Speech by Stephen Haddrill, CEO, FRC at Climate Disclosure Standards Board's 'Comply or Explain' - Review of FTSE 350 companies
29 January 2016
On 28 January, Stephen Haddrill, CEO, Financial Reporting Council, addressed the audience at the Climate Disclosure Standards Board's event on Comply or Explain: Review of FTSE 350 companies. The plain text version of Stephen Haddrill's speech can be found below. Read or download the formatted version (PDF).
Chief Executive, Financial Reporting Council
Climate Disclosure Standards Boards – Comply or Explain: Review of FTSE 350 companies
28 January 2016
Norton Rose Fulbright LLP, 3 More London Riverside, London, SE1 2AQ
Ladies and Gentlemen,
I congratulate the Climate Disclosure Standards Board for its contribution and the quality of its report. I commend the report for its timing; for its practical focus and promotion of best practice; and for the encouragement it gives to regulators to play their part in fostering good environmental reporting and to work together.
Climate change has been on the global agenda for thirty years and has been on the agenda of business for almost as long. For much of that time it was seen as an issue for particular sectors not business as a whole. Suggestions that companies which were not obvious polluters should report on environmental matters were seen as unnecessarily burdensome and adding to the clutter in annual reports. That perspective is changing. Most major companies now recognise that the environment presents risks to and opportunities for their business that they and their investors need to understand. So the willingness to report is growing rapidly and the question is how best to do it. That is why your report is so timely.
In considering what to report it is worth remembering that reporting serves two purposes. It puts information into the capital markets that enables shareholders and lenders to judge performance and so determine how investment should be directed. But it also shapes the debate in the boardroom. That which is reported is discussed.
Our first requirement for corporate reporting is that it should be fair, balanced and understandable. It is not the companies’ job to use its report as a marketing tool but to ensure it paints a picture that balances the good with the less good. This applies as much to environment reporting as any other aspect of the report.
Second the reporting regulations require the company to set out its business model and its strategy for delivering its objectives, the risks to its strategy and how it will mitigate those risks. Our expectation is that the company will show how all the key aspects of its report contribute to its strategy. How do operations, financing, remuneration help build the strategy. But also, in many cases, how does its approach to environment matters contribute to the strategy too.
That brings me to the question of materiality. I was pleased to see that the report recognises that it should be relevant and material to shareholders. It should not be cluttered with environmental information that is not material. In some cases such information is useful and can be reported elsewhere. But in others there may be nothing to be said at all.
Now in the past nothing would be said in those circumstances and that would generally be the end of the matter. That is no longer good enough. Public and investor recognition of the impact of the environment on business and business on the environment is such – and legitimately such – that the directors need to explain why they have concluded that environment matters are not material. The public, including shareholders, want to know that the matter has been properly considered and the reasoning needs to be set out clearly.
There is another respect too in which reporting is evolving. The report and accounts has traditionally been a rear view mirror. That is still largely true of accounting. It should not be, cannot be true of the strategic report. The focus on the business model and good risk reporting necessarily requires the directors to look at what might be. On our last revision of the Code we asked directors to report on longer term viability looking beyond the one year going concern time horizon, and on the threats to such viability. This future focus provides a real stimulus to consideration of the environment. And through its Financial Reporting Lab the FRC will also be focusing on forward looking reporting through projects on best practice in Business Model, viability and risk reporting.
So is there anything in the report to disagree with? Clearly very little. But I would issue a couple of words of caution. First the report calls on regulation to work together more effectively. I cannot disagree with that. However, I think we should avoid standardisation of reporting requirements for a while longer. I think we should encourage innovation and a degree of diversity. Standardistaion helps comparability but it also encourages boiler plate reporting and that undermines the exercise of judgement. Narrative reporting is in transition and at the FRC we are keen within legal requirements to let the best ideas emerge. We have developed the framework of law, codes and standards significantly since the financial crisis. Now we intend to let it settle down and devote our efforts to promoting and celebrating best practice. I profoundly hope that reporting on environmental matters will be at the head of the pack and I can assure you that we will do what we can to help that happen.