Environmental and social transparency under the ... - ClientEarth

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| Environmental and social transparency under the Companies Act 2006 | iExecutive SummaryUK-based companies are required by the Companies Act 2006 to publishannual accounts and reports. The law in this area 1 mainly seeks to keepshareholders informed of the company’s performance that year, mattersthat have had bearing on the company’s performance and position thatyear, and matters that may do in the future. The requirements are alsointended to allow shareholders to see whether company management arelooking after their investment properly, and how they are performing intheir statutory duties.Legal requirements and standards set out the information that companiesmust account and report. These requirements include explicit obligationsfor some types of company to account and report information aboutenvironmental and social issues, policies and impacts, but only wherethey have implications for the company’s business.Environmental and social issues have implications for many companies’businesses, in many different ways. The way that companies approachthem will be fundamental to their long-term business success. TheCompanies Act 2006 established a legal framework for reporting thatrecognised this, but there is currently a lack of detail in the requirements,which undermines the effectiveness of the framework. Specifically, reputation,social licence to operate, regulatory freedom, access to capital andthe risk of litigation can have substantial implications for businesses, andthese success factors can be directly and significantly affected by companyenvironmental and social impacts, interaction and performance.There is a need for the law to explicitly require quoted companies toreport in relation to these intangible assets and risks where relevant,and on the environmental and social issues that may have implicationsfor them. This information is already required by law, but clearer andmore detailed requirements are needed to ensure that company practicereaches the standard envisioned by policy, and that certainty is providedto companies when reporting.Reporting requirements covering these matters are not against the interestsof business – on the contrary, companies that have a grip on the waysin which environmental and social issues interact with their business, and
ii | Environmental and social transparency under the Companies Act 2006| iiiwhich engage with and discuss them effectively, will be the best-placed tosucceed in the future.“[In the next 50 years] successful companies will be those who embedsocial, environmental, and ethical risk management into their corebusiness processes and performance measures.” 2- John Browne, former Director of Reputation Assurance,PricewaterhouseCoopersDirectors need to understand the risks that they are taking and the impactsthey are having on the company’s business, and how to effectively managethose risks and opportunities. Shareholders need to have the opportunityto be accurately and appropriately informed of and engaged with theseissues in order to monitor the directors’ performance and stewardship oftheir investment. Investors need to be aware of the issues that may havebearing on a potential investment, and of the quality of management inplace in the company. The proper recognition and reporting of the waythat these issues interact with business in the long-term will be essentialto ensuring stable and sustainable investor confidence.Company accounts and reports are also subjected to scrutiny from anumber of legal mechanisms established under the Companies Act2006, to ensure that the accounts and reports comply with the relevantrequirements, and meet the needs of their users. The key legal mechanismsare:- External audit carried out by private consultants, in accordance withlegal requirements.- Regulatory oversight by the Financial Reporting Review Panel (FRRP),the independent regulator appointed and mandated by statute to monitorand ensure compliance with legal requirements.- The laying of accounts and reports before the company at its AnnualGeneral Meeting, to be subjected to scrutiny and questioning fromshareholders.Again, although the Companies Act 2006 established the legal framework(the mechanisms exist) there are fundamental weaknesses that need to beaddressed. ClientEarth does not consider that these mechanisms can beeffective or fit for purpose in their current form. Therefore ClientEarthconsiders that reforms are necessary to provide adequate scrutiny to thereporting process.ClientEarth’s proposed measures are entirely consistent with the UKgovernment’s policy on company law, and its ‘light touch’ regulatoryapproach. The proposals strongly support the achievement of the policyobjectives that underpin the Companies Act 2006, as grounded in thefindings and views of the group of highly esteemed experts, practitionersand business people who were given the task of setting the foundations forthe Companies Act 2006, the Company Law Review. Furthermore, theproposals would not impose excessive cost on companies or unnecessarilyinterfere in their operations.ClientEarth’s proposalsClientEarth considers that the legal framework governing companyreporting on environmental and social issues is currently inadequate.There is a need for supplemental regulatory and governance measures, togive clarity as to what companies are legally required to report, to provideeffective safeguards on the exercise of discretion by company directorswhen reporting these matters, and to deliver the objectives of the CompaniesAct 2006.ClientEarth considers that three key actions are required in law and governanceto reinforce and enhance the legal framework established by theCompanies Act 2006:1. Regulations made by the Secretary of State under section 416(4) and468(1) of the Companies Act 2006 to clarify and better articulate theexisting reporting obligations of quoted companies under section417(5) Companies Act 2006, relating to environmental and socialissues. Regulations should include:i. Explicit provisions to give substance to the types of businessfactor that can be affected by environmental and social issues.ii. Explicit provisions to outline the types of environmental orsocial issue that can be particularly relevant to companies, anda structure as to how they must be reported.iii. General provisions to ensure certainty and consistency in narrativereporting, requiring balanced, reliable and comparableinformation.
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