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ClientEarth, PIRC give cautious welcome to s172 proposals

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Campaigners have given a cautious welcome to proposals from the UK’s Financial Reporting Council (FRC) to update its guidance on the contents of a company’s strategic report.

The update follows criticism of the FRC over a perceived failure to reflect existing UK laws in its guidance for non-financial reporting.

Section 172 (s172) of the Companies Act 2006 puts a duty on UK company directors to take decisions that promote the success of the company “for the benefit of its members”.

ClientEarth lawyer Alice Garton said in a statement: “Climate change and the clean energy transition are creating clearly foreseeable risks for many companies.

“If they are material, the law already requires these risks to be reported, but it is good to see the FRC start to catch up and provide some clarity.”

Alan MacDougall, managing director at Pensions & Investment Research Consultants (PIRC), said: “We welcome the revision to the FRC guidance that now corresponds with the position of the law.”

Last year, PIRC accused the FRC of failing to reflect the requirements of the Companies Act in its strategic report guidance.

MacDougall told IPE: “The error seems to have occurred due to the prior guidance transcribing only the short title of the section heading of s172, rather than the full content of the section itself.”

The FRC rejected the claims in a strongly worded rebuttal letter.

The updated guidance from the FRC coincided with the release in July by the European Union of non-binding Guidelines on Non-financial Reporting.

Although the EU directive addresses climate-change disclosure, it is possible for a company to comply with its requirements by complying with a comparable reporting framework.

All UK-incorporated companies are required to prepare a strategic report as part of their annual report unless they are exempt. The report is supposed to contain an overview of the company and explore the principal risks that it faces.

The collapse of BHS and the impact on the firm’s pension scheme has shifted the focus to s172 in recent months. In particular, s172 refers to the duty on directors to have regard to “the interests of the company’s employees”.

In addition, environmental campaigners such as ClientEarth have latched on to s172 as a means of forcing companies to report on climate-change risk.

Last year, ClientEarth lawyers brought two regulatory complaints against Cairn Energy and SOCO International, alleging that the two companies had failed to report adequately on climate-change-related risks in their 2015 strategic reports.

The FRC has refused to disclose its findings on those complaints, citing confidentiality.

The new sections of the draft guidance require businesses to report on the effect of “the risks and opportunities” arising from environmental factors.

The disclosures also require directors to report on the effect of “long-term systemic risks” caused by, for example, climate change or changing technology.

Meanwhile, ClientEarth has also urged the FRC to be more ambitious with the final draft of its new guidance and embrace the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Alice Garton said: “As an industry-led global initiative, which has received widespread support, the TCFD’s work provides an excellent starting point to help companies meet their existing legal duties.”

The FRC, she added, “should be making the most of it”.

Interested parties have until 24 October to comment on the new guidance.

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