Investor Briefing
Complaints filed against SOCO International PLC and Cairn Energy PLC
ClientEarth has submitted regulatory complaints to the FRC alleging that two oil and gas companies have failed to disclose climate-related risks to investors
ClientEarth has requested intervention by the Financial Reporting Council (FRC) in relation Investors support improved climate risk to what we say is inadequate disclosure in disclosures company annual reports of climate-related risks. Investors are increasingly requesting additional disclosures of climate-related risks. The complaints were made against SOCO Initiatives include: International PLC (SOCO) and Cairn Energy PLC (Cairn), both upstream oil and gas supporting shareholder resolutions at BP, exploration companies listed on the Main Shell, Glencore, Anglo American and Rio Market of the London Stock Exchange. Tinto; Other than the mandatory disclosure of backing CDP’s enhanced information greenhouse gas emissions for which each request (822 investors with over USD95 company is responsible: trillion); and joining investor coalitions relating to climate SOCO makes no mention of climate- change issues and engaging with related risks facing the company and does companies and sectors (IIGCC, Montreal not even mention the term climate change Carbon Pledge etc.). (or anything similar); and Investors are demanding more regulatory Cairn identifies climate change (as oversight opposed to climate related risk) as an issue in its corporate responsibility materiality In August 2016, 130 investors with more than matrix, but does not adequately disclose USD13 trillion in combined assets under the relevance of climate related risk to its management, recommended that G20 leaders business model and strategy.. ‘prioritise rulemaking by national financial regulators to require disclosure of material
climate risks.’1 This briefing outlines: This comes at a time of increasing regulatory the legal requirements for reporting scrutiny in various jurisdictions of corporate climate-related risks; climate risk disclosures illustrated by: the content of the complaints made against the Financial Stability Board establishing a each company; Task Force on Climate-related Financial the companies’ public responses to date; Disclosures; and the New York Attorney General’s 2015 the reasons why the FRC must properly settlement with Peabody Energy oversee reporting of climate-related risks Corporation now requiring improved for the benefit of investors. climate change disclosures after a two year This briefing also suggests questions that investigation into the company; and investors could ask the FRC about its oversight of corporate climate risk disclosures. 1 http://investorsonclimatechange.org/wp- content/uploads/2016/08/FinalWebInvestorG20Letter24Aug1223pm.pdf
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the New York Attorney General’s (and By failing to report on climate-related risks, we others) current investigation of Exxon Mobil consider that the annual reports of both for potentially misleading investors about SOCO and Cairn fail to provide: climate risks to the company. a fair review of the company's business2 The complaints in respect of SOCO and Cairn and a proper account of the main trends are the first submitted to a UK regulator in and factors likely to affect the future respect of specific failures to report climate- development, performance and position of related risks. the company's business3; and/or a proper description of the principal risks Accordingly they represent an opportunity for 4 the FRC to demonstrate a robust approach to and uncertainties facing the company. ensuring adequate corporate climate-related We argue that these reporting failures prevent risk disclosures. shareholders from assessing how the Climate-related risks directors have performed their duty to promote the success of the company.5 Climate change poses clear and material risks to oil and gas exploration and development Cairn’s reporting companies. These include: Cairn’s annual report makes only two brief statements about climate change which both transition risks (i.e. the business and refer to the Paris Agreement and emissions financial risks arising from the transition of management and controls becoming the world economy to a lower carbon increasingly important to any future intensity over the coming years); and production. physical risks (i.e. the risk of the physical impacts of climate change – extreme It is impossible to discern from its annual weather, sea level rise, water scarcity etc. report how important Cairn's directors – damaging the economic value in the consider climate-related risks to be from these business). limited disclosures, or what the impact of these risks will be on the company’s These climate-related risks could expose oil operations and strategy. However, Cairn’s and gas companies to increased operating CDP response shows its directors are costs, increased capital costs, the potential for monitoring these risks and that their thinking stranded assets (e.g. exploration licences, oil is much more developed than the annual and gas reserves or resources or report would suggest. Its CDP response infrastructure required to develop them), states that the directors consider many of the reputational damage and/or reduced market risks from climate change to be ‘likely’, ‘highly valuation. likely’ and ‘virtually certain’ and the magnitude As financial risks to the business, physical of impact of many of those risks to be risks and transition risks must be disclosed so ‘medium’ and ‘high’. that investors can adequately factor these More specifically, the statements in the annual considerations into investment decisions. report: Expected standard of reporting imply the Paris Agreement is the first The annual report should be fair, balanced relevant development in climate change and understandable and provide the policy and legislation, which it is not; information investors need to assess the only relate to one component of climate position and performance, business model risk (regulatory risk) and make no and strategy of a company. The annual report reference to the other physical and is not a marketing tool – the information contained should paint a picture of the company which balances the good with the 2 S414C(2)(a) Companies Act 2006 bad. 3 S414C(7)(a) Companies Act 2006 4 S414C(2)(b) Companies Act 2006 5 S172 Companies Act 2006
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transition risks identified in Cairn’s CDP It’s unclear to what peers SOCO is referring response; and but other companies in the oil and gas imply any impact will be limited to exploration sector – including the comparable operational emissions and do not refer to Tullow Oil Plc - do disclose information on the implications for demand for Cairn’s climate risk (although we do not endorse the products. adequacy of that information). Both statements appear in the corporate Why is this a problem? responsibility section of the annual report. As the critical document explaining a Cairn’s response to ClientEarth’s complaint company’s performance to investors, it is vital states: ‘We continually identify corporate that all relevant information (particularly risks responsibility priorities and our 2015 annual to the business) is described in its annual report featured climate change in the report. comprehensive materiality matrix.’6 Proper reporting is a fundamental As a material financial risk to the business, we precondition to investors exercising their have submitted to the regulator that climate fiduciary duties through well informed and risk should be disclosed in the core business balanced decision-making.8 information and risks sections of the annual report. There is a catalogue of climate-related risks for the oil and gas exploration sector – each of SOCO’s reporting which could have negative impacts on Other than the mandatory disclosure of operational and financial performance. In our greenhouse gas emissions for which the opinion, Cairn and SOCO’s failure to disclose company is responsible, SOCO’s annual to investors relevant climate-related risks report does not mention the term climate does not meet the standard of disclosure change (or anything similar). The annual required by law. This means that investors report makes no reference at all to the cannot fully evaluate the investment case, or company facing any risks associated with the potential of each business to deliver value climate change. over time. In response to ClientEarth’s complaint, SOCO told the Financial Times that its board had What happens now? decided that, in keeping with its sector peers, Following ClientEarth’s complaint, the FRC it would not include climate change as ‘a should carry out a review in accordance with separate risk among the principal risks to the its Operating Procedures. We will be kept company’s strategy in 2015.’7 informed of the outcome of the FRC’s We believe that this is an unsatisfactory decision. response which does not conform to the The FRC can impose sanctions which include current legal requirements. issuing either a Committee Reference or a The information that must be disclosed is Press Notice to publically communicate the judged in terms of its materiality to the outcome of the investigation and the business or its shareholders rather than the corrective action required of the company activities of peer companies. Company following FRC investigation. directors must exercise reasonable care, skill Ultimately the FRC can apply for a court order and diligence in their role and this requires forcing the company to prepare a revised directors to proactively identify and monitor report (and the costs of this can be risks to their own business (not merely by recoverable from the directors personally). reference to sector peers).
6 http://www.ft.com/cms/s/0/6fcf1090-67b7-11e6-a0b1- d87a9fea034f.html#axzz4IoFtikbh 8 Donald MacDonald, 27 April 2016. Letter to Financial Times: 7 http://www.ft.com/cms/s/0/6fcf1090-67b7-11e6-a0b1- ‘Shareholders and public entitled to full disclosure on climate change d87a9fea034f.html#axzz4IoFtikbh issues.’
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The complaints brought by ClientEarth offer a Questions for the FRC timely opportunity for the FRC to send a clear What procedures and initiatives does the FRC message that climate risks must be treated have in place to monitor the adequacy of like any other risk to capital, and properly disclosures around climate-related risks? disclosed. Does the FRC’s monitoring of climate-related Natasha Landell-Mills, Head of Stewardship risks have a sector focus (e.g. oil and gas Sarasin & Partners LLP exploration)? ‘ How does the FRC plan to assimilate the
findings of the Task Force on Climate-related Financial Disclosures into its own monitoring The need for FRC oversight acitivities?
A requirement to disclose material risks to a How does the FRC coordinate with other company’s business exists in most G20 financial regulators in the UK (Prudential jurisdictions. It is clear that for companies in Regulation Authority, Bank of England, certain sectors, compliance with the legal Financial Conduct Authority etc. ) to address requirement to report material risks means the systemic financial risk from climate reporting on climate-related risks. change? It is not possible for investors to monitor the How does the FRC coordinate with other adequacy of the corporate disclosures of national financial and corporate reporting every company in their portfolio. As the regulators? regulator responsible for ensuring that company reports comply with the law and relevant reporting requirements, the FRC shares this burden of oversight. Further information Proper enforcement of statutory reporting ClientEarth is continually monitoring the requirements is a crucial part of investors corporate disclosures of carbon intensive being able to exercise their stewardship companies. Where investors identify reporting responsibilities. Therefore investors should, in failures in their own engagement with their own engagements with the FRC, companies, we encourage you to let us know emphasise the necessity of adequate so that we can assist with addressing these corporate disclosure of climate-related risks, concerns. and the need for the FRC to ensure compliance. They may also wish to support the complaints against SOCO and Cairn. We Alice Garton suggest the following questions for investors Lawyer (Australian qualified) to ask of the FRC. Company and Financial Project Leader e. [email protected] t. +44 (0)303 050 5937
David Cooke Lawyer e. [email protected] t. +44 (0)303 050 5932
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