Account Director, Chris Judd, examines the importance of appropriate corporate disclosure.
I read with great interest in the press recently about the legal challenge that has been brought against Soco International and Cairn Energy for their alleged failing to disclose to investors, in an appropriate level of detail, the risks that climate change poses to their businesses. ClientEarth (an environmental law firm) brought their complaint to the Financial Reporting Council, claiming that the disclosure in their annual report failed to address this material physical and financial risk posed.
Now, stakeholder pressure on companies to improve their reporting is not a new concept. A raft of legislation in the UK has come into force in recent years, creating the strategic report for large companies and those listed on the London Stock Exchange’s different markets. Equally, many influential investment funds are applying pressure on large companies to improve the disclosure of the environmental, social and governance (ESG) issues that are of greatest concern to said companies. The oil and gas sector, for example, has been challenged by the “Aiming for A” campaign: a coalition of funds and NGOs seeking greater transparency for carbon emission reporting and long-term business management. This was recently followed, in September 2016, with the BlackRock report on “Adapting portfolios to climate change”, which discusses carbon pricing and preparing investors for higher carbon prices that may impact portfolio performance. Equally, many of the large food retailers and clothing manufacturers have experienced similar pressure to ensure that human rights and resource management are being adequately dealt with and reported upon, particularly given the detrimental effects to brand reputation as a result of negative stories.
However, this recent case is the first legal challenge to be brought against listed companies for insufficient disclosure surrounding climate change risk and is therefore likely to have a reputational impact beyond the investment community.
With this, companies need to work more closely with their corporate advisers and more collegiately, particularly in light of the legal requirements that are in place and now appear to being enforced(!). Companies should look to understand the information requirements of all their stakeholders and particularly those shareholders that are seeking both an ethical as well as a financial return. The integration of ESG issues into management decision making must be improved and must be effectively disclosed across appropriate corporate communications platforms to limit possible future challenges.
That is why good communication is essential. There is growing expectation to articulate company activity beyond “lip-service” statements and, from the ESG perspective, this is certainly more than just the philanthropic activities conducted during the year. Communications, across all platforms and materials, should demonstrate a consistent approach to managing the key themes: that management not only understand how to drive value creation, but also where value can be lost too.
For more information please contact Richard Darby, Partner
020 7466 5000