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TCFD & Climate Disclosures – ClientEarth Calls for Tougher Laws and Stronger Enforcement

  • United Kingdom
  • Financial services and markets regulation - ESG
  • Financial services disputes and investigations
  • ESG - ESG Climate Litigation

01-03-2021

In November 2020 our briefing on the Financial Reporting Council’s (FRC) “Climate Thematic” report highlighted their conclusion that there was much room for improvement in relation to premium listed companies’ climate disclosures.  ClientEarth, an organisation focused on changing law and policy to combat the climate emergency, have reiterated this message in their recent “Accountability Emergency” report.  The report is indicative of a growing trend to name and shame companies that are perceived to be failing to deliver on ESG commitments.

Having reviewed the annual reports of the FSTE 100 and the largest 150 on the FTSE 250 ClientEarth conclude that only 4% of the companies reviewed made a clear reference to climate change-related factors in their financial accounts.  Auditors also came under the spotlight with a finding that only 4% of audit reports provided a clear explanation as to whether climate change risks had been considered.

ClientEarth welcome the UK Government’s commitment to introduce Task Force on Climate-Related Financial Disclosures (TCFD) aligned reporting and the Financial Conduct Authority’s new rules requiring TCFD disclosures on a “comply or explain” basis for the largest companies.  They are clear that the Government and regulators must go further and call for making TCFD disclosures mandatory “as soon as possible” with explicit requirements for firms to disclose a strategy and associated metrics and science based targets that are aligned to the Paris Agreement goals to achieve “net-zero” global emissions by 2050. 

ClientEarth also call for stronger enforcement to eliminate “greenwash” (the practice of overstating or misrepresenting the green credentials of a company or product).  They call on the FRC and the FCA specifically to properly resource and train enforcement teams to supervise and investigate the adequacy of climate-related disclosures and to “take strong enforcement action” where companies, their directors and auditors fall short.  They also point to investor duties to drive accountability. ClientEarth want to see investors filing and supporting shareholder resolutions at AGMs to demand that companies set and implement a strategy with associated metrics and targets (including interim targets) to achieve net-zero emissions by 2050. They want investors to vote against the reappointment of directors, audit committee chairs and auditors at companies that omit material climate related information.

ClientEarth are no passive observers and the report provides examples of companies who they have reported to the FRC and the FCA for failing, in ClientEarth’s view, to meet obligations to make appropriate climate-related disclosures.  They say that a clear accountability gap is evident from the fact that none of their reports have led to a public finding of non-compliance.

A number of cases studies examining what ClientEarth consider to be good and bad climate-related disclosures in financial and audit reports are discussed in the report which other companies may find helpful in considering their own disclosures, along with the examples provided in the FRC’s report. 

Following on from the ClientEarth report, the Investment Association has indicated that, ahead of this year’s round of AGMs, it will flag where companies in high risk sectors fail to report in accordance with TCFD recommendations.  Amber tops will be issued which will indicate a significant issue for investors to consider in their voting decisions.

Firmswhich do not heed the report’s warnings may not just draw the ire of ClientEarth, but also face action from regulators and their investors.