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Narrative reporting

Narrative reporting refers to information included in the front end of a company’s annual report and accounts. It includes the three key areas in measuring the sustainability and societal impact of a business: Environmental, Social, and Governance (ESG).

The significance of narrative reporting, or non-financial reporting as it’s also referred to, is on the rise and has become a central area of focus for business leaders and their stakeholders. This increasing interest has driven many existing legal and regulatory requirements as key stakeholders, including investors, regulators, and consumers, turn their attention to how the entity plans to deliver products and services against the backdrop of ESG strategies.

With climate change now recognised as a ‘global emergency’, the spotlight is on businesses to explain how they impact on and are impacted by environmental, social and governance matters. Narrative reporting enables you to effectively tell the full story of your business and how it is playing its part in tackling today’s challenges for a better future. It can also help to cultivate stakeholder trust, integrity, and confidence at a time when corporate transparency and responsibility are becoming increasingly attractive to consumers and influencing buying behaviours.

Ensuring that your narrative reporting is effective and meets the legal and regulatory requirements can be challenging. When considering your approach, including whether to go beyond the minimum level of compliance, there are five key areas to consider.

1. Understanding what’s required

The first step is to understand what is required. Non-financial reporting takes time to prepare so it needs to be proportionate to the size and type of business and who uses the entity’s annual report. The consideration of these and other factors by regulators, has resulted in a variety of different scope criteria and exemptions for boards and management teams to understand and apply.

Gathering data to consider each of the requirements can be time-consuming. Start by identifying which listing rule and/or UK company law requirements may apply, the in-scope criteria and possible exemptions. UK requirements are broadly driven by:

Having this information can make it easier to work through the requirements which can be based on one or more than one of these factors. For example, in-scope criteria may consider the size of the entity only and/or the nature of its business and may be assessed for the company only and/or the group it is part of, or that it heads.

Key areas for consideration

1. Financial information Collate turnover, gross assets, UK and global employees for the last three financial periods for the company, and if it is a parent, the group that it heads. Then consider the following:

a. Does the income the business generates meet the definition of turnover in company law?

b. How many employees (if any) work wholly or mainly outside the UK?

c. Group figures are considered for a parent entity even if consolidated accounts are not prepared so can be before or after consolidation adjustments, but are processes in place to collate that information for the same or a closely aligned period?

2. Nature of activities Identify activities that might cause an entity to be in-scope, typically certain types of financial services, insurance or investment activity or if an entities’ securities are traded. Then consider the following:

a. Does the entity itself undertake activities that prevent it from qualifying for an exemption?

b. If the entity is part of a group, whether or not it is the parent, do any entities within the group undertake activities that prevent the entity from qualifying for an exemption?

3. Exemptions Exemptions can reduce the burden of non-financial reporting but only if they are taken appropriately.

a. Are there specific exemptions that might apply, such as the 40,000 kWh limit for carbon reporting, and do they apply at a company or group level?

b. Is there anything the directors do not want to disclose as they consider it to be seriously prejudicial to the entity’s interests? and if so, why?

c. If exemptions are available because the entity is included in a group report, does that report meets the conditions for exemption? For example, is it prepared in accordance with the same legal requirements and for the same or a closely aligned period?

Please note that disclosures that are only required if an entity undertakes a particular activity, such as the purchase of its own shares, are not covered here.

2. Understanding stakeholder expectations

3. Assessing data integrity

Businesses have been developing and enhancing internal controls and governance procedures around financial reporting for many years and are now challenged with how to implement these for non-financial reporting purposes.

How to obtain assurance and comfort over the integrity of your data and disclosures is key. There are important questions that the board and management team should consider that help with this:

  1. What process has been used to identify applicable non-financial reporting requirements, whether the entity is in-scope and eligible to take an exemption?
  2. What information is required to meet the non-financial reporting requirements both at a high level and the detailed requirements, such as whether global or UK information is required?
  3. Is that information already reported to the board? If so, is the format of that reporting consistent with what’s required for non-financial reporting, or could it be made consistent?
  4. Is information already generated internally or if not, what sources are available to obtain it?
  5. Are the sources of data reliable? Eg What systems/sources are used to obtain the information? What controls are there over the information gathered to cover its completeness and accuracy? What is the process for recording that information and who is responsible for collating and reviewing it?
  6. Do specialist skills for the preparation and assurance of the data exist in-house or will external experts be engaged?
  7. What is the process for identifying and engaging external experts to ensure the scope of the engagement and skills of the expert can deliver the information or assurance required in an appropriate format? Are there any caveats or exclusions in the expert’s report that affect the reliance that can be placed on it?
  8. Is legal or Nomad advice needed before the information is put in the public domain by including it in the annual report? Eg Is there a risk of greenwashing, or from forward-looking statements?

Subject to ethical requirements our Governance experts can help by advising boards and organisations on effective corporate governance and good decision making and our Environmental team can consider your business’s environmental impact across four areas; Emissions, Natural world, Resource consumption, Waste and recycling.

4. Stakeholder communication

The annual report explains what has happened during the historic financial period up to the date the annual report is approved and sets out the entity’s future plans. The challenge for entities is how to deliver this and ensuring key messages are clearly communicated whilst at the same time ensure applicable legal and regulatory requirements are complied with.

It may be useful to start with matters considered by the board, for example:

Different forms of visual presentation such as tables and diagrams can help to show linked information in an engaging and cohesive way. The FRC’s publication on What Makes a Good Annual Report and Accounts includes examples of how reports should be connected and consistent and its Guidance on the Strategic Report includes ‘linkage examples’ to illustrate how interdependencies or relationships might be highlighted or presented.

Once the annual report has been drafted, it’s always good practice to stand back and consider whether:

The increased focus of users on non-financial reporting increases the importance and attention given by regulators to this area.

Requirements generally come from two main sources:

  1. UK company law; and
  2. Listing rules (where applicable).

Breaches can result in the following sanctions:

The FRC has heightened its consideration of non-financial reporting demonstrated by the following examples:

It is vital that the important legal and regulatory requirements are fully understood and applied in a clear, concise and entity-specific manner, as the consequences of not doing so can be both financially and commercially damaging.

How RSM can help you

Whether you are just starting to bring ESG into your narrative reporting, or already have an established strategy, it’s essential that you have the right advice, take the necessary actions and consider how you will best meet your reporting requirements, whether statutory or based on stakeholder expectations. We have dedicated resources and expertise, covering both the implementation and reporting of ESG, as well as the wider narrative reporting landscape.

authors:danielle-stewart-obe,authors:lee-marshall

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