4 February 2021
Pressure from investors and regulators is mounting on corporations to commit to climate targets and effectively report how climate change will impact their business.
But in a comprehensive review, our lawyers found that the overwhelming majority of the UK’s top listed companies are failing to meaningfully disclose climate-related risks, impacts and financial implications.
Given many companies are increasingly making public ‘net-zero’ commitments, this widespread failure not only highlights possible greenwashing, but also potentially puts some firms in breach of existing UK laws.
Companies are required to report to investors their material risks, impacts and financial position, with climate change being a key factor to be considered, our lawyers say.
With the UK having set a commitment to achieve net-zero greenhouse gas emissions by 2050, investors managing our pensions and savings need a clear picture of how companies are positioned for this transformational change. Therefore, those failing to disclose material information must be held accountable.
ClientEarth lawyers conducted an extensive review of the entire FTSE 100 and the largest 150 companies on the FTSE 250, studied each company’s most recent annual report, and developed a quantitative assessment of how company disclosures match up against existing disclosure requirements.
The path to net-zero creates enormous opportunities for individual businesses and the entire economy, but it also presents significant risks. Worldwide, environmental disasters combined with fast shifting market trends, fuelled by the transition to zero-carbon economies, are exposing companies to climate-related losses and stranded assets.
The world’s biggest investors are therefore demanding that firms provide a detailed picture of how they are positioned to manage these changes, from their business model and strategy to their long-term viability and balance sheet.
The expectation extends to auditors too, with recent guidance clarifying their need to factor climate-related impacts into their own work and reporting. Shareholder pressure is also sending a clear materiality signal, with support rising for resolutions demanding more transparency and better management of climate risk.
And with the UK Government now legally bound to reach net-zero greenhouse emissions by 2050, businesses’ management of material climate risk, for which effective reporting is critical, will be fundamental to establishing economic resilience in the transition.
To close the existing accountability gap for corporate reporting, urgent action is needed, with strong enforcement taken against those that fail to meet existing standards. Our report sets out a series of key recommendations for companies, government and investors, to better manage systemic climate change risks.
Daniel Wiseman is a lawyer in our Climate Finance team. Daniel said: “A handful of firms are doing the right thing, but the vast majority still have their head in the sand.
“Current disclosure practices indicate that many firms appear to be either ignoring or denying the systemic impact climate change and the zero carbon transition will have on their business. Regulators, auditors and investors are letting them get away with it.”
Last year, the Government announced intentions to make recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD) – the global baseline reporting standards – mandatory across the economy by 2025. Initial ‘comply or explain’ requirements take effect for premium listed firms from January.
While this will go some way in providing investors with the level of information necessary for informed decision-making, timely introduction must also be bolstered by requirements for firms to disclose strategies aligned with the Paris Agreement and net-zero goals.
This too should be supported by tough enforcement action for non-compliance in light of the increasing risks of greenwash – simply setting net-zero ambitions is not enough.
“The Financial Reporting Council (FRC) and Financial Conduct Authority (FCA) already have powers to sanction companies and auditors, and require new statements. Strong enforcement action is needed when companies, their directors and auditors omit material climate change-related information in their annual reports,” Daniel added.
The onus is also on investors themselves to drive accountability through their decision-making and stewardship. Shareholder resolutions filed against major companies, including BP, during last year’s AGM season made some progress in bringing pressure to bear, but our findings show clear need for stronger action.
Wiseman said: “If investors are serious about their climate credentials, they need to use their legal powers to vote out directors and auditors where climate change risks are not being properly managed and reported.
“Providing shareholders with a new advisory vote on the adequacy of companies’ climate change strategies and targets would strengthen the tools available to facilitate market-led improvements in accountability.
“However, if businesses, auditors and investors do not take prompt action to properly manage these risks and align their activities with Paris Agreement goals, the UK will fail in its ambition for climate leadership.”
Daniel Wiseman is an Australian-qualified lawyer.