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Mandatory environmental reporting could discourage innovation: UK FRC’s Haddrill

Regulatory intervention on environmental reporting matters can wait until the market probes it cannot make satisfactory progress, Stephen Haddrill, CEO of the UK Financial Reporting Council (FRC), said yesterday at an event in London hosted by the Climate Disclosure Standards Board (CDSB).

The CDSB held a panel discussion to launch a study reviewing FTSE 300 constituents' environmental reporting disclosures in annual reports.

Among the panellists was Richard Baker, professor of accounting at Oxford University's Saïd Business School, who said in relation to one of the CDSB's findings that a market solution is unlikely to be sufficient.

"We wouldn't be raising the issue of environmental issues and concerns if markets worked. And markets don't work fully and properly and that's where regulators come into play. So it seems pretty clear that a market solution is not the answer."

The CDSB's study suggests that regulators can enhance environmental disclosures in annual reports by establishing and strengthening "some mandatory requirements".

When Haddrill addressed the audience he said there is very little in the CDSB's study to disagree with, however "when it comes to the role of regulators, one or two words of caution" would be needed.

Haddrill said he was "a little bit nervous" about the assumption that regulators should move before they have had the opportunity to see what the market can deliver.

"I certainly agree that if the market is making no progress, then a regulatory intervention in this area in particular has to be commended."

He said that the standardisation of mandatory requirements, while it may drive improved reporting and comparability, could also discourage innovation and diversity.

Haddrill pointed to the two main purposes that corporate reporting serves. First, inform capital markets and thus direct investment decisions. And second, shape the debate about environmental issues in the boardroom.

In that respect, he said that a regulatory intervention could also "discourage directors in applying their judgement and tackling some of the difficult issues themselves."

He previously commented on the CDSB's report observations about the materiality of environmental information.

Haddrill said such disclosures used to be seen as adding to the clutter and therefore were omitted in annual reports. That trend is changing, he said, yet environmental matters should be relevant and material to shareholders.

"In the past if nothing was said, that was the end of the matter. That's no longer good enough. Directors need to explain why environmental matters are not material and have that discussion in the boardroom. People want to know that the matter has been properly considered."

Lois Guthrie, CDSB founding director, said Haddrill's views on regulatory intervention resonated with many of the people in the audience: "How to strike a balance between standardisation and creating the conditions to allow innovation to flourish."

Non-financial reporting directive
The CDSB study notes that the UK is well-placed to implement the Directive 2014/95/EU on disclosure of non-financial and diversity information, which came into force on 6 December 2014 but granted member states a two-year period to transpose it into national laws.

The CDSB underscored the UK's leadership in non-financial reporting. In 2013 it modified the Companies Act to make mandatory a directors' strategic report comprising a holistic view of non-financial risks, explicitly including greenhouse gas emissions.

The European Commission (EC) issued a public consultation on 15 January to seek views to inform the preparation of non-binding guidance implementing the Directive.

The Directive mandated that a non-financial statement should be included in management reports disclosing information about four topics: environmental matters; social and employee issues; human rights; and anti-corruption and bribery concerns.

The deadline to comment on the EC's consultation is 15 April 2016 and a transposition workshop only for government officials will be held on 1 February.

Approached by The Accountant, the FRC said information about the EC's workshop was not available.

 

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