Reporting on Environmental Risk

When new company regulations become law on 1 April 2006, London stock market listed companies will have to report in detail on their environmental risks. The Operator and Financial Review Regulations will require the directors of all these companies to include their environmental risks, if they believe they have any, in their 2005/06 Annual Reports and Accounts.

Directors must make clear what risks their companies pose to the environment and how they are managing these risks to reduce their impact. They will also have to report on progress made in reducing their impact using specified key performance indicators.

The UK Accounting Standards Board is currently producing a new Financial Reporting Standard that all companies must use to report on their environmental risks. Their auditors will use the same standard to ensure that companies follow the regulations.

Environment Agency research (by Trucost plc) has shown that although 89 per cent of the 550 FTSE all-share companies made environmental disclosures in their Annual Reports and Accounts, the majority currently lack depth, rigour and sufficient detail for shareholders to properly assess environmental risks or opportunities which they currently face. Only 24 per cent made quantitative disclosures.

Our research (by Innovest) on corporate environmental governance and financial performance leaves no doubt that environmental issues do have a material impact on the financial success of stock market listed companies.