Study of FTSE companies shows little environmental accounting
Less than a quarter of FTSE All Share companies bother to make any quantitative environmental disclosures in their annual reports, and only a small proportion of those that do actually link environmental disclosures to financial consequences or future changes in shareholder value.These were some of the results from a study of environmental disclosure within the annual reports and accounts of FTSE All Share companies conducted by Trucost Plc on behalf of the Environment Agency. It was commissioned in order to establish a baseline for environmental reporting prior to the introduction of mandatory operating and financial review (OFR) reporting requirements for company directors in 2005.
The study found that "while the vast majority of companies (89%) discuss some aspect of their interactions with the environment, the majority of these lack depth, rigour and quantification and few could be described as comprehensive, or adequate for shareholders to properly assess environmental risks or opportunities."
A mere 10% of companies in the FTSE All Share use annual reports and accounts to report on waste, water and energy/climate change, and even less provide quantitative information, it found.
The report's authors say these low results are particularly surprising given that the Defra environmental reporting guidelines recommend all companies report on these issues as a minimum.
Howard Pearce, Head of Environmental Finance at the Environment Agency, said: "The Environment Agency believes that companies interactions with the environment are of significant financial importance and environmental disclosures need to be clear, consistent, comparable and compulsory, as they are for financial information. Without this, customers, shareholders and potential investors cannot truly assess their environmental and financial results. We commissioned this study to establish current environmental disclosure levels and we intend to repeat the study in 2006."
Simon Thomas, Chairman of Trucost Plc, said that, from discussion with the financial community, he believed fund managers and investors would like to reward good environmental performance from companies but they simply didn't have the data available. "This is what good reporting, OFR and projects like this can provide," he said.
"There is overall very little consistency in the type or quality of information disclosed, and guidelines with relevant key performance indicators are needed if the OFR objective of producing consistent, comparable and relevant environmental disclosure is to be achieved."
Speaking at the presentation of the report in the heart of the London's financial district, Mr Thomas said that the lack of reporting on climate change issues was "simply staggering".
"We have mandatory emissions trading system starting next year and yet there's virtually no reporting by those affected," he said.
Even worse, Mr Thomas felt, was the lack of data concerning water use, one of the key performance indicators of the study. This data is easy to collect as water is metered for most businesses yet is not presented in a way shareholders can use.
He used the speech to address claims by the CBI last week that regulation is costing industry £4 billion a year (see related story) and that inspections and assessments by the Environment Agency cost money.
"The costs of the these site inspections would be worth something to the company if they could prove to their shareholders that they had taken place. If the costs are as material as the CBI implies then why don't companies report on them?"
Barbara Young, Chief Executive of the Environment Agency told the audience the results were very disappointing. She said: "We're not asking companies to hug bunnies or wear sandals," but simply to make better use of existing reporting systems.
Ms Young said it was particularly disturbing that very few companies tell investors about the economic significance of the various operating licences they hold from the Agency. "We can take them away if they are breached. Shareholders need to know the risks, need to understand about licences and see if companies have a system in place to manage their licence activities and the risks it may pose."
She highlighted the reporting practice of six companies - Scottish Power, BAA, Slough Estates, BP, ICI, and Kelda - as good examples for the rest of the financial community.
Ms Young added that she had many concerns with the draft OFR proposals, saying that the discretionary aspects meant it was hard to get a standard baseline on resource use and environmental impact.
In addition, the draft proposals only affect about 1,200 companies listed on the London stock exchange. This leaves large numbers of companies, such as those on the alternative investment market and privately owned companies, exempt from the rulings. All small to medium sized enterprises (SMEs), which make up 99% of all companies and are responsible for 80% of all pollution, are also outside the proposed legislation.
"Lets get a minimum standardised form of reporting on a basic list of priorities," Ms Young urged. "All companies have to know that disclosure is an opportunity, not a threat."
By David Hopkins