Climate disclosure failures reported to regulator

23rd August 2016

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Rebecca Bomers

Environmental lawyers have alleged that two oil and gas companies have breached mandatory reporting rules and have filed an official complaint with the Financial Reporting Council (FRC).

ClientEarth has written to the FRC requesting it takes action against SOCO International and Cairn Energy for what they claim is defective reporting. It says both companies failed to make adequate reference to climate-related risks to their business in their annual reports.

The complaints focus on the strategic report element of the firms’ annual reports, which ClientEarth says breach legal obligations under section 414C of the Companies Act 2006 because the disclosures fail to adequately spell out the risks climate change presents to the business models of both companies.

In particular, the lawyers say that the strategic reports fail to comply with the act’s requirement to provide: ‘a fair review of the company’s business’; an account of 'the main trends and factors likely to affect the future development, performance and position of the company's business'; and/or a ‘description of the principal risks and uncertainties facing the company’.

The lawyers argue that as SOCO and Cairns are both leading oil and gas exploration and development companies, they are materially exposed to the risks associated with climate change, including from the global transition from high- to low-carbon intensity energy sources, as well as the physical risks of extreme weather, sea level rise and water scarcity to assets.

They argue that climate risk could expose both firms to: increased operating and capital costs; the potential for assets, such as exploration licences and oil and gas reserves becoming unviable; and reputational damage or reduced market valuation.

ClientEarth also notes that the global energy transition could also bring opportunities for both companies.

Lawyer Alice Garton said: ‘For companies operating in this sector, with business models and strategies which rely on the continued use of hydrocarbons, it is inconceivable that climate risk is not a material and significant factor.

‘Failing to adequately disclose climate risk is failing to mention one of the most important risks facing the company and means the annual report is only telling the positive side of the story.’

Such information is vital to investors, who cannot make fully informed investment decisions without it, she added.

David Cooke, lawyer at ClientEarth, said climate risks were now at the forefront of investors’ minds. ‘We very much hope the FRC will send a strong message to the market that climate risks must be reported in the strategic reporting framework.’

SOCO strongly refuted the allegations, with a spokesperson saying that the firm was confident that its report complied with the act. However, she added that it took allegations of non-compliance seriously and was reviewing ClientEarth’s complaint in detail.

‘After careful consideration by the board, with the guidance and advice of the company’s auditors, and in keeping with its sector peers, the judgment of the directors of SOCO was not to include climate change as a separate risk among the principal risks to the company’s strategy in 2015,’ she said.

The company had listed underlying business risks, uncertainties and trends potentially associated with climate change as principal risks, including environmental impacts, commodity prices and operating costs.

A spokesperson for Cairn Energy said that the company was a member of the FTSE4Good, which means it has been screened for environmental, social and governance criteria.

‘Corporate responsibility is key to our business and we take our commitments to responsible and transparent reporting very seriously and have been recognised for the quality of our work in this area. We continually identify corporate responsibility priorities and our 2015 annual report featured climate change in the comprehensive materiality matrix,’ he said.

The firm’s 2014 annual report was nominated for two financial industry awards, he added.

If the FRC decides to take forward an investigation, it can write to the chairs of both companies asking for more information or details of why they believe there has been no breach. A spokeswoman for the regulator said: ‘This is an iterative process. There may be several exchanges of letters and/or meetings with the company.

‘If little progress is made, then the corporate reporting review committee may propose that a review group of FRRP members be set up to take the case forward,’ she said.

To read the complaint letters in full, click here.


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