability KPIs Sustainability of perform- a summary provide should The report social KPIs that environmental and ance on the to the company. “material”) (or are most relevant report of KPIs in the performance The summary an explanation linked to—and provide should be statements, for—the sustainability of and context comprehensive set of en- which provide a more vironmental, (For and governance metrics. social, of KPIsinformation on linking the summary more report to the sustainabilityin the performance Sustainability Statements, see 3.3. statements, the tables in including Toolkit, of this 109 page that section. For further disclosure guidance on Indi- Introducing Key Performance see 1.5. KPIs, 49 page cators,
-
Beyond the Balance Sheet | Beyond -
, and , satisfaction employee for retail, and assets for retail, sales per square foot Source: SAB Miller. Source: Example 3.3: Goals— and Strategic Snapshot of KPIs: Financial and Commercial ReportAnnual SAB Miller 2016 - Examples of indus across most industries. formance ratio replacement KPIs include the reserve try-speci c in telecommu- rate churn for oil and gas companies, nications, page—its strate- presents—in a single age company, providing a clear and recent performance, KPIs, gy, The speci c material. picture of what is considered of future prospects andgoals give a strong indication This snapshot is supported by narrative challenges. regionally oriented strategy discussions of the rm’s and business model. under management for nance. food and bever a U.K. Miller, SAB In Example 3.3, operations and delivers its products and services. and services. products delivers its and operations generic and indus- KPIs can be both Operational utilization , capacity and For example, try-speci c. , satisfaction customer indicators of per are common turnover employee IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 100 Part I: Disclosure Framework Source: Cemex. 102 Example 3.4: 2016 Core Sustainability KPIs—Cemex Integrated Report 3. Financial Position and Performance Beyond the BalanceSheet| countries. States andanationalversionofIFRS inmostother accounting principles—suchasGAAPintheUnited nancial statementsaccordingtonationallyaccepted ple, theymayrequirelistedcompaniestoprepare companies listedonstockexchanges. Forexam- ly, countrieshaveadditionalrequirementsforlarge recognized generalprinciplesofaccounting. Typical- national corporateorsecuritieslawsandnationally and thereforeshouldbemadeinaccordancewith ments isoftenstrictlyregulatedatthenationallevel The preparationandpresentationof nancialstate- comparable acrosscompaniesandindustries. to generallyacceptedaccountingpracticesthatare of performancethatismorestandardizedaccording and context, nancialstatementspresentanaccount which areuniquetothecompany’s businessmodel counting andaccountability. Unlike nancialKPIs, Financial statementsareimportantforpublicac- FinancialStatements 3.2. its annualreports. company inMexico, presentssustainabilityKPIsin Example 3.4illustrateshowCEMEX, aconstruction IFC Toolkit IFCfor Disclosure and Transparency about cash ows, liquidity, andsolvency. SMEs whoareinterestedprimarilyininformation needs oflenders, creditors, andotherstakeholdersof is lessdemandingandtailoredtotheinformation The IFRS forSMEsStandard, ontheotherhand, BEST PRACTICES scal years. comparative guresfromthecompany’s pasttwo Typically, nancialstatementsarepresentedwith as theInternationalFinancialReportingStandards. nationally recognizedaccountingprinciples, such prepared andpresentedinaccordancewithinter All nancialstatementsandreportingshouldbe 3.2.1. General Guidance formance (incomeandcash ow). Typical annual position (assets, liabilities, andequity)per key elementsofacompany’s performance: nancial Financial statementsaredesignedtomeasuretwo ments andendorsingthe nancialstatements. accountability forpreparationofthe nancialstate- nancial of cerorchiefexecutiveof cer)accepting statement byseniormanagement(typicallythechief and regulation often require a and regulationoftenrequirea - - Part I: Disclosure Framework
3. Financial Position and Performance 103
IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Examples 3.5 below and 3.6 on the next page 3.6 on the and 3.5 below Examples statements for Novo rst two of these illustrate the the illustrates 105 3.7 on page Example Nordisk. Limited. statement of cash ows for Sasol. And Example of cash ows for Sasol. statement change the statement of illustrates 106 3.8 on page Holdings equity for Liberty in stockholders’ Beyond the Balance Sheet | Beyond
Statements of income, of income, Statements Balance sheet, of cash ows, Statement equity, of change in stockholders’ Statement Notes to nancial statements. Income Statement—Novo Nordisk Annual Report 2016 Nordisk Example 3.5: Income Statement—Novo Source: Novo Nordisk. Novo Source:
• • • • • reports include the following nancial statements and statements nancial the following include reports related information: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 102 Part I: Disclosure Framework 104 3. Financial Position and Performance Beyond the BalanceSheet| Source: Novo Nordisk. Example 3.6:BalanceSheet—Novo Nordisk 2016 Annual Report IFC Toolkit IFCfor Disclosure and Transparency Part I: Disclosure Framework
3. Financial Position and Performance 105 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Source: Sasol. Source: Statement of Cash Flows—Sasol Integrated Report Integrated Cash Flows—Sasol of Statement 2017 3.7: Example IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 104 Part I: Disclosure Framework 106
of nancialstatements. content oftheauditor’s reportissuedasa resultofanaudit adverse, ordisclaimerofopinion)as wellastheformand an opiniononthe nancialstatements (thatis, quali ed, on Auditing) dealswiththeauditor’s responsibilitytoform on Financial Statements:ThisISA (InternationalStandard ISA 700(Revised), Forming anOpinionandReporting BEST-PRACTICE RESOURCES: Auditing Standards 3. Financial Position and Performance Beyond the BalanceSheet| Auditing Standards. Example3.9showsatypical ally Accepted Auditing StandardsortheInternational international auditingstandards, suchastheGener have their nancialstatementsauditedaccordingto Larger andpubliclylistedcompaniesareexpectedto and audit. should oversee nancialandnon nancialreporting (Matrix Level3), theauditcommitteeofboard and competentauditor. Ingoodinternationalpractice management andauditedbyanindependent, quali ed, that the nancialstatementshavebeenpreparedby The annualreportshouldincludeanaf rmation Results Statementof Audited Financial 3.2.2. Source: Liberty HoldingsLimited. Source: Liberty Liberty Holdings Integrated Report 2015 HoldingsIntegrated Report Liberty Example 3.8:StatementofChangeinStockholders’Equity— IFC Toolkit IFCfor Disclosure and Transparency
- matters thataroseduring AkzoNobel’s 2016audit. arose duringtheaudit. Example3.10showskeyaudit requires theauditortodisclosekeyauditmattersthat codi ed underISA Standard700(revisedin2015), BEST PRACTICE inauditing, whichwasrecently audited. statements oflargeorpubliclylistedcompaniestobe In mostjurisdictions, thelawrequires nancial services companyinSouth Africa. auditor’s reportfromLibertyHoldings, a nancial porting in nancial statements should correspond with porting in nancialstatementsshouldcorrespondwith tion andmanagement’s decisionmaking. Segmentre- corresponds tothecompany’s owninternalorganiza- Companies shouldpresentsegmentinformationthat SegmentReporting 3.2.3. decision making. company’s owninternalorganizationand management’s to reportsegmentinformation thatcorrespondstothe IFRS 8 Segment Information Reporting BEST-PRACTICE RESOURCES: and itsU.S. equivalent FAS 131r
equire companies equire companies
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3. Financial Position and Performance 107 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Independent Auditor’s Report—Liberty Independent Integrated Holdings 3.9: Example Report 2015 Source: LibertySource: Holdings Limited. Source: AkzoNobel. Source: Independent Auditor’s Report—AkzoNobel Report Independent 2016 Example 3.10: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 106 Part I: Disclosure Framework 108 Source: BASF. Example 3.12: Integrated Report 2017 SegmentReporting—BASF 3. Financial Position and Performance Beyond the BalanceSheet| panies in growth mode often choose not to distribute panies ingrowthmodeoftenchoosenottodistribute shareholders, inproportiontotheirholdings. Com- the percentageofearningsthatwillbedistributedto of theannualreport. policythat companiesdisclosetheirdividend aspart LEADERSHIP PRACTICES (MatrixLevel4)suggest bility. (SeeExample3.13.) developed consistentlyovertimetoenablecompara- average duringtheyear). Resultspershareshouldbe number ofcommonsharesoutstanding(usuallythe tax andpreferredstockdividends), dividedbythe (pro t) thatbelongtocommonshareholders(netof share, calculatedasacompany’s totalannualearnings in thefuture. Itistypicallyexpressedasearningsper formance overtime, andestimatepriceappreciation use tocomparealternativeinvestments, trackper ratio thatcurrentandprospectiveshareholderscan Results pershareisasimplebutpowerful nancial Disclosures ResultsperShare, Dividends,and 3.2.4. Tax 3.12.) and performancereporting. (SeeExamples3.11and relevant, includingbusinessmodelandenvironment other partsofthereportswherebusinesssegmentsare Segment Reporting—Liberty Holdings Integrated Report 2015 HoldingsIntegrated Report Example 3.11: SegmentReporting—Liberty Source: Liberty HoldingsLimited. Source: Liberty IFC Toolkit IFCfor Disclosure and Transparency A dividend policy typically sets A dividendpolicytypicallysets - cused investors. panies usedividendsasafeaturetoattractincome-fo- dividends, whereasmorestableandestablishedcom- country-by-country activities. of taxpolicyandrelatedriskstax-related and sustainabilitystrategy, taxgovernance, andmanagement ny’s approach totaxation, anditsalignmentwithbusiness corporate taxdisclosure, includingontaxpolicy, thecompa- investors underthePrinciplesforResponsibleInvestmenton Tax Disclosure 2017 PRI: Investors’RecommendationsonCorporate Income corporate citizenshipconsiderationinKingIV.” responsible andtransparenttaxpolicyisputforwardasa and thattakesaccountofreputationalrepercussions. Hence, that isalsocongruentwithresponsiblecorporatecitizenship, a taxpolicythatiscompliantwiththeapplicablelaws, but dimensions. The governingbodyshouldberesponsiblefor 2016: King IVReportonCorporate GovernanceforSouth Africa on Reporting Tax Matters BEST-PRACTICE RESOURCES: “Tax hasbecomeacomplexmatterwithvarious presents recommendations by global presents recommendationsbyglobal
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IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Core environmental and social issues applicable to most industries; Sustainability issues that are relevant to a business model, speci c technology, company’s and that relate to the company’s or industry, and contribution ethics, products and services, to economic and social development.
• • 3.3.1. General Guidance General 3.3.1. Sustainability statements consist of a tabulated indicatorspresentation of metrics or performance that the company tracks as part of its management Similar to the assessment of key sustainability issues. risks (see 1.4. of key sustainability opportunities and 26 of page Sustainability Opportunities and Risks, include sustainability statements should Toolkit), this onmetrics that characterize company performance to bea range of issues that the company determines for example: material, In preparing sustainability statements, companies In preparing sustainability statements, must strike a balance between using only KPIs—which should be highly individualized to re ect the strategy and serve as targets for its execution—or using a larg- er selection of commonly accepted metrics that can be compared with peers and across time. Information and data in the sustainability statements should be presented with comparative gures from the and ideally should be past two scal years company’s subject to an annual assurance process by an independent
Beyond the Balance Sheet | Beyond
Source: Santova. Source: Results per Share—Santova Limited 2016 Annual Integrated Report Integrated Annual 2016 Limited per Share—Santova Results 3.13: Example 3.3. Statements Sustainability Sustainability statements (just like nancial state- ments) are important for public accounting and which And unlike sustainability KPIs, accountability. business model and are unique to the company’s sustainability statements should present an context, account of performance that is more standardized according to more commonly used metrics that are comparable across companies and industries. sustainability disclosures are For the most part, there is a growing trend among However, voluntary. regulators and quasi-regulators (stock exchanges, and others) to either require standard-setting bodies, or strongly encourage the disclosure of sustainability information alongside nancial information. provides guidance on Toolkit This section of the including how to prepare sustainability statements, suggested environmental and social metrics. (Matrix Level 4) also LEADERSHIP PRACTICES suggest that companies disclose tax transparency a description which typically contain statements, of the company’s strategy and policy regarding of the company’s tax paid incorporate tax and the actual amount of it operates. different jurisdictions and segments where how theExample 3.14 on the next page shows Telefonica, Spanish telecommunications company, ofpublicly discloses its policy and actual payment taxes. IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 108 Part I: Disclosure Framework 110
external reporting. information isreliable—bothforinternalmanagementand of sustainabilityinformationisimportanttoensurethat tion, and internalcollectionprocessforthedata. Assurance requires thatthecompanyclearlyestablishscope, de ni- and metricsbeindependentlyveri ed(orassured), which Leadership practicessuggeststhatsustainabilityinformation Collection, and Assurance ofSustainabilityData BEST-PRACTICE RESOURCES: Definition,Scope, 3. Financial Position and Performance Beyond the BalanceSheet| tion containedintheannualreport. the boardshouldoverseesustainabilityinforma- audit committeeorE&S/sustainabilityof In goodinternationalpractice(MatrixLevel3), the 112, illustrateamorecomprehensiveapproach. ments, andExamples3.16 a morelimitedsetofKPIsforthesustainabilitystate- provider. Example3.15illustrates AkzoNobel’s useof Example 3.14: Tax Statement—Telefonica 2016 Integrated Report Source: Telefonica. IFC Toolkit IFCfor Disclosure and Transparency and 3.17 on pages 111 and and 3.17onpages111 that canbecomparedwithpeers andacrosstime. bene t frominclusionofcommonly acceptedmetrics larger selectionofmetricsand, like nancialstatements, for itsexecution. Sustainabilitystatementscanincludea that re ectthecompanystrategyandserveastargets important metricsandcustomizethemtocreateKPIs BEST PRACTICE suggeststhatcompaniespickthemost accounting, andreporting. standards ofcorporatesustainabilityperformance, ci c. They arederivedfromcommonlyaccepted well asissuesthataremoreindustry-orcontext-spe- suggested metricscovercoresustainabilityissuesas as thepreparationofsustainabilitystatements. These that canbeusedfortheidenti cationofKPIsaswell This sectionpresentsalargeselectionofESGmetrics KPIs andStatements SuggestedMetricsfor Sustainability 3.3.2. independent provider. that ESGdatabesubjecttoanannualauditby LEADERSHIP PRACTICES (MatrixLevel4)suggest Part I: Disclosure Framework 111 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
Consolidated Sustainability Statements—AkzoNobel Report Statements—AkzoNobel Sustainability Consolidated 2016 3.15: Example Source: AkzoNobel. Source: Employee Metrics—Standard Chartered Summary Sustainability Metrics—Standard 2015 Employee Example 3.16: Source: Standard Chartered. Standard Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 110 Part I: Disclosure Framework 112
Beyond the BalanceSheet| 3. Financial Position and Performance Example 3.17: NonfinancialSummary—Westpac Group 2016 AnnualReport Source: Westpac. IFC Toolkit IFCfor Disclosure and Transparency Part I: Disclosure Framework
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(Continued on next page.) IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Performance Standards and that are common to all or most are common to all Standards and that Performance in emerging markets. and industries operating companies Beyond the Balance Sheet | Beyond
INDICATOR forced and child labor in the company’s primary supply chain (#). Describe (#). primary supply chain forced and child labor in the company’s corrective actions. controversies involving accom- or public employee grievances, Legal actions, - sani water, re, and safety (e.g., etc.) such as health dorms, modation (camps, actions. Describe corrective overcrowding) (#). tation, or code about management of forced and statement, Labor or E&S policy, link. Provide description and child labor and migrant workers (y/n). Legal actions, employee grievances, or public controversies involving forced or public employee grievances, Legal actions, Describe corrective actions. operations (#). and child labor in the company’s controversies involving or public employee grievances, Legal actions, Legal actions, employee grievances, or public controversies involving work- grievances, employee Legal actions, Describe labor laws) (#). collective agreements, ing conditions (associations, corrective actions. or public controversies involving grievances, employee Legal actions, Describe corrective actions. discrimination or equal remuneration (#). or public controversies involving third grievances, employee Legal actions, Describe corrective actions. party or contract workers (#). or public controversies indicating poor grievances, employee Legal actions, Describe corrective actions. worker health and safety practices (#). and contract workers. Number of work-related fatalities for direct employees. Lost-time incident rate for direct and contract composition by gender and ethnicity (#). Workforce Provide description and link. Policy on Human Resources (y/n). Provide description and link. grievance mechanism (y/n). Worker Provide description and link. Provide description public (y/n). mechanism accessible by general External communication and link. Provide description Provide Affected Community (y/n). to Information disclosed and link. Provide description System (y/n). Environmental and Social Management and link. Emergency Response Plan or Procedure (y/n). Provide description and link. Plan or Procedure (y/n). Emergency Response (y/n). social policy approved by senior management Environmental and description and link. Provide description (y/n). Affected Community grievance mechanism
presents model indicators that relate indicators that presents model TOPIC construction, agribusiness). construction, Operations or supply chain in countries or sectors with a risk of forced or child labor (e.g., agri, textiles, textiles, agri, labor (e.g., or child countries or sectors with a risk of forced in chain or supply Risks: Operations Sector-Speci c Core Sustainability Indicators—IFC Performance Indicators—IFC Sustainability Standards Core 3.1: Table Proactive management of forced and child labor and migrant workers Safe worker accommodation Forced and child labor in the primary supply chain Forced and child labor in the company Workforce composition Workforce conditions working Transparent feedback and recourse Worker Injury and fatality Worker health and safety Worker Protection of contract workers Opportunities and fairness for all workers Performance Standard 2: Labor and Working Conditions Working Labor and 2: Performance Standard protection Workers Affected Community knowledge ofAffected Community General public knowledge and recourse General public knowledge to the core environmental and social issues covered in the IFC social issues covered environmental and to the core Plan or Procedure Emergency Response regarding E&S Statement of intention impacts and opportunities Affected Community feedback and recourse Systematic process to identify and manage risks/impacts and opportunities 3.1 on page 113 Table Suggested Metrics for Core Issues and the IFC and the IFC Issues for Core Metrics Suggested Performance Standards Standards Performance Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts and Social Management of Environmental Assessment and 1: PerformanceStandard IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 112 Part I: Disclosure Framework 114 3. Financial Position and Performance Beyond the BalanceSheet| Pollution prevention Resource ef ciency GHG emissions Pollution risks Impact onwaterusedbyothers StandardPerformance 3:Resource EfficiencyandPollutionPrevention TABLE 3.1:CoreSustainabilityIndicators Negative impactonpeoples’livelihoods or evictedthroughforce People/communities involuntaryresettled StandardPerformance 5:Land Acquisition andInvoluntary Resettlement harmed thepublic Fires orstructuraldamagethathave harm tothepublic Infrastructure failuresthathaveresultedin Worker impactonacommunity a community Contribution tohealthimpactson Security forceimpactstoacommunity StandardPerformance 4:CommunityHealth,Safety andSecurity or thatcanthreatenthesafetyofcommunities(bridges, dams, etc.). Sector-Speci c Risks:Companies/projectsthatconstructoroperate buildingsandstructuresthatareaccessedby thepublic, TOPIC IFC Toolkit IFCfor Disclosure and Transparency
—IFC Performance Standards and link. Availability of anemissionmonitoringsystem(y/n). Providedescription description andlink. Pollution preventionpolicyandmanagementplan(y/n). Provide renewables intheenergymix, %waterrecycledinproduction. gy, andwater)requiredfortheprovisionofaunitgoodorservice;% Resource ef ciency:resourceintensity, i.e, resources(e.g., materials, ener production orsales]). released inenergyconsumptionforproduction/normalizationfactor[usually GHG emissions:Scope1and2(t), Scope3ifrelevant, intensity(GHGs corrective actions. ter contamination, wastedisposal)fromthecompany/project(#). Describe or ongoingpollutionrisks(e.g., airorwateremissions, soilorgroundwa- Legal actions, communitygrievances, orpubliccontroversiesinvolvingpast or ongoingimpactonwaterusedbyothers(#). Describecorrectiveactions. Legal actions, communitygrievances, orpubliccontroversiesinvolvingpast corrective actions. has resultedinpeoples’livelihoods beingnegativelyaffected(#). Describe Community grievancesorpubliccontroversieswherethecompany/project actions. untary resettlementandevictionwiththeuseofforce(#). Describecorrective Legal actions, communitygrievances, orpubliccontroversiesinvolving invol- controversies indicatingharmtothepublic. Describecorrectiveactions. structures, numberoflegalactions, communitygrievances, orpublic If thecompanyconstructsoroperatespubliclyaccessedbuildings or lic controversiesindicatingharmtothepublic. Describecorrectiveactions. dams, orashponds), numberoflegalactions, communitygrievances, orpub- If thecompanyconstructsoroperatesinfrastructure(bridges, dams, tailing munity (y/n). Providedescriptionandlink. Statement, policy, orcodeonworkerconductandinteractionwithlocalcom- (#). Describecorrectiveactions. tribution toanincreaseofdisease(HIV/Aids, malaria, etc.)inacommunity Legal actions, communitygrievances, orpubliccontroversiesinvolvingcon- corrective actions. with majorsecurityincidentinvolvingthelocalcommunity(#). Describe Legal actions, communitygrievances, orpubliccontroversiesassociated community (y/n). Providedescriptionandlink. Statement, policy, orcodeonsecurityforcesandinteractionwithlocal INDICATOR (Continued frompreviouspage) (Continued onnextpage.)
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IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Beyond the Balance Sheet | Beyond
INDICATOR harm to indigenous people (through relocation, impact on livelihoods, taking impact on livelihoods, harm to indigenous people (through relocation, Describe corrective actions. etc.) (#). traditional knowledge, Provide description or policy on indigenous people (y/n). code, Statement, and link. % of agro-commodity that is certi ed (e.g., FSC, RSPO, MSC, RTRS, BCI, BCI, RTRS, MSC, RSPO, FSC, % of agro-commodity that is certi ed (e.g., etc.). Bonsucro certi cation, GRSB, of supply chain where there is or code on the management policy, Statement, Provide description habitats (y/n). the risk of signi cant conversion of critical and link. migrate peoples may live on, Company/project in area that indigenous Provide description. or use (y/n). through, or public controversies involving grievances, community Legal actions, controversies related to com- or public community grievances, Legal actions, Describe corrective heritage (#). impact on or use of cultural pany/project’s actions. Legal actions, community grievances, or public controversies involving peo- involving or public controversies community grievances, Legal actions, largerfrom the effects of or suffering or food, enough water ple not having because of etc.), salinization of soil/water, loss of land, storm events ( ooding, actions. Describe corrective (#). the company/project Company/project located in or near protected area, park, or reserve (y/n). (y/n). or reserve park, in or near protected area, Company/project located Provide description. endangered, in or near an area known to contain Company/project located Provide description. or rare species (y/n). vulnerable, Provide on biodiversity management (y/n). or policy code, Statement, description and link. related to large or public controversies community grievances, Legal actions, con- either through or wetlands, lakes, rivers, impacts on water sources, for or the volume of water needed permanent change in land use, struction, Describe corrective actions. company operations (#).
(Continued from previous page) from (Continued Standards Performance —IFC TOPIC Agribusiness companies and companies that purchase agro-commodities as part of their primary business. purchase Risks: Agribusiness companies and companies that Sector-Speci c Source: IFC.Source: Performance Standard 8: Cultural Heritage 8: Cultural Performance Standard Impact on cultural heritage Proactive engagement with indigenous people Impact on indigenous peoples from land acquisition Performance Standard 7: Indigenous Peoples 7: Performance Standard Impact on indigenous peoples Proactive management of supply chain toProactive management of supply chain protect critical habitats Agro-commodity certi cation Impacts to protected areas, parks, or parks, areas, Impacts to protected reserves or vulnerable, Impact on endangered, rare species and biodiversityProtection of habitat management lakes, rivers, Impact on water sources, or wetlands Impact on ecosystem services Impact on Performance Standard 6: Biodiversity Conservation Resources 6: Biodiversity Living Natural Management of and Sustainable Performance Standard Indicators Sustainability 3.1: Core TABLE IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 114 Part I: Disclosure Framework 116 3. Financial Position and Performance Beyond the BalanceSheet| moted bytheMatrix. The right-handcolumnindicates good corporategovernancepractices(Level3)pro- Table 3.2presentsmodelindicatorsthatrelatetothe Suggested MetricsforCorporateGovernance service providers(Asset4, BBG, MSCI, Sustainalytics). 11 Source: IFC. Table ModelGovernance Indicators 3.2: Frameworksandstandardsanalyzed includereportingframeworks(GRI), nancialanalysisframeworks(DJSI), andinformation Engagement Governance ofStakeholder and Grievances External Communication Executive Compensation Dividend Policy RPTs Ownership Disclosure Shareholders Equal Treatment of Equal Voting Risk Disclosure Annual Report Compliance Risk Governance Internal Audit F. Governance ofStakeholderEngagement E: Treatment ofMinorityShareholders D. Disclosure and Transparency Control EnvironmentC. Role andResponsibilities Audit Committee Board Diversity Board Independence B. Structure andFunctioningofBoard CG Of cer CG Framework A: CommitmenttoESG IFC Toolkit IFCfor Disclosure and Transparency
such astheIFCIndicativeDe nition. % independentdirectorsthatmeetarobustde nitionofindependence, and practices?(y/n) Is thereadesignatedof cer/bodyresponsibleforoverseeingCGpolicies Company hasbothaCGcodeandofethics/conduct(y/n) Does theboardapprovebothstrategyandkeypolicies?(y/n) whom arenon-executivedirectorsandatleastonememberisindependent?(y/n) Is theboard-levelauditcommitteecomposedof nanciallyliteratemembers, allof % women(non-promoter/sponsor)onboard Is executivecompensationsubjecttoshareholderconsultation andapproval?(y/n) Is thedividendpolicypubliclydisclosed?(y/n) to shareholderapprovaloveracertainsize?(y/n) Is therearelated-partytransactionpolicythatincludesan escalation mechanism Is ultimatebene cialownershipdisclosedpublicly?(y/n) economic, environmental, andsocialtopics? (y/n) Are thereprocessesforconsultationbetweenstakeholders and theboardon Are grievancemechanismsoverseenbytheboard?(y/n) Are there100%tag-alongrightsforchangeofcontroltransactions?(y/n). 3) transferrights?(y/n) Do allshareholdersofthesameclasshave:1)equalvoting;2)subscription;and Does theannualreportincludedescriptionsofriskandappetite?(y/n) Does theannualreportorsustainabilityincludeESGinformation?(y/n) Does thecompliancefunctionreporttoauditcommittee?(y/n) committee? (y/n) Does thechiefriskof cerhaveaccesstoboardandreportboard/risk responsibilities, andreportinglines?(y/n) Does theinternalauditfunctionhaveitsowncharter/bylawestablishingrole,
standards, andinformationserviceproviders. used corporategovernancedisclosureframeworks, the frequencyofinclusionmetricinwidely
11
11% 33% Freq. Freq. Freq. Freq. Freq. Freq. 22% 78% 78% 44% 11% 38% 11% 11% 11% 50% 43% 1% 1% 1% 0% 6% 0% 3. Financial Position and Performance I: Disclosure Framework Part Most Commonly Reported E&S Metrics Metrics listed are illustrative and based on either a Table 3.3 presents a summary of the most common- common formulation or an amalgamation of different ly reported and tracked E&S metrics, based on an formulations. The right-hand column indicates the analysis of 12 widely used E&S disclosure frame- frequency of inclusion of the metric in the frameworks works, standards, and information service providers.12 and standards analyzed.
Table 3.3: Most Commonly Reported E&S Metrics
TOPICS ILLUSTRATIVE METRICS FREQ.
MANAGEMENT SYSTEM
Environmental & Environmental and Social Management System (y/n). Provide 46% Social Management description and link. System
ENVIRONMENT
Resource Efficiency
GHG emissions GHG emissions: Scope 1 and 2 (t), Scope 3 if relevant, intensity (GHG emissions/production of sales) 92%
Water use Water used (m3), % recycled, % in water stress areas, intensity 92% (water use/sales)
Energy efficiency Energy consumed (GW), % grid electricity, % renewables, 85% and mix intensity (energy/sales)
Pollution Prevention
Waste (water, solid, Waste from operations (t), % hazardous, % recycled, intensity 73% hazardous) (waste/sales)
Air pollutants Air Pollutants (Tn): NOx (excl. N2O), SOx, volatile organic 62% compounds, particulate matter
Pollution risks Legal actions, community grievances, or public controversies 42% involving past or ongoing pollution risks (e.g., air or water emissions, soil or groundwater contamination, waste disposal) from the company/project (#). Describe corrective actions.
Spills Number and volume of significant spills 25%
Biodiversity Conservation
Protection of habitat and Statement, code, or policy on biodiversity management (y/n) biodiversity management Provide description and link. 46%
Impact on endangered, Company/project located in or near an area known to contain vulnerable, or rare species endangered, vulnerable, or rare species (y/n). Provide description and link 23%
Climate Adaptation
Prevent or adapt to climate Steps to prevent and (if not preventable) adapt to the impact of 38% change climate change on the company’s ability to operate profitably or the quality of its products and services 38%
(Continued on next page.)
12 Frameworks and standards analyzed include reporting frameworks (GRI, SASB), financial analysis frameworks (EFFAS/DVFA, DJSI), information service providers (Asset4, BBG, Sustainalytics), regulation and quasi-regulation (European Union, BM&F Bovespa, World Federation of Exchange, Sustainable Stock Exchange Initiative), and investor initiatives (CERES).
116 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 117 Part I: Disclosure Framework 118 3. Financial Position and Performance Beyond the BalanceSheet|
TABLE 3.3:MostCommonly ReportedE&SMetrics LABOR AND WORKING CONDITIONS LABOR ANDWORKING TOPICS COMMUNITY Workers Treatment Wages the company Forced andchildlaborin Temporary workers Training Worker feedback and Turnover agreements Collective bargaining Workers Relations Diversity recourse Opportunities andfairness Opportunities Workforce composition Gender pay ratio for allworkers Health Lost Time IncidentRate andfatality Injury
Operations near a community Security force impacton and management Human rightsduediligence Impact onindigenous Human rightsviolations indigenous people peoples & Safety IFC Toolkit IFCfor Disclosure and Transparency ILLUSTRATIVE METRICS
Average hourlywageand%ofemployees earningminimum (#). Describecorrective actions. involving forced operations andchildlaborinthecompany’s Legal actions,employee grievances, orpubliccontroversies Temporary Worker Rate Hours oftraining peryear peremployee, broken downbygender wage Worker grievance mechanism(y/n). Provide descriptionandlink. employee category Voluntary andinvoluntary employee turnover rate bymajor agreements % ofactive workforce covered undercollective bargaining
Legal actions,employee grievances, orpubliccontroversies Workforce compositionbygenderandethnicity(#) Women/men pay ratio corrective actions. involving discriminationorequalremuneration (#).Describe
(per 200,000 hours worked or per 100 fulltime equivalent (per 200,000hoursworkedorper100fulltimeequivalent Lost Time IncidentRatefor direct andcontract workers employees rate (TRIR)andfatalityrate forInjury direct andcontract employees) Company/project inarea thatindigenouspeoplesmay live on, with localcommunity(y/n). Provide descriptionandlink. Statement, policy, orcodeonsecurityforces andinteraction policies, prevention, and treatment) Management ofhumanrightsinthevalue chain(codes, Company/project inarea thatindigenouspeoplesmay live on, Involvement inhumanrightsviolation migrate through, oruse(y/n) migrate through, oruse(y/n)
(Continued frompreviouspage) (Continued onnext page.)
FREQ. 100% 50% 50% 69% 69% 69% 46% 46% 54% 54% 42% 25% 35% 35% 25% 23% 23% 23% 23% 23% 31% 31%
3. Financial Position and Performance I: Disclosure Framework Part TABLE 3.3: Most Commonly Reported E&S Metrics (Continued from previous page)
TOPICS ILLUSTRATIVE METRICS FREQ.
PRODUCTS
Impact consideration Integration of environmental and social consideration in 38% in product design products and services
Energy/GHG intensity Energy/fuel/GHGs efficiency of products during use-phase 38% of products
Data privacy policies Policies and practices on collection, use, and retention of 38% customer information
Packaging Packaging weight (Tn), % from recycled or renewable 31% materials, % recyclable or compostable
Recalls Product recalls: # of recalls; total units recalled 31%
Materials and chemicals Process to identify and manage emerging materials and 31% of concern chemicals of concern in products
Incidents Product safety fines and settlements (US$) 23%
ETHICS (and GOVERNMENT RELATIONS)
Anticorruption Management of anticorruption in the value chain (codes, 69% (management) policies, prevention, and treatment)
Political spending Political spending, lobbying expenditures (including trade 38% associations) (US$)
Anticorruption Fines and settlements for corruption or bribery (US$), 31% (incidents/fines) description of major fines and corrective actions
Competitive behavior Amount of legal and regulatory fines and settlements 25% associated with anticompetitive practices
SOURCING
Suppliers % of suppliers selected and monitored according to 85% social and environmental criteria
Raw materials % of raw materials from 1) recycled content and 2) renewable 46% (recycled/renewables) resources
Conflict minerals % of tungsten, tin, tantalum, and gold smelters within the 38% supply chain that are verified conflict-free
Critical materials Critical materials: % of materials cost 23%
Note: Some of the metrics in this table are duplicated from the Core Sustainability Indicators— IFC Performance Standards in Table 3.1.
Source: IFC.
118 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 119 Suggested Metrics for Economic and Social spondence with the UN Sustainable Development Development Goals and their indicators. Table 3.4 provides examples of commonly reported economic and social KPIs that have a direct corre-
Table 3.4: Link between ESG Metrics and SDGs Indicators
TOPIC SUGGESTED METRICS SDG SDG INDICATOR
ENVIRONMENT Air Pollutants NOx (excl. N2O), SOx, volatile SDG 11 11.6.2: Annual mean levels of ne par- organic compounds, particulate (Sustainable ticulate matter (e.g., PM2.5 and PM10) Part Framework I: Disclosure matter (Tn) Cities) in cities (population weighted)
Waste Waste from operations (t), SDG 12 12.4.2: Hazardous waste generated per % hazardous, % recycled, (Waste) capita and proportion of hazardous 3. Financial Position and Performance intensity (waste/sales) waste treated, by type of treatment 12.5.1: National recycling rate, tons of material recycled
Energy Energy consumed (GW), % SDG 7 7.2.1: Renewable energy share in the grid electricity, % renewables, (Energy) total nal energy consumption intensity (energy/sales) 7.3.1: Energy intensity measured in terms of primary energy and GDP
Water Use Water used (m3), % recycled, SDG 6 6.3: Improve water quality by reducing % in water stress areas, (Water pollution, eliminating dumping, and intensity (water use/sales) Ef ciency) minimizing release of hazardous chem- icals and materials, drastically reducing the proportion of untreated wastewater and substantially increasing recycling and safe reuse globally 6.3.1: Proportion of wastewater safely treated 6.4: Substantially increase water-use ef ciency across all sectors and ensure sustainable withdrawals and supply of freshwater 6.4.1: Change in water-use ef ciency over time 6.4.2: Level of water stress: freshwater withdrawal as a proportion of avail- able freshwater resources 6.b: Support and strengthen the partici- pation of local communities in improv- ing water and sanitation management 6.b.1: Proportion of local administra- tive units with established and oper- ational policies and procedures for participation of local communities in water and sanitation management
(Continued on next page.)
120 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part I: Disclosure Framework Part TABLE 3.4: Link between ESG Metrics and SDGs Indicators (Continued from previous page) 3. Financial Position and Performance TOPIC SUGGESTED METRICS SDG SDG INDICATOR
ENVIRONMENT Raw materials % from 1) recycled content and SDG 12 12.2: By 2030, achieve the sustainable 2) renewable resources (Resources) management and ef cient use of natural resources 12.2.1: Material footprint, material footprint per capita, and material footprint per GDP 12.2.2: Domestic material consump- tion, domestic material consumption per capita, and domestic material consumption per GDP
Climate Change Steps to prevent and (if not SDG 13 13.1: Strengthen resilience and adap- preventable) adapt to the (Climate tive capacity to climate-related hazards impact of climate change on the Resilience) and natural disasters company’s ability to operate pro tably or the quality of its products and services
Biodiversity Impact on ecosystem services; SDG 15 15.3/15.5: Take action to reduce impact on protected areas, (Land) the degradation of natural habitats, parks, or reserves; impact on halt loss of biodiversity, and strive to endangered, vulnerable, or achieve a land-degradation-neutral rare species; habitat protection project and biodiversity management; 15.3.1: Proportion of land that is impact on water sources, rivers, degraded over total land area lakes, or wetlands 15.5.1: Red List Index
EMPLOYEES
Treatment Average hourly wage and % of SDG 8 8.5: By 2030, achieve full and pro- employees earning minimum (Decent ductive employment and decent work wage Work and for all women and men, including Economic for young people and persons with Growth) disabilities, and equal pay for work of equal value 8.5.1: Average hourly earnings of female and male employees, by occupa- tion, age, and persons with disabilities
Forced or child labor in the SDG 8 8.7.1: Proportion and number of company and its supply chain children aged 5–17 years engaged in child labor, by sex and age
Relations % of active workforce covered SDG 8 8.8.2: Level of national compliance under collective bargaining with labor rights (freedom of associa- agreements tion and collective bargaining) based on International Labour Organization (ILO) textual sources and national legislation, by sex and migrant status
(Continued on next page.)
120 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 121 TABLE 3.4: Link between ESG Metrics and SDGs Indicators (Continued from previous page) TOPIC SUGGESTED METRICS SDG SDG INDICATOR
EMPLOYEES Nondiscrimination Workforce composition by SDG 8 8.5: By 2030, achieve full and pro- gender and ethnicity (#) ductive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value 8.5.2: Unemployment rate, by sex, age
Part Framework I: Disclosure and persons with disabilities
Safety Injury rate (TRIR) and fatality SDG 8 8.8.1: Frequency rates of fatal and rate for direct and contract nonfatal occupational injuries, by sex
3. Financial Position and Performance employees and migrant status
ETHICS Anticorruption Management of anticorruption SDG 16 16.5: Reduce corruption and bribery in in the value chain (codes, pol- all their forms icies, prevention & treatment) 16.5.2: Proportion of businesses that (y/n) had at least one contact with a public of cial and that paid a bribe to a pub- lic of cial, or were asked for a bribe by those public of cials during the previous 12 months
GOVERNANCE Board Diversity % women (non-promoter/ SDG 5 5.1: End all forms of discrimination sponsor) on board (Gender against all women and girls everywhere Equality) 10.2: By 2030, empower and promote SDG 10 the social, economic, and political (Reduce inclusion of all, irrespective of age, Inequality) sex, disability, race, ethnicity, origin, religion, or economic or other status
Annual Report Does the annual report or the SDG 12 12.6: Encourage companies, especially sustainability report include (Sustainable large and transnational companies, to ESG information? (y/n) Consump- adopt sustainable practices and to in- tion and tegrate sustainability information into Production) their reporting cycle 17.5: Adopt and implement investment SDG 17 promotion regimes for least developed (Implemen- countries tation and Target 17.19: By 2030, build on exist- Partnership) ing initiatives to develop measurements of progress on sustainable development that complement gross domestic product, and support statistical capacity- building in developing countries
Source: IFC.
122 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part II: Reporting Guidance
Part II: Reporting Guidance 123 -
of this Toolkit.) IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit The IASB’s International Financial Reporting Stan- The IASB’s “Infor dards de ne material information as follows: it couldmation is material if omitting it or misstating the basis ofin uence decisions that users make on entity. nancial information about a speci c reporting is an entity-speci c aspect materiality In other words, or of relevance based on the nature or magnitude, which the information relates in of the items to both, nancial report.” the context of an individual entity’s In some cases, disclosed? speci cally should be What toregulation provides only a general requirement topic, information on a particular “material” disclose to determinegiving companies substantial discretion the content of a report cases, In other what is material. practice. will be well de ned by regulation or good discretion is more limited in company For instance, related-party the areas of governance and the board, National regulations and and ownership. transactions, on whatstandards tend to give more speci c guidance to disclose in these areas. materiality determination is key in the areas However, and sustainability. risk, of strategy and performance, and Each of those is very speci c to the company, what companies present may differ signi cantly— in (For more information on substance and appearance. see how materiality applies to sustainability issues, Assessment of Key Sustainability Opportunities 1.4.1. page 28 and Risks, The concept of materiality is useful in determining the For example, amount of detail to disclose for a speci c item. a report may contain quali cations for each board member; a in some cases, only key quali cations—such as, however, likely to be material. education—are board member’s Materiality sometimes requires a forward-looking to provide an understanding of the future approach, a typical For material risks, prospects of the company.
Beyond the Balance Sheet | Beyond
Making sure investors have suf cient informa- tion to make informed decisions; Ensuring the cost-bene t of disclosure for companies and society; unnecessary information that can Avoiding obscure a clear view of company performance.
• • • Materiality The concept of materiality serves as a test of what should be reported by bringing into balance different objectives of corporate reporting: Most countries use materiality as the test of what National regulations typically focus should be reported. on current shareholders or investors and their ability This section of the Toolkit provides guidance on the Toolkit This section of the be disclosedpreparation of the information that will It includes guidance on as part of the annual report. as well as itsthe materiality of information reported con- conciseness, completeness, quality—its reliability, also includesThis section and comparability. sistency, the reported, guidance on the scope of the information reporting, dual mandatory and voluntary nature of companies. and special considerations for nonlisted should like all business activities, Corporate reporting, andkeep pace with developing economic realities audience. address the needs of a wide stakeholder reporting asCompanies are encouraged to view all an im- contributing to better communication and proved approach to accountability. Part II: Reporting Guidance to understand the current and future performance of the company; if the information could affect the com- buy or sell share price or investor decisions to pany’s it is usually considered material. its securities, NOTE: Annual reportsAnnual in English should be provided NOTE: investors. foreign when companies seek to attract IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 122 approach is to plot—on a “heat map”—the likelihood particular items in one report and compare them to of impact versus the magnitude of impact. For sustain- the reports of other companies. This is an especially ability risks and impacts, a materiality map or assess- acute concern for institutional investors analyzing and ment can help companies determine what is important investing in large numbers of companies. for the core operations of the company versus what is important for its stakeholders. Scope of Disclosure The report should cover the activities and results of What should not be disclosed? As a corollary to the company itself and any entity in which the company the requirement to disclose material information, holds a controlling interest (generally de ned as 50 regulations and best practices emphasize the need percent ownership or more). Financial reporting is to avoid the disclosure of immaterial information that typically consolidated among the reporting entity
Part II: Reporting Guidance can obscure a clear view of company performance. and its controlled entities. Measures of consolidated (For further discussion of materiality assessment, nancial and operational performance include the see Appendix A of this Toolkit.) totality of the controlled entity, regardless of the size of the minority interest, and the value of the minority Information Quality interest is accounted for separately in the income Good reporting requires a careful balance between statement and balance sheet. competing priorities: • A complete presentation of all material Information on af liated but unconsolidated entities information; should be included to the extent that it is necessary to explain the strategy, governance, and performance of • Ensuring that the report is suf ciently concise the company and its consolidated entities. However, to preserve focus and readability; unconsolidated entities should not be factored into the • Tailoring the report to the company to give the calculation of the consolidated nancial, operational, reader a strong understanding of the company and sustainability performance. and the environment it operates in; • Keeping the presentation comparable—to the For nancial reporting purposes, minority interests company’s reporting in previous periods and to in unconsolidated entities are accounted for using the the reporting of other companies in a similar equity method (pro ts in proportion of the minority industry—to make it easy for investors and interest) or the fair market value of the investment. others to use. Disclosure Requirements Clearly, preparing the annual report involves tradeoffs. Disclosure requirements are different for listed and Attempting to be complete and comprehensive can nonlisted companies. Depending on the jurisdiction, lead to overly long reports that can easily become the reporting elements and suggested disclosure can be disjointed. On the other hand, too much emphasis on legally mandated, voluntary, or not addressed. conciseness can produce some very readable reports, Listed Companies but they may omit key information. For companies that issue securities to the public, it Similarly, reports should be speci c about the com- is important to be familiar with the various require- panies that issue them. A reader should understand ments for the annual report and other disclosure, the performance, main products, markets, risks, and including securities law, corporate law, stock exchange future plans of this particular company—not just listing requirements, and corporate governance codes. concerns that could be applied to any company. Regu- Also, regulators or exchanges will often give supple- lators increasingly encourage companies to take some mental guidance on how to prepare annual reports, initiative in tailoring reports to best communicate their including guidance on sustainability and integrated story with investors and others. But investors frequently reporting. express frustration that information is not comparable Speci c challenges can arise from mixing mandatory from one report to the next—that it is too hard to nd and voluntary information, and from mixing audited nancial information (which is prepared in accordance BEST-PRACTICE RESOURCES: with generally accepted accounting standards) and forward-looking information (which is not so pre- Quality of Nonfinancial Information pared). Therefore, regulations often impose speci c Business-critical non nancial information, including sustain- requirements for the disclosure of voluntary and ability, should be of the same quality as nancial statements. forward-looking information in nancial statements or investor reports.
124 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Part II: Reporting Guidance II: Reporting Part Nonlisted Companies Reporting Formats In some countries, such as India and the United A digital copy of the annual report is often the main Kingdom, larger nonlisted companies have a range channel of access to the report for investors and other of reporting requirements. Even when requirements stakeholders. Although some companies create a Web- are minimal, public reporting can still be important based version of the report, it is recommended that the for private companies. Accessing new funds, engaging annual report be made available as a PDF (portable new stakeholders, and meeting the demands of current document format), which combines many of the ad- stakeholders as the company grows and becomes vantages of a printed physical copy of the report with more complex will still require telling the company’s the exibility of a digital format. story. Nonlisted companies can more easily tailor their reporting to particular investors and stakeholders. The Financial Reporting Council (FRC) Lab Project notes that PDFs of annual reports should have the Who Should Be Involved in following attributes, which are valued by investors Preparing the Annual Report? (FRC 2015): The process of preparing and ling an integrated an- • Has a clear boundary: Allows investors to nual report should be directed by the company man- have a clear understanding of the document, its agement (most appropriately the corporate secretary) scope and content. and overseen by the board of directors and its differ- ent committees (audit, governance, sustainability). • Is assured: To investors, the PDF bene ts from the same level of assurance as the hard-copy Ultimately, the company management (usually the top annual report. executives such as the CEO and CFO) and the board • Covers a de ned period: Represents a report are responsible for the timely issuance and accuracy of at a point in time that does not change, as mandatory and voluntary reports. opposed to webpages, which can be subject to update. Preparation of the report requires the involvement of a multidisciplinary team from a number of departments • Can be downloaded: Provides comfort that the in the company, including the following: investor’s copy will not be subject to manipula- tion or removal. • Strategy • Is searchable: Gives investors more con dence • Functional areas (sales, marketing, manufactur- that the results are relevant, as the search ing) operates within the boundary of the single, • Operations clearly purposed document. This also allows • Sustainability or environmental, health, and them to quickly pinpoint areas of interest safety (EH&S) within that report. • Human resources • Is (relatively) timely: The PDF is available on- line prior to the hard copy arriving in the post, • Risk management, internal control, and audit and it can be accessed by investors as soon as it • Legal and compliance is released. • Finance and accounting • Is portable: The PDF can easily be stored and accessed across most devices. • Investor relations • Is ubiquitous: Widespread adoption of the PDF • Information technology format by companies means that investors can External auditors carry out the independent audit access and analyze les across companies and of nancial statements and selected non nancial years. information. External auditors report to the board of directors (usually the audit committee), acting on The FRC recommends keeping the PDF simple— behalf of shareholders. avoiding e-books and interactive PDFs, which are not valued by investors. It also recommends providing archives of the company’s past annual reports as well as other supporting information—making available 5–10 years of historical records—on the company website (FRC 2015).
124 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 125 Part II: Reporting Guidance 126 Beyond the BalanceSheet| 2016). regulated andvoluntaryreporting(KrizBlomme of technologytosupportcorporatereporting, both Companies areencouragedtoinnovateintheiruse company, investors, andotherstakeholders. a moreengagedandresponsivedialogueamongthe disseminated online. Continuousreportingwillcreate xed-term basis, willbecontinuouslyupdatedand instead ofbeingimplementedonan “annual” orother This willalsoallowfor “continuous reporting,” which munication ofthatinformation. collect andcurateinformation, aswelltheircom- crucial roleinimprovingacompany’s capacityto corporate reporting. These technologiescanplaya examples ofhowdigitaltechnologiesaredisrupting Data analyticsandarti cialintelligencearefurther information. and consumptionof nancialothercorporate reporting process—thatis, theproduction, distribution, of blockchain-basedsolutionsinstreamliningthe example, regulatorsarelookingatthepossiblerole and deliveredtoacompany’s stakeholders. For cantly affectthewaycorporatereportsareprepared Undoubtedly, thesametechnologieswillalsosigni - actions, exchangeinformation, orconnectpeople. increasingly usingnewtechnologiestofacilitatetrans- and existingbusinessmodels, andallcompaniesare New technologieshavealreadydisruptedincumbent chain, areenablersaswelldriversofthischange. in particular, suchasarti cial intelligenceandblock- development ofcorporatereporting. Digitaltechnologies Technology playsanincreasinglyimportantroleinthe Technology andReporting information asymmetryandinsider information. tion fairlyandequallytoallshareholders, toavoid based ontheneedtodiscloseallmaterialinforma- companies, disclosurerequirementsareverystrict, annual reportpubliclyavailable. Forpubliclylisted larger, publiclylistedcompanies, includingmakingthe impose disclosureandtransparencyrequirementson Market authoritiesorstockexchangestypically Disclosure Requirements with smallershareholdersandstakeholders. communication aboutthecompany, andengagement including meetingdisclosurerequirements, strategic have differentaudiencesandservepurposes, Annual reportsandrelatedsourcesofinformation Disseminating the Annual Report IFC Toolkit IFCfor Disclosure and Transparency
business and nancialinformation). standardized, machine-readableformatfortagging information inelectronicformat, suchasXBRL(a also requireorencouragethedisclosureof nancial to improvemarketef ciency, marketauthoritiesmay To make nancialinformationeasilyaccessibleand the corporatewebsite. company’s maincommunicationchannels, including tion, thesereportsshouldbemadeavailableviathe relevant marketauthoritiesandexchanges. Inaddi- and periodicreports, musttypicallybe ledwiththe For thisreason, annualreports, aswellquarterly events thatoccurbetweenthereportingcycles. ments andperiodicorcurrentreportsformaterial publication ofquarterlyunaudited nancialstate- information inatimelyfashion, whichentailsthe Public companiesarealsorequiredtodisclosematerial the languageoftargetedaudience ofthereport. nies shouldmakesuretohave thereportavailablein companies accessingglobalcapitalmarkets, compa- while Englishisusuallytherequiredlanguageforglobal be supplementedbyonlineversions(microsites). Also, report. Printed(andPDF)versionsofthereportcan as socialmedia, toincreasethedistributionoftheir Companies canalsouseotherdigitalchannels, such and ExchangeCommission. al reportandForm10-K ledwiththeU.S. Securities performance. The letterintroduces thecompanyannu- shareholders, highlightingthecompany’s sustainability II.1 providesanexcerptof Amazon’s CEOlettertoits CEO letterthatintroducestheannualreport. Example tegic, governance, andperformanceinformationisthe Another importantchannelforcommunicatingstra- access tonewcapital. used ininvestorroadshowstosupportthecompany’s Similarly, theinformationinannualreportscanbe management presentskeyhighlightsofthereports. annual andquarterly nancialreports, wherethetop typically holdinvestorcallsatthetimeofrelease the required lings. Forexample, publiccompanies their annualreportandrelatedinformationbeyond Companies shouldmaximizethedisseminationof and impact. sharing thecompany’s vision, strategy, performance, partners, customers, andthecommunity, aswellfor stakeholders, includinginvestors, employees, business reports areagreattoolforpromotingthecompanyto Beyond meetingdisclosurerequirements, annual Strategic Communication
Part II: Reporting Guidance 127 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Similarly, the strategic distribution of integrated annu - of integrated distribution the strategic Similarly, - sustainability informa that incorporate key al reports stakeholder engagement a tool to enhance tion can be bycommunities affected with the and communication the company. Beyond the Balance Sheet | Beyond
2017 to Shareholders Letter Amazon.com, Inc. Officer, Founder and Chief Executive Bezos, P. Jeffrey our transporta carbon emissions by optimizing committed to minimizing are - Sustainability—We operations, efficiency in our and enhancing energy packaging, product tion network, improving We energy. using 100% renewable our global infrastructure goal to power a long-term have and we than more which generates wind farm yet, our largest Texas, Amazon Wind Farm launched recently host plans to have 100 turbines. We over annually from hours of clean energy megawatt 1,000,000 projects 24 wind and solar launched 2020, and have at 50 fulfillment centers by systems solar energy en- renewable Amazon’s Together, to come. than 29 additional projects with more the U.S. across In 2017 we 330,000 homes annually. over to power enough clean energy now produce projects ergy of a suite of sustainable Packaging, the first anniversary of Frustration-Free the 10-year celebrated the tons of packaging materials over than 244,000 eliminated more that have packaging initiatives elim- reduced packaging waste, significantly In addition, in 2017past 10 years. alone our programs Amazon is contracting the world, across And of 305 million shipping boxes. inating the equivalent a portion today, Already first low-pollution last-mile fleet. to launch our with our service providers vans and cars, delivery gas fleet is comprised of low-pollution electric and natural of our European 40 electric scooters and e-cargo over local urban deliveries. bikes that complete have and we In all cases, the company should make sure thethe company should In all cases, equally among all is shared fairly and information - and minority share including individual shareholders, of the annual a strategic dissemination In fact, holders. engage with smaller be a tool to actively report can and minority shareholders. Engaging with Minority Shareholders and Shareholders Minority with Engaging Stakeholders Amazon 2017 CEO Letter to Shareholders—Excerpt Example II.1: Source: Amazon. Source: IFC Toolkit for Disclosure and Transparency and Disclosure IFC for Toolkit Beyond the Balance Sheet | Beyond 126 Appendix A
128 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Appendixes
Appendix A: Commonly Reported ESG Metrics Appendix B: Major Frameworks for Sustainability Management and Disclosure Appendix C: IFC Environmental, Social, and Governance (Integrated Corporate Governance) Progression Matrix for Listed Companies Appendix D: List of Annual and Sustainability Reports Appendix E: Major Frameworks for Sustainability Management and Disclosure Appendix F: Annual and Sustainability Reports Used in the Toolkit
Appendix A 129 - IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit Information necessary to an understanding ofInformation necessary nancial condition and operat- the company’s as its prospects for the as well ing performance, future; and uncertainties that events, Known trends, are reasonably likely to have material impacts nancial condition or oper on the company’s ating performance; busi- Risk factors that may affect a company’s or nancial position industry, operations, ness, or its future nancial performance.
• • • It is best practice for a company to disclose the de - It is best practice for a company to disclose material issuesnition of materiality it used to identify and to structure reporting. Step Two: Assess Step Two: the importance and prioritize matters of relevant these matters. prioritizingThe following are different methods of relevant issues to determine what is material. Assess what is important to Materiality matrix. the reporting organization compared with what is stakeholders—using important to the organization’s it In reporting, an axis for each and plotting a matrix. but is not necessary to produce a materiality matrix, if this is the process the reporting organization uses some stakeholders may nd such a for prioritization, matrix useful (GRI 2016b). Risk and opportunity assessment. Embed or integrate the prioritization into ongoing risk and opportunity Using this meth- 2013). assessment processes (IIRC a company ensures that matters od of prioritizing, determined to be material are appropriately addressed in strategy de- in relevant governance structures, and in management velopment and risk mitigation, processes. reference to multiple capitals: nancial, manufactured, manufactured, nancial, multiple capitals: reference to and natu- social and relationship, human, intellectual, 2013). ral (IIRC guidance on disclosure of material provides SASB on the listed companies based sustainability for U.S. Supreme adopted by the U.S. de nition of materiality and Securities by the U.S. Court and interpretations Ac- (SEC 1989; SEC 2003). Exchange Commission informa- the following is material cording to the SEC, 2018): tion (SASB - Beyond the Balance Sheet | Beyond
Step One: Identify relevant Step One: Identify relevant matters. a reporting organization matters, identify relevant To materialitymust determine the speci c de nition of This decision may be made it will use in its reporting. to use awhen the reporting organization commits The de nition of ma- speci c reporting framework. needs ofteriality focuses on the material information report thethe primary stakeholders for the particular 2016). company is issuing (IIRC GRI de nes a material For sustainability reporting, “topic that re ects a reporting organiza- topic as a environmental and social signi cant economic, tion’s impacts; or that substantively in uences the assess- 2016b). (GRI ments and decisions of stakeholders” Issues are usually deemed relevant for an entire sector. rele- issues are considered For integrated reporting, vant based on whether the matter has an effect on the over ability to create value reporting organization’s Relevant matters are usually linked to the re- time. model—or strategy or business porting organization’s speci c inputs or outputs of the business model—and therefore are more entity-speci c or at least indus- try-speci c.
occur, itslikelihoodofoccurrence. and, if itisuncertainwhetherthematterwill uating themagnitudeofmatter’s effect effect onvaluecreation. This involveseval- important intermsofitsknownorpotential report, amatteralsoneedstobesuf ciently material. To beincludedinanintegrated Not allrelevantmatterswillbeconsidered aggregate. sidered materialeitherindividually orinthe the matterinquestion. Mattersmaybecon- judgment andwilldependonthenatureof ence valuecreationovertime. This requires it hasthepotentialtosubstantivelyin u- nance, performanceorprospectsissuchthat whether thematter’s effectonstrategy, gover Magnitude isevaluatedbyconsidering IFC Toolkit IFCfor Disclosure and Transparency - 3.26 3.27 what matters. reporting isstructuredusingmaterialitytofocuson to reportusefulinformationandmakethecasethat rial informationisnot. Reportingentitiesshouldstrive topics isusefultoexternalreportreaders, butimmate- In otherwords, materialinformationabout does notmakesuchadifference(IIRC 2016). issue athand, itfollowsthatimmaterialinformation making adifferencetotheproperevaluationof Since materialinformationisthatwhichcapableof issues, theseissuesshouldbeusedtoshapereporting. Once areportingorganizationde nesitsmaterial shape disclosure. Step Four:Usematerialissuesto not material(GRI2016b). does notwarrantactivemanagement, itisprobably policies andobjectivesrelatedtoemissions. Ifanissue change, forinstance, companiesmayinstitutespeci c objectives relatedtotheissueinquestion. Forclimate tion, riskmanagement, orspeci cpoliciesstrategic issues canbeaddressedthroughstrategyimplementa- what ismaterialnotenough. Generally, material the speci csofmaterialissue, butjustidentifying to bemanaged. The appropriateprocessdependson Issues thataredeterminedtobehighlymaterialneed issues. Step Three: Respondtomaterial • • • •
Time frame. Area oftheeffect, beitinternalorexternal and regulatoryperspectives Financial, operational, strategic, reputational Quantitative andqualitativefactors more appropriate. matter, aqualitativeevaluationmightbe quanti ed. Dependingonthenatureof does notimplythattheeffectneedstobe Evaluating themagnitudeofamatter’s effect organization considers: In evaluatingthemagnitudeofeffect, the Appendix A 131 IFC Toolkit for Disclosure and Transparency Transparency and Disclosure for IFC Toolkit INDUSTRY NORMS, BEST PRACTICES, BEST PRACTICES, NORMS, INDUSTRY Peer actions DRIVERS: & COMPETITIVE may create on industry issues and disclosure performance high standards of pressure for disclosurethe management and related to in order to remainof sustainability topics investors. competitive and satisfy & SOCIAL CONCERNS STAKEHOLDER may raise concernsTRENDS: Stakeholders medium- or long-termthat could in uence performance or create nancial or operating impacts throughacute short-term nancial in uence on demand, changes in customer and disruptions to business new regulations, viability. FOR INNOVATION: OPPORTUNITIES - New products and business models to ad dress the topic can drive market expansion or have the potential for a disruptive change ad- that provides new sources of competitive and risks associat- Financial impacts vantage. ed with these innovations may be of interest to investors.
• • •
- Beyond the Balance Sheet | Beyond
DIRECT FINANCIAL IMPACTS & RISK: DIRECT FINANCIAL IMPACTS cor This factor assesses the likelihood that porate performance on the topic will have or a direct and measurable impact on near- medium-term nancial performance. & POLICY REGULATORY, LEGAL, or emerging evolving, Existing, DRIVERS: regulation may in uence company actions and affect nancial performance by forcing bythe internalization of certain costs and/or withcreating upside opportunity associated sustainability-related externalities.
• • ance. The SASB designed an evidence-based approach to approach designed an evidence-based The SASB - for which to de the sustainability topics help select ve-factor testThis standard. velop a corresponding select mate- management a company’s can also help should be reported. topics that rial sustainability direct nancial impactsThe rst factor addresses performance on the company’s and risks related to addresses Each of the next three factors each topic. have the potential for indirectdrivers and trends that The nancial performance. impact on the company’s upside opportunities that can fth factor addresses nancial perform- company’s have an impact on the The SASB’s Five-Factor Materiality Test A.2: Five-FactorBox SASB’s The Materiality Source: Adapted from SASB (2015). Adapted from Source: Appendix B: Questions the Board Should Ask on ESG Management and Disclosure Appendix B
Below is a set of questions that the board of directors should ask when exercising oversight of the company’s management and disclosure of environmental, social, and governance matters.
Strategy • Is there an internal audit function and a • Is there an integrated corporate strategy that process to ensure the accuracy of nancial in- includes goals and targets for nancial and formation? Does it include E&S information? E&S performance? If not, and there are two Stakeholder Engagement separate strategies, how are these strategies • Who are the company’s key stakeholders? linked internally? How is the link explained in What is the process to identify them? Does the corporate reporting? board recognize its responsibilities to stake- • What are the key sustainability or E&S factors holders beyond shareholders? that affect the company strategy regarding • Is there a mechanism for stakeholder engage- risks and opportunities? Which factors affect ment and grievance redressal? the company’s short-term nancial performance? • Are the process and results of stakeholder Is there a long-term value-creation process in engagement disclosed publicly? Is relevant place? information disclosed to Affected Communities • Does the company have a documented method in an understandable format and language? for assessing material E&S issues? Performance • Is the strategy consistent with information that • How does the company’s performance com- the company has identi ed as material—in- pare with its peers, including on the manage- cluding E&S information? Does the strategy ment of critical ESG issues? include measurable targets and KPIs? Are sus- tainability objectives reviewed by the board? • How does reported performance compare with the company’s internal management dash- • Is E&S information integrated into the risk board? management framework? Does it provide insight into emerging risks that may not be • Does the reported ESG information align with captured by traditional areas of risk manage- material issues and priorities for the company? ment (operational, nancial, and so on)? • Are the links between ESG and nancial per- Governance formance explained? • Are key areas of corporate governance ad- Disclosure and Transparency dressed in the report, including commitment to • Who is the primary audience for reporting? corporate governance, culture and leadership, What information do they need? Does compa- board composition and functioning, compli- ny disclosure meet their information needs? ance, risk appetite, executive compensation, • What framework should be used (and why) to controlling shareholders, and stakeholder report sustainability information: GRI, IIRC, engagement? SASB? Should it be reported together with • How are E&S issues integrated into govern- nancial information? ance structures and processes, including risk management, control environment, compli- ance, board composition, disclosures?
132 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Appendix C Appendix C: Internal Planning for Annual Report Preparation The corporate secretary has a central role in preparing the annual report and in all aspects of the report. Other Appendix C internal company departments and groups are also valuable resources for report preparation. Table C.1 offers suggestions regarding which internal entities may be critical resources for which elements of the report—and provides examples of key questions to ask in preparing the annual report. (The table follows the model annual report presented in Table 1.1: Model Structure of an Annual Report, on page 15 of this Toolkit.)
Table C.1: Internal Resources for the Annual Report, and Key Questions to Ask
Who Would This Type of Information Questions to Think About Information Come From?
Strategy
Business Model • Strategy • What does the company do, what makes it distinctive? Its • Operations customers, products or services, or business processes? • Does the company have a clear business model? Can this be clearly articulated and/or presented in a diagram? • What are the inputs, outputs, and outcomes of the company’s activities? Its key relationships?
Business Environment • Strategy • Where does the company operate? • Operations • What is the internal operating environment? • Sustainability • What is the external environment, and what are the trends in the environment? • How does the company’s structure relate to its environment?
Strategic Objectives • Strategy • Where does the company want to go, and how does it • Executive Management intend to get there? • Board of Directors • How does the company preserve and create value? • Sustainability • What are the short- and long-term objectives? • What financial and nonfinancial KPIs are used to ensure that the company is delivering on its strategy? • How does the strategy respond to the business environment? In other words, why is the strategy the right strategy? • What is the governance for the strategy? How is the board involved?
Risk Analysis and Response • Risk Management • What are the specific risks that may affect the company’s • Executive Management ability to create value in the short and long term? • Board of Directors • Why does management believe these are the key risks? • How are these risks assessed? • How are they managed or mitigated? • How does the company see these risks changing over time? • How are new or emergent risks identified?
Sustainability • Sustainability • What are the issues that affect financial performance, Opportunities and Risks • Strategy social/development impact, reputation, and license to operate? • Risk Management • What are the issues that have an impact on the company’s • Executive Management ability to create value? • Board of Directors • Is there a process for determining these issues? • If so, how does this process feed into management priorities?
(Continued on next page.)
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 133 TABLE C.1: Internal Resources for the Annual Report, and Key Questions to Ask (Continued from previous page)
Who Would This Type of Information Questions to Think About Information Come From?
Introducing Key • Strategy • How are KPIs chosen? Are they related to the company Appendix C Performance Indicators • Risk Management strategy? Are they used to evaluate performance? • Operations • Do KPIs allow for performance comparisons over time and with similar companies?
Corporate Governance
Leadership and Culture • Executive Management • What does the company stand for? • Board of Directors • How is the company’s culture defined and embedded • Board and Committee throughout the company? What are the company’s values? Chairs • What are the relevant governance policies? • How are these policies implemented in practice? • What were the major focus areas for governance during the year?
Structure and Functioning • Board of Directors • What is the process to elect directors? of the Board of Directors • Board and Committee • What is the company’s governance structure? Chairs, including • What are the different committees of the board? Nomination • Was the effectiveness of governance (or the board) reviewed during the year? • How does the board oversee sustainability?
Control Environment • Legal and Compliance • What is the company’s risk appetite? • Risk Management • What systems are in place to ensure compliance? • Internal Controls • What does the control environment look like? • Internal Audit • Does the company use a three-lines-of-defense model of risk • Audit or Risk Committee management, internal controls, and internal audit? • How does the board oversee this, and how is it accountable? • Are there any suggestions for improvement from the external auditors?
Treatment of Minority • Finance and Accounting • Who owns the company? How is it controlled? Shareholders • Legal and Compliance • Is there a significant indirect ownership? • Remuneration • Are there any controlling shareholders? Who are they and Committee what is their role? Are there succession policies in place? • What are the rights of minority shareholders, including during a change of control? • What is the remuneration policy? • What remuneration was awarded to the board and key executives in the current year? • Does remuneration link to strategy? Does it link to performance? • What is the policy on related-party transactions? • Were significant transactions entered into or still in effect during the reporting period?
(Continued on next page.)
134 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Appendix C TABLE C.1: Internal Resources for the Annual Report, and Key Questions to Ask (Continued from previous page)
Who Would This Type of Information Questions to Think About Information Come From?
Governance of Stakeholder • Sustainability • Who are the company’s stakeholders, and what impact do Appendix C Engagement • Board of Directors the company’s activities have on them? • Strategy • How are stakeholder concerns integrated into the strategy? • What is the processes to manage stakeholder concerns, including grievance mechanisms and external communication? • What is the role of the board?
Financial Position and Performance
Performance • Executive Management • What are the company’s operational and financial results? • Board of Directors • What are some of the major trends driving operational and • Strategy financial results, including investment needs, intangibles, and sustainability? • Finance and Accounting • What are the company’s nonfinancial results, including on • Sustainability the management of sustainability risks and opportunities? • Risk Management • How are different dimensions of performance (financial, operational, sustainability) linked? • What are future performance targets and the outlook for future performance?
Financial Statements • Accounting and Finance • What are the local requirements for financial reporting and • Legal and Compliance auditing? • Audit and/or Finance • What accounting standard should be followed—locally, Committee globally? • External Auditor • What additional financial information is required or recommended for the industry sector? • How is the business segmented? • What is the result of the external audit?
Sustainability Statements • Executive Management • What are the cross-cutting, industry-specific, and entity- • Board of Directors specific metrics that the company follows year on year? • Sustainability • Is it possible to present more than one year’s worth of data, for comparison? • Strategy • What reporting/accounting standards should be used? Can • Finance and Accounting it be audited? • What explanation is needed to ensure that the data are understandable and comparable?
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 135 Appendix D Appendix D
Appendix D: IFC Corporate Governance Progression Matrix for Listed Companies (Integrating Environmental, Social, and Corporate Governance Issues)
The core of this Toolkit is the IFC Corporate Governance Progression Matrix for Listed Companies, but any organization—listed or not, and across sectors—can apply its concepts. This was the basis of the Toolkit, because it is the most comprehensive tool of its kind. Adapted versions of the Matrix—for nancial institu- tions, small and medium enterprises, family-owned companies, and funds—will eventually be available on our website: www.ifc.org/corporategovernance.
136 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency
Appendix D Publicly recognized as a globalPublicly recognized leader in ESG practices. Organization culture has culture Organization and a embedded ESG awareness - consciousness through control out the organization. Adequacy of ESG policies and is disclosed. procedures
3. 2. 1. 4. Leadership 4. +
Publicly recognized as a regional Publicly recognized leader in ESG practices. Designated compliance function ensuring compliance with ESG code of policies and procedures, ethics and/or conduct. Internal audit of implementation Codes of ethics and/or conduct fully in business ESG practices integrate activities. of ESG policies and procedures.
3. Good International Practices 4. 2. 3. 1. +
S Code of ethics included in employee orientation program. as a nationalPublicly recognized leader in ESG practices. Designated fulltime CG officer and/ secretary. or company/corporate CG code, which addresses E & CG code, which addresses issues. to shareholders Periodic disclosure and theiron CG code and practices, to the country’sconformance code of best practices.
3. 5. 4. 2. Intermediate Practices 1. 2. +
S law
A company officer serves A company as a secretary. corporate Code of ethics and/or conduct by the board. approved Written policies/corporate governance policies/corporate Written at a minimum, code addressing, (CG) rights and of the board, the role and other of shareholders treatment stakeholders, compliance with the law and and disclosure, and transparency and principlesstating the objectives guiding the company. at a policies that address, Written minimum, compliance with E & and regulations.
4. 3. 1. 2. 1. Basic Practices 1.
Functions Functions
and Culture Culture and
Formalities Formalities Recognition Recognition
Designated Officer/ Officer/ Designated Ethics of Code Commitment to Environmental, Social, and Governance (Leadership and Culture) Social, and Governance A. Commitment to Environmental,
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 137 Appendix D -
-
S/
( continued on next page) Independent directors periodically meet separately. 1/2 or more of board members are of board or more 1/2 defined as independent in with international accordance best practices. Audit committee membership 100% independent. CG committee Special board-level established. Specialized committees (gov - ernance, nominations, E & and compensa - sustainability, tion) composed of a majority includingindependent directors, the chair. Compensation committee compen - that executive ensures sation is based on performance (and ad - and long-term incentives and all types of current justed for risk), based on financialfuture and nonfinancial performance. Risk management or other spe cialized committee with a major andity of independent directors, experience a majority who have managing risks.
7. 4. Leadership 4. 1. 2. 3. 4. 5. 6. +
-
-
S/sustainability, S/sustainability, 11 Non-executive directors Non-executive at leastmeet separately once a year. 8. 1/3 or more of board members are of board or more 1/3 defined as independent in accor dance with international best practices. Board diversity, including but not diversity, Board in all achieved limited to gender, aspects. separate.Roles of chair and CEO are Board chair is independent, or a leadBoard independent director has beenindependent director designated. able. - Committee of independent direc all material related- tors approves party transactions. risk management, etc.), if applic- Majority of audit committee mem - bership is independent. Specialized committees address special technical topics or potential (e.g., nomina - conflicts of interest tions, compensation, technology/ E & cybersecurity, Board-established succession plan Board-established manage senior and members its for ment.
3. Good International Practices 2. 3. 4. 7. 5. 6. 1. + The board is fully elected on an The board annual basis. 1/5 or more of board members are of board or more 1/5 management and independent from shareholders. controlling composition is based on a Board skills matrix. Board-established audit committee. Board-established
2. Intermediate Practices 1. 2. 3. 4. +
Board meets at least quarterlyBoard and is charged with objectively and is charged management. overseeing The board has a number of The board independent directors inindependent directors and with law accordance regulations. Board approves strategy. approves Board sufficient given members are Board to exercisetime and information their duty.
4. 3. 1. 2. 1. Basic Practices 1.
and Succession and Frequency
Composition Composition Committees Committees
Election, Role, Meeting For example, IFC’s “Indicative Independent Director Definition.” For example, IFC’s Independent Director “Indicative Structure and Functioning of the Board of Directors and Functioning of the Board B. Structure 11
138 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency
S issues. Board and committee evaluations Board conducted/facilitated by third party. Special board-level committee Special board-level E & established to review independent audits reviews Board of Environment on effectiveness and Social Management System (ESMS), including stakeholder andengagement processes mechanism. grievance
4. Leadership 4. 8. 9. 10. +
S S 1 director 12 S policies; routinely S risks and impacts. S performance; ensures S risks. S issues/risks. & & or more has in-depth knowledge ofor more E board recurring ESG issues are ESG approves agenda items; board and E & strategy reviews E & reviews the dialogue between appropriate and key stakeholders; company of External effectiveness ensures Communications Mechanism (ECM). that management ensures Board in place to identify and are systems manage E & Board is trained on industry is trained E & Board risk issues. and risk appetite integrateStrategy E has experienceAt least 1 director risks. industries, In sensitive analyzing and interpreting E & analyzing and interpreting
Board, committees and individual Board, directors undergo an annual evaluation. undergo directors
3. Good International Practices 14. 15. 10. 11. 12. 13. 9. + S Board is trained on general E & on general is trained Board risk issues. The board as a whole undergoes The board periodic evaluation. Formal performance evaluation of management conducted annually. continued from previous page) 2. Intermediate Practices 7. ( 5. 6. + Appendix D
1. Basic Practices 1.
Performance
& S E of Oversight Evaluation and and Evaluation Examples of “sensitive industries” include oil, gas, mining, heavy industry (steel, cement), and chemical manufacturers, and large agro-commodity production or processing. agro-commodity production industry and large industries” include oil, gas, mining, heavy (steel, cement), and chemical manufacturers, Examples of “sensitive Structure and Functioning of the Board of Directors of Directors and Functioning of the Board B. Structure 12
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 139 Appendix D
continued on next page) COSO, ISO 31000, ( 14 19600, 37001, and 27001. 19600, 37001, structure The organizational adopted by management has a on performance, effect positive and leadership productivity, effectiveness. Control environment in accord- environment Control ance with highest international including but not standards, limited to IIA, Audit committee reviews longAudit committee reviews association of EA. Audit committee ensures that theAudit committee ensures internal audit function is subject to periodic quality assessment by party. third
2. 1. 4. 4. Leadership 4. 3. +
- 13 -
Internal audit function is indepen - and has risk-based, dent, objective, unlimited scope of activity. Head of internal audit reports to the audit committee and adminis - to management. tratively internal audit has been adopted. management, internal control and management, internal control “Three model of risk lines of defense” Board routinely monitors risk routinely Board management and compliance with policies and procedures. risk reports to board-level CRO management committee or equivalent. Chief compliance officer reportsChief compliance officer to the audit committee or equivalent to manage and administratively ment. Audit committee owns relationship with external auditor (EA); agrees and under on scope and audit fees, takes a periodic quality assessment Audit Quality of EA, using relevant Indicators. has established CFOCompany function.
3. Good International Practices 2. 3. 1. 4. 5. 6. 7. 8. +
Board approves risk appetite. approves Board has establishedCompany framework risk-management or (CRO) with a chief risk officer access with unfettered equivalent to the board. Comprehensive compliance Comprehensive with annually reviewed, program mechanisms to report wrongdoing and misconduct. Audit committee ensures actions on control corrective deficiencies identified in Man - agement Letters.
2. 3. 4. 2. Intermediate Practices 1. +
Company has establishedCompany documented internal control policies and procedures. Internal audit function regularly interfaces with external audi - tors and is accountable to the board. Written Management Letters Written by external auditor. provided
1. 1. Basic Practices 1.
2. 3.
Audit Audit
Internal Controls Controls Internal Audit External Risk Governance Governance Risk Compliance
Control Environment (Internal Control System, Internal Audit Function, Risk Governance and Compliance) Audit Function, Risk Governance Internal System, (Internal Control Environment Control Internal Namely, management is the first line of defense, risk management and compliance function are the second line of defense, and internal and external audit as independent assurance providers are the third line of defense. the third are providers and internal external audit as independent assurance the second line of defense, risk management and compliance function are management is the first line of defense, Namely, The Institute of Internal Auditors standards and related promulgations. and related Auditors standards The Institute of Internal C. 13 14
140 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency S
S/ S/
&
& Appendix D
the organizational structure and and structure organizational the the activities of its subsidiaries. subsidiaries. its of activities the
ensures corrective actions on E on actions corrective ensures issues.
sustainability committee. sustainability
tional standards (e.g., ISO 14001). ISO (e.g., standards tional
Board exercises oversight over over oversight exercises Board
Head of ESG reports to board E board to reports ESG of Head
Board or sustainability committee committee sustainability or Board
interna- with consistent is ESMS
8.
5.
6.
7.
4. Leadership 4.
+
continued from previous page) previous from continued
(
S risks are part of establishing establishing of part are risks S
S/sustainability head has unfet- has head S/sustainability
&
&
ESG activities are highly integrated, integrated, highly are activities ESG effective, and efficient and support support and efficient and effective, the strategic and operational operational and strategic the business objectives, and controls controls and objectives, business support objectives. support Company has a centralized sub- centralized a has Company Security internal audits. internal Security and function governance sidiary subsidiaries are categorized based based categorized are subsidiaries on complexity and an appropriate appropriate an and complexity on risk-management framework, and and framework, risk-management to applied framework governance E category. each the risk appetite. risk the
tered access to senior management management senior to access tered and CRO. and
E
Comprehensive ESMS integrated in in integrated ESMS Comprehensive
Periodic ESG, IT, and Information Information and IT, ESG, Periodic
3. Good International Practices International Good 3.
13. 13.
9. 9.
10.
11.
12.
+
S
&
Company has established established has Company industry practices in its E its in practices industry risk-management practices. risk-management
Company has policies and pro- and policies has Company cedures to control the creation creation the control to cedures and dissolution of subsidiaries. subsidiaries. of dissolution and
2. Intermediate Practices Intermediate 2.
6. 6.
7. 7.
+
Company can identify its its identify can Company subsidiaries.
1. Basic Practices Basic 1.
4. 4.
Governance
& S Integrating of E of Integrating Subsidiary Subsidiary
Control Environment (Internal Control System, Internal Audit Function, Risk Governance and Compliance)Audit Function, Risk Governance Internal System, (Internal Control C. Environment Control
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 141 -
Tax transparency Tax statement disclosed. compensation isExecutive disclosed. Dividend policy is disclosed. Nonfinancial disclosure inNonfinancial disclosure with highest accordance (e.g., international standards SASB). GRI, IIRC, Periodic nonfinancial reporting of ESG issues of concern to stake that are holders. ESG data subject to an annual audit by an indepen - dent provider. Risk appetite disclosure includes both qualitative and quantitative information.
2. 3. 4. 5. 6. 7. 4. Leadership 4. 1. + - -
S/sustainability committee reviews S/sustainability & Annual report includes ESG information. annual report ESG information. ESG data subject to independent review. Affected disclosed to Information mat and language. Affected Annual updates to locally Communities. Communities is in understandable for Audit committee oversees financial andAudit committee oversees reportingnonfinancial and audit. policy in place. Disclosure Company discloses its risk appetite.Company Significant ultimate beneficial share disclosed. holders are and communicationsAll disclosure and stakeholderswith shareholders and online in a relevant made available timely fashion.
E 1. 2. 3. 3. Good International Practices 4. 5. 6. 7. 8. 9. 10. +
conduct. Company discloses its code of ethics/ Company Financial statements prepared in Financial statements prepared with International Financial accordance Reporting (IFRS) or Standards equivalent. audited inFinancial statements are with International accordance Auditing (ISA). on Standards
3. 2. Intermediate Practices 1. 2. - + - ESG/sustainability reporting, if any, ESG/sustainability reporting, if any, minimum national require follows ment. Compliance with all disclosure require Compliance with all disclosure and ments and listing rules. Investors equally treated are financial analysts disclosure. information regarding with accu - provided Shareholders on the and timely information rate of all classes heldnumber of shares and their shareholders by controlling (ownership concentration). affiliates Financial statements are auditedFinancial statements are independent externalby recognized auditing firm. Disclosure Disclosure and Transparency
1. Basic Practices 1. 4. 2. 3.
1. D.
Financial Reporting Reporting Financial Disclosure ESG Risk Appetite Appetite Risk Disclosure Corporate
142 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency
15 Related-party (over transactions 2.5% of net assets or $150,000) approval subject to shareholder or stricter requirements. Treatment of shareholders con - of shareholders Treatment sistent with best international market practices. compensation subjectExecutive approval. to shareholder at one vote is afforded Each share the AGM.
4. 4. Leadership 4. 1. 2. 3. + - - ity of minority” provisions). consulted on are Shareholders compensation. executive Effective shareholder voting shareholder Effective mechanisms to protect from minority shareholders ownership orconcentrated conflicts of interest strong shareholders with controlling (e.g., supermajority or “major Well-understood policy and Well-understood mate of company practices that couldrial transactions the rights ofpotentially affect minority shareholders. Annual report discloses material risks to minority associated withshareholders shareholders, controlling ownership concentration, and voting- cross-holdings, imbalances. power Investor relations functions relations Investor engaging for include program minority shareholders.
3. Good International Practices 2. 1. 3. 4. 5. + Well-understood policy and practice Well-understood toof full and timely disclosure of all material related- shareholders party and shareholder transactions agreements. Effective representation of minority representation Effective cumulative through shareholders or similar mechanisms; andvoting economic rights such as inspection rights, exit and tag-along rights. has a dividend policy. Company Clearly articulated and enforced of minoritypolicies on treatment in changes of control. shareholders
2. Intermediate Practices 4. 1. 2. 3. + Investor relations function relations Investor established. Holders of all securities the same access to equal type and class have (fair disclosure). information All shareholders of the same classAll shareholders subscription, and equal voting, have rights. transfer receive Minority shareholders adequate notice and the agenda for meetings; and are all shareholders’ permitted to participate at and vote meetings. shareholders’
1. Basic Practices 1.
4. 3. 1. 2.
Voting Rights Rights Voting Investor Relations Relations Investor Protective Rights Rights Protective (2009) 31. Asia in Transactions Abusive Related Party limits. See OECD, Guide on Fighting the referenced the OECD has recommended in the listing jurisdiction; however, set by law/regulation are thresholds Often, requisite Treatment of Minority Shareholders E. Treatment 15
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 143 Appendix E
Issues raised through grievance through Issues raised anal- workers are mechanism for with the particiyzed and resolved - pation of a worker representative. about is informed The board on outcomes and trends grievance basis.a regular Commitment to SE visible to staff, Commitment to SE visible staff, suppliers, and collab-contractors, via codes of conduct settingorators stakeholderout expectations for and human rights.interactions into incorporated SE practices primary for suppliers. requirements SE activities and outcomes included decision making andin board external reporting procedures. Periodic analysis of grievancesPeriodic analysis and root to identify trends causes is conducted by senior management. Senior management participate in international industryactively topics. discussions on related SE and reporting consistent (AA with international standards on Stakeholder 1000 Standards Engagement and Accountability Principles and ISO 26000). Senior executive responsible for responsible Senior executive includ - stakeholder relationships, withing ensuring integration setting. and target strategy
5. 6. 2. 3. 4. 7. 8. 9. 1. 4. Leadership 4. + - 17 16 ments for contractors. ments for stakeholder issues Unresolved a management action plan. require External and publicly accessible communication procedure. mechanism facilitatesGrievance of concerns from the resolution Communities. Affected Designated Affected Communities clearly engagement personnel have responsibilities, training, defined and reporting lines to senior man - agement and the board. into require SE policy incorporated Management responds to griev - Management responds workers and contracted ances from basis. workers on a regular Formal stakeholder-mapping Formal stakeholder-mapping and expanded definition of process stakeholders includes contracted workers, primary- supply-chain and workers, neighboring projects, international NGOs and CSOs. SE policy and strategy includesSE policy and strategy with stakeholder anal - procedures for approaches differentiated ysis, disclosure iterative priority groups, and and consultation requirements, reporting.
3. Good International Practices 8. 4. 5. 6. 7. 3. 1. 2. + - -
Key stakeholders identified also or include local nongovernmental ganizations (NGOs) and civil society (CSOs). organizations Established Stakeholder Engage ment (SE) policy and procedures. External Communications Mech - stakeholder questionsanism for are and complaints, if there Communities, a grievance Affected mechanism is established. Basic grievance mechanism forBasic grievance workers.
2. Intermediate Practices 1. 2. 4. 3. +
Ad hoc stakeholder-identification, Ad hoc stakeholder-identification, including workers, customers, Affected and the locally regulators, Community. HR policy and procedures for worker for HR policy and procedures engagement. Informal response to stakeholder response Informal and concerns. requests
1. Basic Practices 1. 1.
2. 3.
Mechanism Mechanism
Mechanism Mechanism Engagement Policy Policy Engagement Mapping
Worker Grievance Grievance Worker Grievance Communities Affected Stakeholder Governance of Stakeholder Engagement Governance Stakeholder policy, strategy, and procedures, if applicable. and procedures, strategy, Consult with Social Specialist to determine quality of SE policy, ion procedure is adequate to (a) receive and register external communication from the public; (b) assess issues raised and determine assess issues raised the public; (b) external communication from and register is adequate to (a) receive Consult with Social Specialist to determine whether communicat ion procedure F.
16 17 response; (c) provide and document responses, if any; and (d) adjust the management program, as appropriate and if applicable. as appropriate adjust the management program, and (d) if any; and document responses, provide (c) response;
144 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Appendix E Appendix E: Major Frameworks for Sustainability Management and Disclosure Appendix E
BROAD-BASED SUSTAINABILITY FRAMEWORKS
Guidelines/ Objective Strengths Limitations Best Use Framework
Companies that Covers environmental Principle-based Creating commit to the 10 and social issues and framework does accountability for principles of the human rights. not offer specific upholding broad- UN Global Compact key performance based international are required to indicators for norms. annually report measuring Topics and flexible on their progress performance, framework relevant and sustainability comparability. for emerging markets performance. and smaller compa- nies.
Guidance to Guidance on core Reporting guidance Reporters who maximize social responsibility is limited. want to use global contributions topics. best practice but to sustainable want a great deal of Guidance on development. flexibility in how they integrating social report. Includes external responsibility communication throughout an Topics and flexible on improving organization. framework performance relevant for related to social emerging markets; responsibility. comprehensiveness limits smaller companies.
BROAD-BASED SUSTAINABILITY REPORTING FRAMEWORKS
Guidelines/ Objective Strengths Limitations Best Use Framework To improve Specific indicators for Used for standalone Communicating sustainability of all companies. sustainability a broad range of organizations and Sector-specific reports. sustainability/ support sustainable indicators for some nonfinancial More detailed development. industries. management information is not practices to many Guidelines are always relevant different types of developed using a for strategic stakeholders. multistakeholder management and approach investment. Topics relevant for emerging markets; comprehensiveness limits smaller com- panies.
(Continued on next page.)
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 145 (Continued from previous page.)
BROAD-BASED SUSTAINABILITY REPORTING FRAMEWORKS
Guidelines/ Objective Strengths Limitations Best Use Appendix E Framework To increase long-term, Can help drive Principle-based Reporting on value- integrated thinking internal change, framework does not creation processes within companies, embedding offer specific KPIs for and explaining and improve the environmental and measuring and re- how sustainability allocation of financial social considerations porting performance. issues are managed capital. in core operations. strategically.
Investor prioritized. Approach relevant for emerging markets; sophistication limits smaller companies.
Large public- Mandatory reporting Limited to companies Reporters with interest entities (or explain) with based or operating in significant (> 500 employees) flexibility to choose the EU. operations or should disclose among the most markets in the EU. policies, risks, and widely used reporting outcomes relating frameworks. to environmental, social, and employee matters, human rights and anticorruption, and diversity in the board of directors.
Enhance corporate Designed for both Guidance geared Topics and flexible transparency— emerging and primarily to stock framework relevant and ultimately developed markets. exchanges in their for emerging performance—on ESG efforts to issue markets. Although designed issues, and encourage reporting guidance for public companies, sustainable to their members guidance can be used investment. (indirect). by private counter- parts.
ISSUE-BASED SUSTAINABILITY REPORTING FRAMEWORKS
Guidelines/ Objective Strengths Limitations Best Use Framework To democratize Specific for each For U.S.-listed Explaining the availability of sector and subsector. companies. sustainability decision-useful management and Fully embedded with- Integrating sustain- sustainability performance to in financial reporting. ability information information. investors. and financial regu- Primary audience is latory filings; not a Focus limited to list- investors. user-friendly format. ed U.S. companies.
.
(Continued on next page.)
146 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency (Continued from previous page.) Appendix E
BROAD-BASED SUSTAINABILITY REPORTING FRAMEWORKS
Guidelines/ Objective Strengths Limitations Best Use Framework Improve transparency Focused on Very process oriented. Detailed of human rights governance and communication Indicators are performance and management of regarding human qualitative. adoption of the UN salient human rights rights management, Guiding Principles on issues. adoption of UN Business and Human Guiding Principles on Can be used with Rights. Business and Human other guidelines or Rights (“Ruggie frameworks. Framework”). Topic relevant for emerging markets; sophistication limits smaller companies.
CDP requests Provides comparable Standalone Specialized disclosure standardized climate and aggregate disclosure, not to investors. change, water, and information on integrated in annual Industries with forest information key climate- reports. significant climate through annual related measures Sophistication and change impacts questionnaires of corporate comprehensiveness and/or those sent on behalf performance. limits application to with regulatory of institutional very large companies. requirement to report investors. on climate change.
Focused on large listed companies.
Provide information Harmonizes climate- Format may not Integrated reporting. for investors on related disclosures be user-friendly for Industries with how climate change and supplements stakeholders other significant climate- affects strategy, financial statements, than investors. change impacts performance, and placing climate and/or those future prospects. information in with regulatory context for investors. Intended for use with requirement to report financial reporting. on climate change.
Focused on large listed companies.
Develop voluntary, Comprehensive Sophistication and Integrated reporting. consistent climate- and integrated comprehensiveness Industries with related financial disclosure of climate limits application to significant climate- risk disclosures for risks, including very large companies. change impacts use by companies in governance, and/or those providing information strategy, risk, and with regulatory to stakeholders. performance. requirement to report Includes scenario on climate change. planning and industry- Focused on large specific metrics. listed companies.
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 147 Glossary Appendix F: Annual and Sustainability Reports Used in the Toolkit Appendix F
Company Name Country Industry Listing Report Year
Absa Group South Africa Finance JSE Integrated Report 2015 (formerly Barclays Africa) Absa Group South Africa Finance JSE Integrated Report 2017 (formerly Barclays Africa) Aggreko United Kingdom Energy LSE Annual Report 2015 AkzoNobel United Kingdom Chemicals Euronext Report 2016 Apple United States Hardware APPL Environmental 2016 Responsibility Report Astellas Pharma Japan Pharmaceuticals TYO Annual Report 2016 BASF Germany Chemical Borse Integrated Report 2017 Frankfurt BHP Billiton Anglo- Mining NYSE Annual Report 2016 Australian CEMEX Mexico Building Materials NYSE Integrated Report 2016 CEMEX Mexico Building Materials NYSE Integrated Report 2017 Chugai Pharmaceutical Co Japan Pharmaceuticals TYO Annual Report 2016 Commercial Bank of Ceylon Sri Lanka Finance Private Annual Report 2016 Deutsche Bank Germany Finance ETR Corporate 2016 Responsibility Report EnBW Germany Electric Utility Borse Integrated Annual 2017 Frankfurt Report Eskom South Africa Electric Utility JSE Eskom Integrated 2016 Report Exxaro South Africa Coal and Heavy JSE Integrated 2015 Minerals Mining Ford United States Auto NYSE Sustainability Report 2014–2015 Fresnillo Mexico Precious metals LON Annual Report 2015 mining Gold Fields South Africa Extractive NYSE Integrated Annual 2015 Report Gold Fields South Africa Extractive NYSE Integrated Annual 2016 Report Impahla Clothing South Africa Apparel Private Integrated Annual 2013 Report Itau Unibanco Brazil Finance NYSE Annual Report 2014 Kumba Iron Ore Limited South Africa Iron-Ore Mining JSE Integrated Report 2017 Li & Fung Limited China Logistics HKG Annual Report 2015 Liberty Holdings South Africa Finance JSE Financial Results 2015 Liberty Holdings South Africa Finance JSE Integrated Report 2015 Natura Brazil Cosmetics BVMF Annual Report 2016 Nedbank Group South Africa Finance JSE Integrated Report 2015 Nestlé Switzerland Food & Beverage VTX Nestlé in Society 2016 Novo Nordisk Denmark Pharmaceutical CPH Annual Report 2016 Prudential United States Finance NYSE Proxy Statement 2016
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148 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Appendix F (Continued from previous page.)
Company Name Country Industry Listing Report Year
Glossary Reliance Industries Limited India Conglomerate NSE Annual Report 2015 Rio Tinto Australia and Metals & Mining LSE Annual Report 2017 United Kingdom Roche Switzerland Pharmaceuticals VTX Annual Report 2016 Siam Commercial Bank Thailand Finance BKK Annual Report 2016 SABMiller (InBev) Belgium Food & Beverage EBR Annual Report 2016 Santova Limited South Africa Logistics JSE Annual Integrated 2016 Report Sappi Group South Africa Pulp & Paper JSE Annual Financial 2016 Statements Sasol South Africa Energy and Chemical NYSE Integrated Annual 2017 Report Standard Chartered United Kingdom Finance LON Sustainability 2015 Summary Takeda Japan Pharmaceuticals TYO Annual Report 2016 Tata Motor India Auto NYSE Sustainability Report 2014–2015 Telefonica Spain Telecommunications BME Integrated Report 2016 Telekom Malaysia Malaysia Telecommunications KLSE Annual Report 2015 The CLP Group China Utilities HKG Annual Report 2015 The CLP Group China Utilities HKG Sustainability Report 2015 The Coca-Cola Company United States Food & Beverage NYSE Proxy Statement 2016 True Group Thailand Telecommunications SET Annual Report 2015 Türk Telekom Turkey Telecommunications Private Annual Report 2015 Unilever United Kingdom Food & Beverage NYSE Annual Report 2015 Vopak Netherlands Marine Euronext Annual Report 2016 Transportation Westpac Group Australia Finance ASX Annual Report 2016
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 149 Glossary Glossary
Glossary In the following de nitions, “project” and “client” refer to companies or speci c projects that companies are undertaking. Following each de nition is the source of its substance.
Affected Communities. Local communities direct- board of directors (or board). A body of elected ly affected by the project. —2012 Performance or appointed members who jointly oversee the Standard 1, paragraph 1 (IFC). activities of a company or organization. Some countries use a two-tier system where “board” audit. A review of the historical nancial statements refers to the “supervisory board” and “key execu- to enhance the degree of con dence in them. tives” refers to the “management board.” —G20/ Examination and veri cation of a company’s OECD Principles of Corporate Governance. nancial and accounting records and supporting documents by a competent, quali ed, profession- business model. An organization’s system of trans- al, and independent external auditor to assure forming inputs through its business activities readers that the records are in accordance with into outputs and outcomes to ful ll the organi- applicable reporting and accounting require- zation’s strategic purposes and create value over ments, are free from material misstatement due the short, medium, and long term. —Integrated to fraud or error, and constitute a true and fair Reporting Framework (IIRC). representation of the company’s nancial condi- tion. —Who’s Running the Company: A Guide to capitals. Stocks of value that all organizations de- Reporting on Corporate Governance (IFC). pend on for their success as inputs to their busi- ness model, and that are increased, decreased, or audit committee. A committee constituted by transformed through the organization’s business the board of directors, typically charged with activities and outputs. The IIRC
150 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency climate-change adaptation. Reduction in the vulner- compliance. Agreeing to and abiding by rules and Glossary ability of human or natural systems to the effects regulations. In general, compliance means con- of climate change and to risks related to climate forming to a speci cation or policy (internal or
Glossary variability by maintaining or increasing adaptive external), standard, or law that is clearly de ned. capacity and resilience. —De nitions and Metrics —Who’s Running the Company (IFC). for Climate-Related Activities, version 3.1, June 2017 (IFC). concentrated ownership. A form of ownership in which a single shareholder (or a small group of climate-change mitigation. Reduction in greenhouse shareholders) holds the majority of the compa- gas (GHG) emissions into the atmosphere or ny’s voting shares. —Who’s Running the absorption of GHGs from the atmosphere. Can Company (IFC). include 1) a reduction in GHG emissions cur- rently emitted, 2) lower emissions as a result the controlled companies. Firms in which an individual project than those of a credible business-as-usu- or a number of connected individuals or a legal al alternative, or 3) sequestration of emissions entity holds the majority of the voting rights. — currently in the atmosphere. —De nitions and Who’s Running the Company (IFC). Metrics for Climate-Related Activities, version 3.1, June 2017 (IFC). controlling shareholder. Person or entity that owns enough of the company’s voting capital (typically, codes of conduct/ethics. Developed and adopted 30 percent or more) to control the composition by organizations to de ne appropriate behaviors of the board of directors—usually a family or and actions on relevant and potentially delicate state shareholder. —Who’s Running the subjects. An indicator of how the company will Company (IFC). achieve its goals and go about its business. —Who’s Running the Company (IFC). corporate governance. Involves a set of relation- ships between an organization’s management, its collective bargaining. Discussions and negotia- board, its shareholders, and other stakeholders. tions between employers and representatives of Governance provides the structure and processes workers’ organizations to determine working through which the organization sets its objec- conditions and terms of employment by joint tives, monitors its progress against performance agreement. Collective bargaining also includes goals, and evaluates its results. —G20/OECD the implementation and administration of any Principles of Corporate Governance. Corp- agreements that may result from collective orate governance is de ned as the structures and bargaining and the resolution of other issues that processes by which companies are directed and arise in the employment relationship with work- controlled. IFC. ers represented by the workers’ organizations. —2012 Guidance Note 2, paragraph 34 (IFC). corruption. Abuse of entrusted power for private gain. Corruption can be classi ed as grand, petty, committees of the board. Committees (comprising or political, depending on the amounts of money board members only) established to assist the lost and the sector where it occurs. —Transparency board in the analysis of speci c subjects outside International. of regular board meetings. Common board com- mittees are audit, remuneration, and nomination. critical habitat. An area with high biodiversity —Who’s Running the Company (IFC). value, including 1) habitat of signi cant impor- tance to critically endangered and/or endangered common shares. Equity securities representing own- species; 2) habitat of signi cant importance to ership in a corporation and providing the holders endemic and/or restricted-range species; 3) habi- with voting rights and the right to a share of the tat supporting globally signi cant concentrations company’s residual earnings through dividends of migratory species and/or congregatory species; and/or capital appreciation. —Who’s Running 4) highly threatened and/or unique ecosystems; the Company (IFC). and 5) areas associated with key evolutionary processes. —2012 Performance Standard 6, para- graph 16 (IFC).
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 151 cultural heritage. Refers to 1) tangible moveable natural hazards; 3) cultural services—nonmateri- Glossary or immovable objects, property, sites, structures, al bene ts from ecosystems, such as natural areas or groups of structures having archaeological that are sacred sites and areas of importance for
Glossary (prehistoric), paleontological, historical, cultur- recreation and aesthetic enjoyment; and 4) sup- al, artistic, or religious value; 2) unique natural porting services—natural processes that maintain features or tangible objects that embody cultural the other services, such as soil formation, nutrient values, such as sacred groves, rocks, lakes, and cycling, primary production. —2012 Perform- waterfalls; and 3) certain instances of intangible ance Standard 6, paragraph 2 (IFC). forms of culture that are proposed to be used for commercial purposes, such as cultural knowl- employee grievance mechanism. A vehicle for work- edge, innovations, and practices of communities ers (and their organizations, where they exist) to embodying traditional lifestyles. —2012 Perform- raise workplace concerns. The client will inform ance Standard 8, Paragraph 3 (IFC). the workers of the grievance mechanism at the time of recruitment and make it easily accessi- cumulative voting. A system that gives minority ble to them. The mechanism should involve an shareholders more power by allowing them to appropriate level of management and address cast all of their board-director votes for a single concerns promptly, using an understandable and candidate, as opposed to regular or statutory transparent process that provides timely feedback voting in which shareholders must vote for a to those concerned, without any retribution. The different candidate for each available seat or mechanism should also allow for anonymous distribute their votes among a number of candi- complaints to be raised and addressed. The dates. —Who’s Running the Company (IFC). mechanism should not impede access to other judicial or administrative remedies that might disclosure. Refers to a rm’s obligation to provide be available under the law or through existing material, market-in uencing information in arbitration procedures, or substitute for griev- accordance with the requirements of a number ance mechanisms provided through collective of parties, including regulatory authorities and agreements. —2012 Performance Standard 2, the public, or in accordance with such standards paragraph 20 (IFC). as accounting standards and self-regulatory contracts. Disclosure contributes to the rm’s Environmental and Social Impact Assessment transparency, which is one of the main corporate (ESIA). The client should conduct a comprehen- governance principles. —Who’s Running the sive full-scale ESIA for certain projects—partic- Company (IFC). ularly for green eld investments and projects (including, but not limited to, major expansion discrimination in employment. Any distinction, ex- or transformation-conversion activities) involving clusion, or preference with regard to recruitment, speci cally identi ed physical elements, aspects, hiring, working conditions, or terms of employ- and facilities that are likely to generate potential- ment—made on the basis of personal characteris- ly signi cant adverse environmental and social tics unrelated to inherent job requirements—that risks and impacts. Generally, the key process nulli es or impairs equality of opportunity or elements of an ESIA are 1) initial screening of the treatment in employment or occupation. “Inher- project and scoping of the assessment process; ent job requirements” refers to genuine occupa- 2) examination of alternatives; 3) stakeholder tional quali cations that are necessary to perform identi cation (focusing on those directly affect- the job in question. —2012 Guidance Note 2, ed) and gathering of environmental and social Paragraph 41 (IFC). baseline data; 4) impact identi cation, prediction, and analysis; 5) generation of mitigation or man- ecosystem services. Bene ts that people, including agement measures and actions; 6) signi cance of businesses, derive from ecosystems: 1) provision- impacts and evaluation of residual impacts; and ing services—products from ecosystems, such 7) documentation of the assessment process (the as food, fresh water, timber, bers, medicinal ESIA report). The breadth, depth, and type of plants; 2) regulating services—bene ts from analysis should be proportionate to the nature the regulation of ecosystem processes, such as and scale of the proposed project’s potential surface-water puri cation, carbon storage and impacts as identi ed during the course of the sequestration, climate regulation, protection from assessment process. The ESIA must conform to
152 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Glossary the requirements of the host country’s environ- nancial statements. A complete set of nancial mental assessment laws and regulations, includ- statements comprises a balance sheet, an income ing the relevant disclosure of information and statement, a statement of changes in equity, a
Glossary public consultation requirements, and should be cash ow statement, and notes, which collective- developed following principles of good interna- ly communicate an entity’s economic resources tional industry practice. —2012 Guidance Note or obligations at a point in time or the changes 1, paragraph 23 (IFC). therein for a period of time in accordance with a nancial reporting framework. —Who’s Running Environmental and Social Management System the Company (IFC). (ESMS). A set of policies, procedures, tools, and internal capacity to identify and manage a nan- forced labor. Any work or service not voluntarily cial institution’s exposure to the environmental performed, exacted from a person under threat of and social risks of its clients/investees. An effec- force or penalty. It includes any kind of invol- tive ESMS is a dynamic and continuous process untary or compulsory labor, such as indentured initiated and supported by management, and it labor, bonded labor, or similar labor-contracting involves engagement between the client and its arrangements. —2012 Performance Standard 2, workers, local communities directly affected by paragraph 22 (IFC). the project (Affected Communities), and, where appropriate, other stakeholders. Drawing on the Free, Prior and Informed Consent (FPIC). Despite elements of the established business management no universally accepted de nition, for purposes process of “plan, do, check, and act,” the ESMS of IFC Performance Standards, FPIC builds on entails a methodological approach to managing and expands the process of Informed Consulta- environmental and social risks and impacts in tion and Participation and is established through a structured way on an ongoing basis. A good good-faith negotiation between the client and ESMS appropriate to the nature and scale of the the Affected Communities of indigenous peoples. project promotes sound and sustainable envi- FPIC does not necessarily require unanimity and ronmental and social performance and can lead may be achieved even when individuals or groups to improved nancial, social, and environmental within the community explicitly disagree. —Glos- outcomes. —First for Sustainability website and sary of Terms 2006; 2012 Performance Standard Performance Standard 1, paragraph 1 (IFC). 7, paragraph 12 (IFC).
environmental and social risk. Risk of adversely freedom of association. The right of workers and affecting people or the environment through employers to form and join organizations of their inadequate or failed internal processes, people, own choosing is an integral part of a free and and systems, or through external events. Envi- open society. —International Labour Organiza- ronmental and social risk is a combination of the tion. probability of certain hazards and the severity of impacts resulting from such an occurrence. Generally Accepted Accounting Principles (GAAP). Environmental and social impacts refer to 1) Accounting rules, conventions, and standards for any change, potential or actual, to the physical, companies, established by reporting requirements natural, or cultural environment and 2) impacts and accounting standard setters in a particular on the surrounding community and workers, country. Each country is likely to have a GAAP, resulting from the business activity to be support- which is unlikely to be identical to any other ed. —IFC; and 2012 Performance Standard 1, country’s GAAP. For example, U.S. GAAP is paragraph 1, footnotes 2 and 3 (IFC). the body of accounting policies applicable to U.S.-registered rms, and the GAAP rules are External Communications Mechanism (ECM). Pro- issued by the Financial Accounting Standards cedure that includes methods to 1) receive and Board (FASB). These are not identical to IFRS register external communication from the public; standards issued by the International Account- 2) screen and assess the issues raised and deter- ing Standards Board and applied in Europe and mine how to address them; 3) provide, track, and many other countries. —Who’s Running the document responses, if any; and 4) adjust the Company (IFC). management program, as appropriate. —2012 Performance Standard 1, paragraph 34 (IFC).
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 153 greenhouse gas (GHG) emissions. Scope levels: independent director. A director whose only non- Scope 1—all direct GHG emissions; Scope 2— trivial professional, familial, personal, or nancial indirect GHG emissions from consumption of connection to the corporation, its chairman,
Glossary purchased electricity, heat, or steam; and Scope CEO, or any other executive of cer is his or her 3—other indirect emissions, not covered in Scope directorship. The independent director is expect- 2, that occur in the value chain of the reporting ed to be capable of applying objective judgment company, including both upstream and down- to all company decisions. —Who’s Running the stream emissions. Scope 3 emissions could in- Company (IFC). clude the extraction and production of purchased materials and fuels, transport-related activities in independent non-executive director. A director who vehicles not owned or controlled by the report- 1) has not been employed by the company or its ing entity, electricity-related activities (such as related parties in the past ve years; 2) is not, transmission and distribution losses), outsourced and is not af liated with a company that is, an activities, and waste disposal. —Greenhouse Gas adviser or consultant to the company or its re- Protocol (WRI). lated parties; 3) is not af liated with a signi cant customer or supplier of the company or its relat- grievance mechanism. A means for a company ed parties; 4) has no personal service contracts to receive and facilitate resolution of Affected with the company, its related parties, or its senior Communities’ concerns and grievances about management; 5) is not af liated with a nonpro t the company’s environmental and social per- organization that receives signi cant funding formance. The grievance mechanism should be from the company or its related parties; 6) is not scaled to the risks and adverse impacts of the employed as an executive of another company project and have Affected Communities as its where any of the company’s executives serve on primary user. It should seek to resolve concerns that company’s board of directors; 7) is not a promptly, using an understandable and transpar- member of the immediate family of an individual ent consultative process that is culturally appro- who is, or has been during the past ve years, priate and readily accessible—and at no cost and employed by the company or its related parties without retribution to the party that originated as an executive of cer; 8) is not, nor in the past the issue or concern. (See employee grievance ve years has been, af liated with or employed mechanism.) —2012 Performance Standard 1, by a present or former auditor of the company paragraph 35 (IFC). or of a related party; and 9) is not a controlling person of the company (or member of a group hazardous waste. Substances classi ed as hazard- of individuals and/or entities that collectively ous wastes possess at least one of four charac- exercise effective control over the company) or teristics—ignitability, corrosivity, reactivity, or such person’s brother, sister, parent, grandparent, toxicity—or appear on special lists. —Glossary child, cousin, aunt, uncle, nephew or niece, or of Terms 2006 (IFC). a spouse, widow, in-law, heir, legatee, or suc- cessor of any of the foregoing (or any trust or independent auditor. Professional(s) from an similar arrangement of which any such persons external audit rm charged with undertaking an or a combination thereof are the sole bene cia- audit of the nancial statements. An audit may be ries) or the executor, administrator, or personal required annually, semiannually, or quarterly. In representative of any person described above most countries the independent auditors under- who is deceased or legally incompetent. For the take an annual audit. They must have no person- purposes of this de nition, a person is deemed to al interest in the nancial statements and should be “af liated” with a party if such person 1) has have no role in the development of the nancial a direct or indirect ownership interest in or 2) is statements. The independent auditor is required employed by such party. —IFC. to render an unbiased judgment that the nancial statements and accounting records of the rm are likely to be free from material misstatement and are a fair re ection of the nancial position of the rm. —Who’s Running the Company (IFC).
154 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency Glossary indigenous peoples. Generically refers to a distinct material/materiality. Information is material if omit- social and cultural group possessing the follow- ting, misstating, or obscuring it could reasonably ing characteristics in varying degrees: 1) self-iden- be expected to in uence decisions that the pri- ti cation as members of a distinct indigenous mary users of a speci c reporting entity’s gener- cultural group and recognition of this identity by al-purpose nancial statements make on the basis others; 2) collective attachment to geographically of those nancial statements. Materiality depends distinct habitats or ancestral territories in the on the nature or magnitude of information, or project area and to the natural resources in these both. Assessing whether information is material habitats and territories; 3) customary cultural, requires consideration of the entity’s circumstanc- economic, social, or political institutions that are es. —Exposure Draft, 09.14.2017 (IFRS). separate from those of the mainstream society or culture; or 4) a distinct language or dialect, often minority shareholder. A person or entity with a different from the of cial language or languages minority stake in a company controlled by a of the country or region in which they reside. majority shareholder. It is usually less than a —Performance Standard 7, paragraph 5 (IFC). 5 percent stake, but each country may deter- mine various thresholds applicable to the term Informed Consultation and Participation (ICP). For “minority shareholder.” —Who’s Running the projects with potentially signi cant adverse im- Company (IFC). pacts on Affected Communities, ICP requires cli- ents to involve Affected Communities (both men non-executive director. A director who does not and women) in decision making that affects them have executive management responsibilities with- directly, such as proposed mitigation measures, in the organization. —IFC. the sharing of development bene ts and opportu- nities, and implementation issues. The client will non-voting shares. Owners holding this share document the process, in particular the measures class do not commonly have voting rights at the taken to avoid or minimize risks to and adverse annual general meeting, except on some mat- impacts on the Affected Communities, and will ters of highest importance. Usually, non-voting inform those affected about how their concerns shareowners have preferential rights for receiving have been considered. —Performance Standard 1, dividends. —Who’s Running the Company (IFC). paragraph 31 (IFC). one-tier board. A board of directors composed of integrated report. A concise communication about both executive and non-executive members. It how an organization’s strategy, governance, per- delegates day-to-day business to the management formance, and prospects, in the context of its ex- team. Found in the United States, the United ternal environment, lead to the creation of value Kingdom, and Commonwealth countries. (See in the short, medium, and long term. —Integrated two-tier board.) —Who’s Running the Company Reporting Framework (IIRC). (IFC). internal audit. An independent, objective assurance operational risk. Risk of loss resulting from inad- and consulting activity designed to add value equate or failed internal processes, people, and and improve an organization’s operations. It systems, or from external events. This de nition helps an organization accomplish its objectives includes legal risk, but excludes strategic and by bringing a systematic, disciplined approach to reputational risk. —IFC. evaluating and improving the effectiveness of risk management, control, and governance processes. ownership structure. The way company shares are —Who’s Running the Company (IFC). distributed among shareholders. —Who’s Run- ning the Company (IFC). internal control. A process, effected by an entity’s board, management, and other personnel, de- signed to provide reasonable assurance regarding the achievement of objectives in 1) effectiveness and ef ciency of operations; 2) reliability of nancial reporting; and 3) compliance with appli- cable laws and regulations. —IFC.
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 155 Paris Agreement. To address climate change, coun- risk appetite. The broadly based level of risk the References Reading for Further tries adopted the Paris Agreement at the Confer- entity is willing to seek or accept in pursuit of ence of the Parties (COP) 21 in Paris on Decem- long-term objectives. —IFC.
Glossary ber 12, 2015. In the agreement, which entered into force less than a year later, the countries risk assessment. The process of identifying risks, agreed to work to limit global temperature rise to assessing the critical functions necessary to con- well below 2 degrees Celsius, and given the grave tinue business operations, de ning the controls in risks, to strive for 1.5 degrees Celsius. —United place to reduce exposure, and evaluating the cost Nations. of such controls. Risk assessment often involves an evaluation of the probability of a particular pollution. The IFC Performance Standards use the event. —IFC. term to refer to both hazardous and nonhazard- ous chemical pollutants in the solid, liquid, or risk governance. The principles of good governance, gaseous phases, and include other components applied to the identi cation, assessment, manage- such as pests, pathogens, thermal discharge to ment, and communication of risk. It incorporates water, GHG emissions, nuisance odors, noise, the principles of accountability, participation, vibration, radiation, electromagnetic energy, and and transparency in establishing policies and the creation of potential visual impacts, including structures to make and implement risk-related light. —Performance Standard 3, paragraph 1, decisions. —IFC. footnote 1 (IFC). risk management. Coordinated activities to direct related party. A party is related to an entity if it can and control risk. —IFC. directly or indirectly control the other party or exercise control through other parties; it may risk management framework. The complete set of also be where parties are subject to a common components that provide the foundation and control from the same source. Related parties organizational arrangements for designing, im- tend to have in uence over the nancial or plementing, monitoring, reviewing, and continu- operating policies of a rm or have the power ally improving risk management throughout the to in uence another party’s actions. A related organization. —IFC. party may be a close family member (including partners, spouses, children, other relatives), a key share option. An agreement, or privilege, which manager in the entity (and his or her close family conveys the right to buy or sell a speci c security members), or entities such as subsidiaries of the or property at a speci ed price, by a speci c date. entity, its holding company, joint ventures, and The most common share options are calls (the associates. —Who’s Running the Company (IFC). right to buy a speci ed quantity of a security at a set strike price at a time on or before expiration) renewable energy. Energy sources derived from and puts (the right to sell a speci ed quantity of a solar power, hydro, wind, certain types of geo- security at a set strike price at a time on or before thermal, and biomass. —Glossary of Terms 2006 expiration). —Who’s Running the Company (IFC). (IFC).
renewable resources. Natural resources that, after shareholder. A person or entity that owns shares exploitation, can return to their previous stock issued by companies. —Who’s Running the Com- levels by natural processes of growth or replen- pany (IFC). ishment. Conditionally renewable resources are those for which exploitation eventually reaches a shareholders rights. The rights resulting from level beyond which regeneration will become im- ownership of shares, which may be based in legal possible, such as clear-cutting of tropical forests. rights or other rights contracted with the com- —Glossary (OECD). pany. The basic shareholder rights include the right to information on the company, to attend risk. Anything that can affect the ability of an enter- the meeting of shareholders, to elect directors, prise to meet its objectives. —IFC. and to appoint the external auditor, plus voting rights and cash ow rights. —Who’s Running the risk analysis. A process intended to reveal the Company (IFC). nature of potential risk and determine the level of risk. —IFC.
156 Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency shareholders’ agreement. A written document sustainable development/sustainability. Develop- Glossary governing the relations among shareholders and ment that meets the needs of the present without de ning how the company will be managed and compromising the ability of future generations to controlled. The agreement helps align the ob- meet their own needs. —Brundtland Commission. jectives of controlling shareholders to safeguard common interests and to protect the interests tag-along rights. If a majority shareholder sells his of minority shareholders. —Who’s Running the or her stake, minority shareholders have the right Company (IFC). to participate and sell their stake under the same terms and conditions as the majority shareholder. staggered board. Structure of a board of directors This right protects minority shareholders and is in which every year a fraction of the directors are a standard inclusion in shareholders’ agreements. elected, each for a multiyear term. Also called a —Who’s Running the Company (IFC). classi ed board. —Who’s Running the Company References for Further for Reading References (IFC). transparency. The corporate governance principle of publishing and disclosing information relevant stakeholder engagement. Establishing and maintain- to stakeholders’ interests and to shareholders ing a constructive relationship with a variety of on all price-sensitive material matters. —Who’s external stakeholders over the life of the project. Running the Company (IFC). It is an integral part of an ef cient and adaptive Environmental and Social Management System. value creation. The process that results in increas- An effective engagement process allows the es, decreases, or transformations of the capitals views, interests, and concerns of different stake- caused by the organization’s business activities holders, particularly of the local communities and outputs. —Integrated Reporting Framework directly affected by the project (Affected Com- (IIRC). munities), to be heard, understood, and taken into account in project decisions and creation of voting rights. The right to vote at shareholders’ development bene ts. —2012 Guidance Note 1, meetings on issues of importance for the compa- paragraph 6 (IFC). ny. —Who’s Running the Company (IFC).
supply chain. Materials, components, goods, or voting shares. Shares that give the shareholder the products for use in ongoing operations. —2012 right to vote on matters of corporate policy, Guidance Note 2, paragraph 93 (IFC). including elections to the board of directors. —Who’s Running the Company (IFC). supply chain workers. People employed by suppliers that provide goods and materials to the company. working conditions. Conditions in the workplace There is no direct contractual or labor relation- (including the physical environmental, health ship between the client and the workers at the and safety precautions, and access to sanitary supplier level, and costs and bene ts are paid by facilities) and treatment of workers (including suppliers. —2012 Guidance Note 2, paragraph disciplinary practices, reasons and process for 12 (IFC). termination of workers, and respect for the work- er’s personal dignity). —Glossary of Terms 2006 Sustainable Development Goals (SDGs) or Global (IFC). Goals. The 17 SDGs of the 2030 Agenda for Sus- tainable Development were adopted in Septem- ber 2015 to “end poverty, protect the planet and ensure prosperity for all.” The Goals came into force on January 1, 2016. —United Nations.
Beyond the Balance Sheet | IFC Toolkit for Disclosure and Transparency 157 References Reading for Further References for Further Reading
Abdo, A., and G. Fisher. 2007. The impact of reported corpo- Black Sun Plc. 2015. The Integrated Reporting Journey: The rate governance disclosure on the nancial performance Inside Story. London: Black Sun Plc and the International of companies listed on the JSE. Investment Analysts Integrated Reporting Council. Journal 36 (66): 43–56. Bloomberg. 2016. Environmental, Social and Governance ACCA. 2009. Disclosures on Corporate Governance. Report- Methodology KPIs. New York: Bloomberg. ing trilogy—Research on reporting disclosures: Part 2. BM&F Bovespa. 2016. New Value—Corporate Sustainability: Sydney, Australia: The Association of Chartered Certi ed How to Begin, Who to Involve, and What to Prioritize, Accountants. 2nd edition. São Paulo, Brazil: BM&F Bovespa. ACCA. 2013. Understanding Investors: Directions for Corpo-
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2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Tel: +1 (202) 458-8097 www.ifc.org/corporategovernance www. ifc.org/sustainability SEPTEMBER 2018