Environmental and social transparency under the ... - ClientEarth

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46 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 472.2.2 Enhancing shareholder engagement and dialogue“The Government believes that companies work best…where thereis effective communication and engagement between directors andshareholders, and where there are efficient mechanisms for takingdecisions critical to the running of the company ...Shareholders have a key role to play in driving long-term companyperformance and economic prosperity. Informed, engaged shareholders– or those acting on their behalf – are the means by whichthe directors are held to account for business strategy and performance...It is important that shareholders have access to clear and meaningfulinformation to enable them to have a constructive dialogueand increase their engagement with the company in which they holdshares.” 138– Department of Trade and Industry, ‘Company Law Reform’Another central objective of the company law reform agenda that theCompanies Act 2006 sought to bring into effect was the improvement ofdialogue between shareholders and those who carry out the business of acompany. The relevance of this policy objective to reporting requirementsis obvious; company reporting is the primary means of communicationwith shareholders, and the accounts and reports are the primary source ofinformation for shareholders about company activity. Therefore effectiveand adequate reporting is of central importance to the achievement of thispolicy objective.Chapter 3:Environmental and social issues:Business issues3.1 Intangible assets 483.1.1 Reputation3.1.2 Social licence to operate3.1.3 Regulatory freedom3.1.4 Access to capital3.2 Intangible risks 573.2.1 Litigation riskEnvironmental and social issues are also business issues. Business practicesthat interact with a wide range of environmental or social issues canhave significant implications for business. For example, where companieshave negative impacts on local communities and local environments, theyare exposed to business risks in both the long and short term, and limitingtheir ability to capitalise on business opportunities related to environmentaland social issues. This has been widely acknowledged by businesses,governments and civil society alike, and as Chapter 2 demonstrates, is aconcept that is explicitly a part of the policy that underpins UK companylaw.Section 417(5) Companies Act 2006 requires that the directors’ reportmust include information about environmental and social matters so faras they are relevant to an understanding of the development, performanceor position of the company’s business. There are a number of extremelysignificant intangible assets and risks, key to a proper understanding ofthe development, performance or position of the company’s business,which may be directly affected by a company’s environmental or socialimpacts. Environmental or social impacts must therefore be reported byquoted companies under section 417(5) Companies Act 2006 where theycarry implications for these intangible assets and risks.ClientEarth’s proposed Regulations aim to make explicit the key intangibleassets and risks that quoted companies must consider in relation to the
48 | Environmental and social transparency under the Companies Act 2006Chapter 3: Environmental and social issues: Business issues | 49reporting requirements of section 417(5)(b) Companies Act 2006, relatingto environmental and social matters. This chapter identifies these keyintangible assets and risks, and gives examples where appropriate to illustratehow these issues have affected businesses in the past, in the contextof the mining and extractives industries.3.1 Intangible assets“The continuous evolution and enhancement of non-financialcapital is not only a core purpose of business, but a prerequisite toits durability and vitality... the single-minded focus on financialcapital... has diverted attention from other equally – or arguablygreater – sources of wealth creation...” 139– Allen L. White, Co-founder and former CEO,Global Reporting Initiative“Asset structures are changing, and becoming increasingly ‘soft’, inthe sense that a significant proportion of the value, or capacity, of abusiness is to be found in intangibles, rather than in tangible assetssuch as buildings and machinery.” 140– Company Law Review Steering Group, ‘Modern Law for aCompetitive Economy: The Strategic Framework’Definitions of intangible assets (or ‘intangibles’) vary. However, they canusefully be defined as drivers of economic performance, or generators ofcorporate value, which are manageable and often quantifiable, but whichdo not show up on balance sheets or income statements. 141 They are factorswhich have bearing on the business performance and prospects of acompany, but which are non-physical, and rooted in human knowledge orperception.While increasing investment in certain intangibles (e.g. brand, research &development) suggests progress, it is perhaps still fair to argue that “managerslive in a world where intangibles remain under-recognised, undermanagedand under-reported.” 142There are a number of key types of intangible asset (and associated businessrisks and opportunities) which relate to company impacts on theenvironment and people.3.1.1 Reputation“The future will be dominated by competition for public trust.” 143- Darrel Bricker, President and Chief Operating Officer,Ipsos-Reid Public Affairs North AmericaThere are many ways in which reputation may have an impact on a company’sbusiness. For companies whose business is highly dependent ondirect relationships of trust with consumers, company reputation amongstconsumers will often carry massive significance, and may have a directimpact on sales and returns. Mining and other extractive companies areperhaps affected in this way to some extent, but they may often be moreaffected by the impact that serious reputational damage or long-termreputational neglect may have on employee morale and productivity (or‘human capital’). Human capital is a very significant intangible asset, andreputational damage or neglect feeds into the performance of this intangiblein a number of increasingly significant ways:- Low morale in the existing workforce can often result from ethicalscandal or a broadly negative societal reputation (few people will feelproud or motivated to work for a company with a bad reputation). Thiscan have substantial impacts on employee productivity and loyalty.- Poor company reputation can affect recruitment. The best and brightestemployees are increasingly opting to work for companies whichthey feel proud to be a part of; in the career choices of the most capableyoung people, company reputation (relating to matters from internalculture to external environmental impacts) has increasing weightagainst any slim financial advantages that can be offered against competitors.A study by the organisation Net Impact of 2100 MBA 144 studentsfound that more than half said they would accept a lower salaryto work for a socially responsible company. 145 Thus a company withpoor reputation in any given sector may well lose out in the bid for thebest new workers, while one with a positive reputation may win in thatbid. The quality of individual that a company is able to recruit andretain will be a strongly determinant factor in the company’s successin the long term, especially in industries which will rely heavily oninnovative practices and technology to sustain their market positionor advantage.
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