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Financial regulator failures increase investor risk

The Financial Reporting Council’s failure to effectively oversee and enforce climate risk reporting has serious implications for investors, a new briefing from ClientEarth warns.

The investor briefing from the environmental law organisation details the flaws in the regulator’s approach to its corporate reporting complaints last year.

The FRC failed to send a message to the market about the lack of climate risk assessment in the annual reports of Cairn Energy and SOCO International.

ClientEarth senior lawyer Alice Garton said: “By failing to provide clarity on climate risk reporting when presented with the evidence, the FRC has left investors in the dark.

“The regulator plays a central role supporting market confidence but this sort of behaviour undermines that confidence and investors could be forgiven for doubting that annual reports provide a fair review of the companies they are invested in.”

In July 2017 – nearly a year after the complaints were submitted –the FRC finally informed ClientEarth of the outcome of their investigation.

However, the cases were apparently closed without a full review because of the companies’ explanations combined with their proposals for future reporting. As a result, the FRC review of SOCO and Cairn did not take a view regarding a potential breach of reporting requirements by either company.

The closed-door manner of the investigation and the lack of any decision about whether the strategic reports complied with the law, suggest the FRC took an excessively permissive stance.

ClientEarth is also concerned by the FRC’s response to the Phase II consultation of the Task Force on Climate-related Financial Disclosures. This response is at odds with other financial regulators in the UK (e.g. the Bank of England) and elsewhere.

The TCFD recommendations are emerging as the key means by which investors can access information to assess, price and manage climate-related risks. It has been described by the Bank of England Governor Mark Carney as a solution for the market, by the market.

However, the FRC’s public statements on the TCFD recommendations claim that the complexity of the recommendations may impair their usefulness, and downplay the role of regulators in implementing the recommendations.

Alice Garton is an Australian qualified lawyer.

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Aaron Benson