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FRC under more pressure over climate-related disclosure rules

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A group of environment law campaigners has accused the UK Financial Reporting Council (FRC) of failing to grasp the magnitude of the financial risks investors and businesses face from climate change.

This latest attack on the under-fire audit and financial-reporting watchdog comes in response to the FRC’s submission to a consultation on the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) project.

In its statement, ClientEarth, an EU-based non-governmental organisation, said the FRC’s response to the TCFD recommendations was an indication of the regulator’s attitude to its role in enforcing climate risk reporting rules.

Alice Garton, a lawyer at ClientEarth, said: “The signs coming from the FRC in this response are worrying. They suggest the regulator – when it comes to climate risk – is not effectively ensuring high-quality reporting to foster investment. This is the very purpose of the FRC’s oversight role.

“The FRC’s reluctance to step in and take on its responsibilities leaves an enforcement gap, which will impact negatively on investors. It is not the role of investors to police reporting to the market – that is the regulator’s job.

“The response suggests that, even with these recommendations in place, the FRC will fail to effectively regulate the market when it comes to climate risk disclosure.”

When asked for comment, an FRC spokesperson said: “The FRC supports the publication of the TCFD as a stimulus to develop thinking and practice in this area. We agree that climate change is an area that boards need to consider when identifying the principal risks and uncertainties facing the company, when disclosing information about environmental matters (including the impact of a company’s business on the environment), and when describing the company’s strategy. We also agree that information on climate change is important for investors when making investment decisions and support clear and concise disclosures of climate risk for those entities where the impact is material.”

The charge that the FRC has failed to step in and regulate follows a claim made by Pensions & Investment Research Consultants (PIRC) that the watchdog had failed to compel companies to report on how they have complied with section s172 of the Companies Act 2006.

Section 172 requires company directors to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.

ClientEarth put the issue of s172 under the spotlight last August when it fired off two regulatory complaints to the FRC against UK listed companies SOCO International plc and Cairn Energy plc. The complaints alleged a number of breaches of the duty to report compliance with s172.

Both companies rejected the complaint and told IPE that they believed they were in compliance with requirements of the Companies Act. The FRC has declined to comment, citing confidentiality.

Meanwhile, in its response to the FSB’s climate change task force, the FRC said it welcomed the TCFD initiative.

But it warned: “[W]e are concerned that the size, complexity and detail of the recommendations may impair their usefulness.

“There are risks that, on the one hand, some companies will be dissuaded from engaging because they consider the recommendations to be too onerous or, on the other hand, the recommendations will lead to disproportionate focus on one risk, irrespective of its specific impact on a company or the other potentially more immediate and significant risks it faces.”

The watchdog’s stance on the utility and scope of the disclosure proposals puts it on a potential collision course with the other regulatory bodies around the world.

The Governor of the Bank of England, Mark Carney, recently signalled that investors currently lack the information they need to respond to the challenge of climate change.

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