IIA Los Angeles Chapter PwC... · Internal audit is teaming up with other departments to lead the implementation of a conflict minerals program, ensuring that the program will meet

Trends and challenges in thesustainability spaceIs your organization a leader or afollower?

IIA Los Angeles Chapter

www.pwc.com/us/sustainability

follower?

Private and Confidential

March 13, 2013

Agenda

What is sustainability?

Trends and challenges impacting sustainability

How can Internal Audit play a role?

PwCMarch 13 2013Trends and challenges in the sustainability space – IIA Los Angeles

2

Survey says……. CEOs care about Sustainability and are responding….

Over half of CEOs areinvesting to improve livingand working conditionswhere they operate– PwC’s 15th Annual Global CEO Survey

Seven out of ten CEOs say theywould take more ambitious

Sustainability is a business approach that creates long-term shareholder value by embracingopportunities and managing risks deriving from economic, environmental and social developments.

Sustainable Asset Management (Dow Jones Sustainability Indexes)


– PwC’s 15th Annual Global CEO Surveywould take more ambitiousaction on issues related to theMillennium Development Goals– Global PwC poll of CEOs on Rio+20 Conference on

Sustainable Development53% of S&P 500companies published acorporate sustainabilityreport.– 2012 Corporate Sustainability

Reporting, Does it matter? Governance& Accountability Institute

94% of Private Equity housessurveyed say they will beincreasing their focus onResponsible Investment activities– Responsible investment: Creating value from

environmental, social and governance issues

3

POLLING QUESTION:

Do you believe sustainability represents a material business riskfor your organization today?


4

Trends and challenges impactingsustainability

How do environmental, social and economic trends materiallyimpact shareholder value?

Commodityscarcity

Energy and carbonmanagement

GlobalizationEthicalconsumerism

Emergingmarkets

Security, privacy,freedom ofexpression

Trends

Weather volatility


Shareholdervalue

Digitalinclusion

Demographics andpopulation shifts

SuppliersInvestors

Timing oftrends/impacts

Customers Policy &regulation

Technologychanges

Politics of securityand global stability

Reputation andlicence tooperate

Markets andproducts

Share price

Filters

Impacts

Peers &competitors

Transparencyand openness

6

IA functions are becoming more engaged

• In February 2010, the IIA released apractice guide concerning CSR and theneed for risk oversight

• Classified as “ strongly recommended”,the guide addresses CSR risks thatCAEs should consider when developingtheir audit plans


their audit plans

• Risk areas include:

- Reputational risk

- Compliance risk

- Failure to recognize operationalCSR implications

- Liability

- Capital market implications

- Employee perceptions

- Sales market

- Risks to externalbusiness relationships

PwC 2012 State of the Internal AuditProfession Study respondents consideringinternal audit contribution to monitoringReputation and Brand risks is important orvery important

85%7

How have some IA departments incorporated sustainability intotheir operations?

Intel

The information in Intel’s CorporateResponsibility Report is subject tointernal reviews and, for selected content,external reviews. Intel regularly validatesthe management systems and processesused to collect the data.

Global Technology Company

Internal audit is teaming up with otherdepartments to lead the implementationof a conflict minerals program, ensuringthat the program will meet regulators andother stakeholders expectations.


Publishing company

The Internal Audit department has beenassisting the Sustainability function inmaintaining external traceability andsupply chain certification (FSC, SFI)required by a growing number ofcustomers integrating sustainabilityrelated criteria into audit plans.

used to collect the data.

Xstrata

The internal audit group at Xstrataconducts in-depth SustainableDevelopment risk audits usingappropriate specialists on the specificrisks identified in each business’s annualrisk review, helping to embed sustainabledevelopment into operational andbusiness decision-making.

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IIA Sustainability risk assessment

Reputation

Compliance

Liability

Operational

Stock market

Conflictminerals

Sustainabilityreporting


Employment market

Sales market

External business relationships

reporting

Watermanagement

Responsiblesupply chain

Reputationmanagement

Californiacap-and-trade

Eco-efficiency

9

Section 1502 (s1502) requires companies to determine whethercertain minerals in their products are conflict-freeThe rules require a new level of transparency and risk management within the supply chain

What are conflict minerals?

• Conflict minerals, as determined by the U.S. Secretary of State, may finance conflict in theDemocratic Republic of the Congo (DRC) or adjoining countries. The “3TG” metals aretantalum, tin, tungsten and gold.

Compliance - Conflict Minerals Rule


What is the goal of s1502?

• Promote a strengthening of chain of custody controls surrounding conflict minerals and toincrease transparency of the presence of the minerals to a Company’s stakeholders

• S1502 seeks to reduce funding for armed groups in the DRC and surrounding countries.

When does compliance begin?

• First filings are due May 31, 2014 for calendar year 2013.

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Section 1502 (s1502) requires companies to determine whethercertain minerals in their products are conflict-free

Examine products to determinewhether and to what extent

Section 1502 applies

Step 1:

What is required of companies?



Develop and conduct reasonablecountry of origin inquiry (RCOI)

and due diligence (DD)

Obtain independent audit, ifneeded

Comply with disclosurerequirements

Steps 2/3:

Step 4a:

Step 4b:

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Conflict minerals present both risks and opportunities forcompanies

Potential risks

• Minerals availability and cost increase

• Conflict-free supplier availability

• Customer loss

Domestic and foreign issuers have already begun to report on the significant implications of conflictminerals in their supply chains

Potential opportunities

• Improved collaboration with suppliersand NGOs

• Supply resilience through conflict-free



• Customer loss

• Costs of compliance

• Brand impact due to inadequate orincorrect public disclosure

Source: PwC analysis of domestic and foreign filers annual filings as of 4/18/2012.

• Supply resilience through conflict-freesourcing in the affected region

• Potential new markets for conflict-freeproducts

• Increased supply chain transparency

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What is the impact of the conflict minerals rule?Based on SEC estimates

Number of companies impacted: Compliance cost estimates:

~6,000Issuers will need to perform some level of duediligence

$3-4Billion in total compliance cost



diligence

>4,500Issuers will need to submit an audited conflictminerals report

~278,000Additional companies will also be impacted bycustomer requests

$207-609Million in annual ongoing compliance cost

$1.2Billion in compliance costs incurred by suppliers tocomply with customer requests

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Many companies are impacted by the rules; few have acted

87% of companies* have indicated they have done little to prepare for compliance

60%

70%

80%

90%

100%

We're a leader

We've activelyprepared



0%

10%

20%

30%

40%

50% We have begunto prepare

We've donenothing to date

* Results from poll conducted during PwC’sConflict Minerals webcast on September 11, 2012.

Total respondents: 1,016

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How can Internal Audit begin to bridge the gaps?

• Project Assurance

― Evaluate Management’s program design and implementation plan related to Conflict Mineral compliance, including product scoping, supplier scoping,RCOI/Due Diligence surveys and follow up process, risk assessment framework,and information aggregation and reporting

• Monitoring

― Include Conflict Minerals in the audit universe and consider it as part of the annual



― Include Conflict Minerals in the audit universe and consider it as part of the annualrisk assessment and audit plan creation

― Evaluate Management’s policies and procedures and their ability to support a sustainable Conflict Minerals compliance program

― Independently evaluate (help prepare for an audit of) the design and/or execution of Management’s Conflict Minerals processes and controls

― Incorporate Conflict Minerals testing procedures into Internal Audit’s existing supply chain, supplier compliance, or procurement reviews

15

IIA Sustainability risk assessment

Reputation

Compliance

Liability

Operational

Stock market

Conflictminerals

Sustainabilityreporting


Employment market

Sales market

External business relationships

reporting

Watermanagement

Responsiblesupply chain

Reputationmanagement

Californiacap-and-trade

Eco-efficiency

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Trends in Sustainability Reporting – Top Countries

3000

4000

5000

Reports by country 1992-2011

Reputation – Sustainability Reporting


0

1000

2000

3000

2011

1992-2010

Source: www.corporateregister.com

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Trends in External Assurance - Globally

1200

1500

Third party CR assurance by year 1992-2011



0

300

600

900

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: www.corporateregister.com

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External stakeholders are increasing pressure on companies tofocus on sustainability

CDP is an independent not-for-profit organization which holds thelargest database of corporate climate change information in the world.The data is obtained from responses to CDP’s annual InformationRequests, issued on behalf of institutional investors, purchasingorganizations and government bodies. In 2012, the survey wasconducted on behalf of 655 investors with assets of US$78 trillion.

It’s key that reporting isaccurate, consistent andpresents an accurate portraitof the company. Simply bydisclosing relevantinformation, companies implythat it is investment grade.



Launched in 1999, the Dow Jones Sustainability Indexes (DSJI) werethe first global indexes tracking the financial performance of theleading sustainability-driven companies worldwide. 2,500 largestcompanies of Dow Jones Total Global Stock Market Index are invitedto participate.

The GRI guidelines are the world’s most widely used sustainabilityreporting framework. Over 1,800 organizations around the worldcurrently use GRI.

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http://www.cdproject.net/index.asp

ESG data is part of the standard company reporting provided byBloomberg and Google Finance

With over 310,000 Bloomberg subscribers globally, investors are making decisions based onESG data

• Bloomberg now rates more than 4,000 companies with an overall ESG Disclosure Score , based on ananalysis of 114 ESG data points

• Data is culled from public sources by Bloomberg analysts with some filtering for reasonableness

Carbon Disclosure Rating onGoogle Finance

ESG Sector Analysis on Bloomberg



Google Finance

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Reporting and investor’s attention are increasing, but thechallenges are still present

Efficiency

Cost effectiveness



Standards applied with technical rigor

Materiality

Systemsintegration

Clear roles &responsibilities

Non duplicationof efforts

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Would your organization benefit from communicatingsustainability performance to stakeholders?

Stakeholder Questions

Investors • Is Investor Relations receiving inquiries on sustainability?• Have any of your significant investors endorsed the Carbon Disclosure

Project, the UN Principles for Responsible Investment, or the InvestorNetwork on Climate Risk?

• Do any Socially Responsible Investors have significant holdings of yourstock?

• Are equity analysts covering your organization or sector evaluating

Competitors• Do your

competitors



• Are equity analysts covering your organization or sector evaluatingsustainability performance? competitors

report on theirsustainabilityperformance?

• How dostakeholdersperceive yoursustainabilityperformancerelative to yourcompetitors?

Customers • Is your organization receiving sustainability inquiries from customers,either in RFPs or through sales and marketing engagement?

• Have any of your customer (or end users) made significant sustainabilitycommitments related to supply chain or that impact your products orservices?

Employees • Would communicating your sustainability strategy help recruit new talent?• Can you improve employee engagement and retention through reporting

on sustainability performance?

Civilsociety,NGOs

• Are NGOs actively targeting your company, sector or companies in yourvalue chain?

• Would a sustainability report reduce reputational risk and improve yourrelations with civil society, NGOs and communities impacted by youroperations?

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Greater IA input may be mandated in the future

Industry move towards new codes of practice and mandatory reporting requirements.

For example, new requirements identified by the King III report (South Africa – expandingglobally):

• The need for an annual integrated report that focuses on the impact of the organization in the economic,environmental and social spheres.

• A statement by the audit committee to the board and shareholders on the effectiveness of internalfinancial controls to be included in the integrated report.

• The consideration of the strategic role of IT and its importance from a governance perspective.

• The positioning of internal audit as a strategic function that conducts a risk-based internal audit and


…leading to…

• Greater involvement and integration with audit committee

• Integrating sustainability reviews into internal and external audit functions

• Proactive stakeholder engagement

• Simplified, focused reporting on material matters, based on sustainability framework

• Integrated reporting accompanied by online, real-time reporting.

• The positioning of internal audit as a strategic function that conducts a risk-based internal audit andprovides a written assessment of the company’s system of internal control.

• The governance of risk through formal risk management processes.

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How can Internal Audit begin to bridge the gaps?

• Understand what are the potential material risks

―Engage with the sustainability team and management to understand internal views

―Engage with external stakeholders

• Identify what your organization is already reporting externally

― Sustainability and CSR report



― Sustainability and CSR report

― CDP and DJSI responses

― Other voluntary reporting initiatives (e.g. sustainable apparel index)

• Bring in the right expertise

• Leverage existing frameworks to assess effectiveness of processes andcontrols

―COSO

―ISO 14064

―Global reporting initiative (GRI)

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Sustainability Risk Assessment

• Participation on Sustainability Steering Committee

• Evaluate Sustainability programs and risk through periodic risk assessment process

• Determine whether Management has a reasonable action plan in place to evaluate the impactson your organization.


Implementation and Monitoring Process Review

Evaluate Management’s implementation plan related to Sustainability:

• Is it reasonable given the complexity , deadlines, other organizational commitments?

• Is the preparation process monitored; are there controls?

completeness and accuracy

external reporting discipline

external audit ‘ready’ ; level of testing performed

• Is proper communication and reporting to executive level in place?

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Do you believe sustainability represents a material business riskfor your organization today?

Skeptical Curious Convinced

If you are skeptical – whatwould you need to believe

to become curious orconvinced?


convinced?

If you are curious – whatare you interested in and

how could you beconvinced?

If you are convinced – whataction would you like to see

your organization take?

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Thank you

Liz LoganPartner, Sustainable Business SolutionsLos Angeles, CA(213) 830-8271Email: [email protected]

© 2013 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers toPricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, thePricewaterhouseCoopers global network or other member firms of the network, each of which is a separateand independent legal entity. This document is for general information purposes only, and should not be usedas a substitute for consultation with professional advisors.

Marie-France HacheManager, Sustainable Business SolutionsLos Angeles, CA(213) 217-3679Email: [email protected]

mailto:[email protected]

mailto:[email protected]

Documents

IIA Los Angeles Chapter PwC... · Internal audit is teaming up with other departments to lead the implementation of a conflict minerals program, ensuring that the program will meet