UK FRC calls for consideration of climate change risk and importance of stakeholders to value creation

by Carol A Adams

Main points:

  • Acknowledgement that climate change presents risks for companies
  • Recognition that stakeholders are important to the long-term success of a company
  • Support for increasing integration of non-financial information in corporate reporting
  • Agreement on the need for disclosures on how value is created
  • There is a disconnect between academic research and policy development

The UK FRC has recently released new Guidance on the Strategic Report: non-financial reporting (the Guidance) which places increased emphasis on non-financial reporting and broader influences on long term value ‘generation’.

My submission on the draft amendments to the FRC’s Guidance emphasised: 1) the importance of considering risks and opportunities arising from climate change and other sustainable development issues; and 2) the need to recognise the importance of stakeholders in creating value for shareholders. I reviewed the FRC’s responses in its Feedback and Guidance documents.

Climate change risks

With respect to climate change risks “… the FRC believes that ensuring that a business is sustainable over the longer term is important and… encourages companies to consider matters such as climate risk and report when material.” (Feedback, para 32). Section 7A.42 of the revised Guidance sets out the questions Boards should consider with respect to a range of social and environmental issues, including considering whether climate change presents risks for the company.

The FRC chose to highlight in its feedback (para 22) that “some respondents” called on it to “ensure that the Guidance does not drive the strategic report towards becoming an ESG report or a report for other stakeholders”. In the context of under reporting and insufficient consideration of climate related risks (giving rise to the TCFD recommendations) such concerns seem fanciful.

Importance of stakeholders in creating value for shareholders

The FRC Guidance notes: “Stakeholder relationships are often a key source of value that help to ensure that an entity’s success is sustainable over the longer term. It is important that boards identify its key stakeholders and the importance of those stakeholders to the long-term success of the company.” (para 8.16)

Changes to s172 of the Companies Act 2006 applicable to large companies for financial years beginning on or after 1 January 2019 introduces a requirement to report on how directors have had regard to the interests of employees, suppliers, customers and other stakeholders as well as impacts on the community and environment.

Alignment with integrated reporting

The content elements of the UK’s mandatory Strategic Report are closely aligned with those of the International <IR> Framework.  The FRC’s Guidance states that it should provide a “meaningful picture of a company’s business model, strategy, risks, development, performance, position and future prospects including relevant non-financial information”.  This appetite for alignment is reflected in responses to the consultation with 89% of respondents agreeing that disclosures on how value is generated (or ‘created’ in <IR> language) would be helpful.

Directors are encouraged to consider wider stakeholder interests in fulfilling their duties under s172 of the Companies Act 2006 which requires them to think about the impact of the company’s operations on the community and environment and consider the long term consequences of their decisions.

Academic involvement

The FRC consultation documents made very limited reference to academic research.  There is a clear need for greater collaboration between academics and policy makers in corporate reporting and governance.  Key to achieving this is a change in the reward system for academics and universities which currently favours research addressed to the academic community.  Only one academic responded to the FRC’s draft Guidance on the Strategic Report: non-financial reporting!

Share this article

Speak Your Mind


Enter your email address to receive the latest posts