referral to the frc's conduct committee soco international plc · 8/18/2016 · referral to...

18 August 2016

Referral to the FRC's Conduct Committee SOCO International Plc

SOCO International Plc 18 August 2016

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Contents Executive summary ..................................................................................................................... 3

1 Factual background .......................................................................................................... 4

1.1 ClientEarth ....................................................................................................................... 4

1.2 SOCO International Plc .................................................................................................... 4

1.3 Climate risk ...................................................................................................................... 6

1.3.1 Transition risks ................................................................................................................. 6

1.3.2 Physical risks.................................................................................................................... 9

1.4 Overview of SOCO's 2015 strategic report ..................................................................... 10

2 The relevant law ............................................................................................................. 11

2.1 Law governing the strategic report .................................................................................. 11

2.2 Other related legal duties ............................................................................................... 12

2.2.1 S172 Duty to promote the success of the company ........................................................ 12

2.2.2 S174 Duty to exercise reasonable care and skill ............................................................ 13

3 SOCO's failure to comply with the law ............................................................................ 14

3.1 Overview of relevant legal breaches ............................................................................... 14

3.2 Breach 1 - Failure to provide a fair review of the company's business ............................ 14

3.2.1 The legal test - 'fair review' ............................................................................................. 14

3.2.2 The legal test - materiality .............................................................................................. 15

3.2.3 Application of the legal test to SOCO's strategic report................................................... 15

3.3 Breach 2 - Failure to describe principal risks and uncertainties facing the company ....... 22

4 Request to the FRC ........................................................................................................ 24


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Executive summary

This complaint relates to the Annual Report and Accounts 2015 of SOCO International Plc (SOCO) and, in particular to its Strategic Report contained within that report.

ClientEarth submits that SOCO has failed to comply with its legal obligations under section 414C of the Companies Act 2006 (CA 2006) by failing to make adequate disclosures about climate change, and the risks its presents to SOCO business model, in its 2015 Strategic Report.

In particular, by failing to make adequate disclosures in relation to the risks associated with climate change, SOCO's Strategic Report fails to provide:

'a fair review of the company's business', as required by S414C(2)(a) CA 2006 and does not contain a proper account of 'the main trends and factors likely to affect the future development, performance and position of the company's business', as required by S414C(7)(a) CA 2006; and/or

a proper 'description of the principal risks and uncertainties facing the company', as required by S414C(2)(b) CA 2006.

As a leading international oil and gas exploration and production company, SOCO's business is materially exposed to the risks associated with climate change (climate risk). These include:

Transition risks i.e. the business and financial risks associated with the adjustment of the world economy from high carbon intensity to much lower carbon intensity over the coming years; and

Physical risks i.e. the risk of the physical impacts of climate change (extreme weather, sea level rises, water scarcity) damaging the economic value in the business.

Climate risk could expose SOCO to increased operating costs, increased capital costs, the potential for assets (e.g. exploration licences, oil and gas reserves, or infrastructure required to develop those reserves) to become 'stranded'1, reputational damage and/or a reduced market valuation. The global energy transition could also present opportunities for SOCO.

ClientEarth submits that climate change is therefore a "main trend or factor likely to affect the future development, performance and position of the company's business" and a "principal risk and uncertainty facing the company" and should be properly reported as such in the Strategic Report.

We urge the Conduct Committee of the FRC to investigate and take appropriate action in relation to this matter. It is of utmost importance that the Strategic Report contains accurate and appropriate information, in accordance with the legal requirements of S414C CA 2006, to enable investors to make appropriate and informed decisions on investments and stewardship.

1 See footnote 14 below for an explanation of 'stranded assets.'


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References in the footnotes in bold and square brackets are to the bundle of supporting evidence provided with the complaint in the form: [Folder #/Tab #]

1 Factual background

1.1 ClientEarth

1. ClientEarth is a company limited by guarantee, registered in England and Wales, company number 02863827, registered charity number 1053988, registered office 10 Queen Street Place, London EC4R 1BE (ClientEarth also has a registered branch in Belgium, N° d'enterprise 0894.251.512, and with a registered foundation in Poland, Fundacja ClientEarth Poland, KRS 0000364218). ClientEarth is an environmental law NGO, using the law as a tool to address major environmental issues, including climate change.

1.2 SOCO International Plc

2. SOCO International Plc (SOCO) is a public limited company with company number 3300821, listed on the London Stock Exchange, carrying out international oil and gas exploration and production business.

3. SOCO has a registered office at 48 Dover Street, London W1S 4FF and is listed on the Main Market of the London Stock Exchange (admitted to trading on 29 May 1997).2

4. SOCO is an upstream oil and gas company with activities directed towards the search, evaluation and development of new oil and gas resources. SOCO's stated strategy is to enter into oil and gas exploration projects in the early stages of the upstream project cycle - this is usually prior to any exploration activity having taken place and may (or may not, depending on progress achieved) lead to actual hydrocarbon extraction activities taking place. SOCO is not involved in oil refining or processing.3

5. SOCO's main countries of operations are Vietnam, the Republic of Congo and Angola.

6. SOCO’s business model means development and production interests can be held jointly with third parties, and indeed these interests can be operated by a third party. For example, SOCO has shared interests in sites in Vietnam which are operated by a third party, whereas it has shared interests in Africa which are operated by SOCO itself. 4

7. The market capitalisation of the London listed element of SOCO is £499 million (as at 4 August 2016)5 and there are numerous institutional shareholders with holdings in SOCO.6

2 See summary of information for SOCO International Plc on London Stock Exchange website [Online] Available at:

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB00B572ZV91GBGBXSSMM.html

[Accessed 4 August 2016]. [Folder 1/Tab 1] 3 See SOCO's response to CDP's Climate Change 2015 Information Request (Question CC0.1). [Folder 1/Tab 2]

4 SOCO International Plc, 2016. Annual Report and Accounts 2015 [Online] Available at: https://www.socointernational.com/reports-accounts [Accessed

16 May 2016] pp.2-3. [Folder 1/Tab 3] 5 See summary of information for SOCO International Plc on London Stock Exchange website [Online] Available at:

http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB00B572ZV91GBGBXSSMM.html

[Accessed 4 August 2016]. [Folder 1/Tab 1]

https://www.socointernational.com/reports-accounts


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8. SOCO's board of directors consists of three executive directors and nine non-executive directors.

9. The executive directors are:

a. President and Chief Executive Officer - Ed Story. Mr Story was one of the founding directors of SOCO and has over 45 years in the oil and gas industry, beginning with Exxon Corporation where he held various positions. Mr Story was a non-executive director of Cairn Energy PLC until 2008.

b. Deputy Chief Executive Officer and Chief Financial Officer - Roger Cagle. Mr Cagle was one of the founding directors of SOCO and has over 40 years of experience in the oil and gas industry including succeeding positions of responsibility with Exxon Corporation and senior management roles with The Superior Oil Company.

c. Vice President and Company Secretary - Cynthia Cagle. Ms Cagle was one of the founding executives of SOCO and has over 35 years experience in the oil and gas industry. Prior to SOCO, Ms Cagle had senior accounting positions at Snyder Oil Corporation's international subsidiary, Conquest Exploration Company and The Superior Oil Company.

10. The non-executive directors are:

a. Rui de Sousa. Mr de Sousa is the Non-Executive Chairman. He was appointed to the board in July 1999.

b. Rob Gray. Mr Gray was appointed to the board in December 2013.

c. Oliver Barbaroux. Mr Barbaroux was appointed to the board in July 1999.

d. Robert Cathery. Mr Cathery was appointed to the board in June 2001.

e. Ettore Contini. Mr Contini was appointed to the board in December 2001.

f. Marianne Daryabegui. Ms Daryabegui was appointed to the board in October 2013.

g. Antonio Monteiro. Mr Monteiro was appointed to the board in June 2009.

h. John Norton. Mr Norton was appointed to the board in April 1997.

i. Mike Watts. Mr Watts was appointed to the board in August 2009.

11. Short profiles for each of the directors can be seen at pp.34-35 of SOCO's Annual Report

and Accounts 2015.7

6 See summary of market data for SOCO International Plc on Financial Times website [Online] Available at:

http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=SIA:LSE [Accessed 4 August 2016]. [Folder 1/Tab 4] 7 SOCO International Plc, 2016. pp.34-35. [Folder 1/Tab 3]

http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=SIA:LSE


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12. The board of the directors typically has four scheduled meeting a year and holds additional

meetings as necessary.8

1.3 Climate risk

13. As an international oil and gas exploration and production business, SOCO's business is materially exposed to the risks associated with climate change. In the context of SOCO's business, these risks can primarily be divided into two categories:

a. Transition risks; and

b. Physical risks.

14. We address each of these below.

1.3.1 Transition risks

15. Climate change and greenhouse gas (GHG) emissions have been on the global political agenda for increased regulation for many years. In November 1990 the Intergovernmental Panel on Climate Change (IPCC) released its first assessment report stating that 'emissions resulting from human activities are substantially increasing the atmospheric concentrations of greenhouse gases'.9 This led to calls for a global treaty to curb GHG emissions in order to limit global temperature rises.

16. Since then, world leaders have participated in the United Nations Framework Convention on Climate Change (UNFCC) process, meeting regularly to agree a series of protocols, commitments and agreements with a view to reducing global GHG emissions. For example, in the 2010 Cancun Agreement, 193 nations agreed a goal of keeping global average temperature rises below 2ºC above pre-industrial levels.

17. This is not a new process - it has been ongoing for over 20 years - and oil and gas companies will have been monitoring the potential implications of the outcomes of this process for many years.

18. Whilst this global process has been ongoing, many countries and regions around the world have already moved ahead and started to put in place their own policies, laws and regulations aimed at reducing GHG emissions.

19. This includes the key regions in which SOCO operates. For example:

a. In 2014, the European Union agreed a 2030 Climate and Energy Policy Framework which endorsed a binding emissions reduction target of 40% below 1990 levels by 203010;

8 SOCO International Plc, 2016. p.45. [Folder 1/Tab 3]

9 Intergovernmental Panel on Climate Change, 1990. Climate Change The IPCC Scientific Assessment. [Online] Available at:

https://www.ipcc.ch/ipccreports/far/wg_I/ipcc_far_wg_I_full_report.pdf [Accessed 10 August 2016] p.xi. [Folder 1/Tab 5] 10

European Council, 2014. 2030 Climate and Energy Policy Framework. [Online] Available at:

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/145397.pdf [Accessed 10 August 2016]. [Folder 1/Tab 6]

https://www.ipcc.ch/ipccreports/far/wg_I/ipcc_far_wg_I_full_report.pdf

http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/145397.pdf


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b. In Vietnam, the Prime Minister approved the National Strategy on Climate Change in 2011, which sets out specific objectives including the development of a low-carbon economy, improved public awareness of climate-friendly ways of living and enhancing international co-operation. To implement this strategy, the National Action Plan on Climate Change Period 2012–2020 was issued in 2012. The Action Plan sets out its objectives and lists 65 programmes, projects and proposals, together with the timeline and the agencies responsible for their implementation. One of the tasks is to determine the grounds for the development of a law on climate change11;

c. In the UK, the Climate Change Act 2008 sets a legally binding target for reducing UK GHG emissions to 80% below 1990 levels by 2050 – a level based upon an assessment of the UK’s pro rata share of emissions reductions necessary to limit warming to 2ºC;

d. In 2014 both the United States and China pledged GHG emissions reductions. The United States announced an economy-wide target of reducing its emissions by 26%-28% below its 2005 level in 2025, while China targeted a peaking of emissions in 2030 and an increase in non-fossil fuel use in primary energy consumption to 20% by 2030.

20. This continuing upwards trend in GHG emissions regulation around the world, combined with the rise of the use renewable energy sources, has significant implications for oil and gas companies like SOCO. The process of oil and gas extraction involves the emission of substantial quantities of GHGs (meaning that carbon taxes etc. will hit operating costs). At the same time, the products they sell emit substantial quantities of GHGs (so GHG emissions regulation will impact demand for those products).

21. Increased regulation of GHG emissions combined with increased competition from renewable energy sources is set to reduce the demand for those products over time. Research undertaken by HSBC indicates that this reduced demand will lead to lower commodity prices12 which will in turn impact fossil fuel companies’ cash flows and margins, and jeopardise returns on high cost projects.

22. The business and financial risks associated with this adjustment of the world economy from high carbon intensity to much lower carbon intensity are referred to as the 'transition risks'13 of climate change. For SOCO, these transition risks are likely to result in:

a. increased operating costs;

b. increased cost of capital;

c. the potential for assets (e.g. exploration licences, oil and gas reserves or infrastructure and equipment required to develop these oil and gas reserves), particularly assets associated with higher cost projects, to become 'stranded'14; and

11

Grantham Research Institute on Climate Change and the Environment, 2015. The Global Climate Legislation Study - Vietnam [Online] Available at:

http://www.lse.ac.uk/GranthamInstitute/legislation/countries/vietnam/ [Accessed 12 August 2016]. [Folder 1/Tab 7] 12

Spedding et al., 2013. Oil and carbon revisited: Value at risk from ‘unburnable’ reserves. [Folder 1/Tab 8] 13

Transitional risks also include reputational risks. As investors, NGOs and the general public become increasingly concerned about both the financial

risks and moral implications associated with climate change, oil and gas companies may experience reduced demand for their products or stocks.


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d. a reduced market valuation.

23. The global energy transition could also present opportunities if SOCO's directors take early action to address climate risks, providing them with both a competitive advantage in the changing market and enhancing their reputation amongst stakeholders (including investors, and the wider community).

24. In their 'World Energy Outlook' the International Energy Agency sets out a range of projections for the global energy system, known as 'scenarios'. The following graph15

illustrates the significant drop in oil and gas use that is required to reach the '450 Scenario'. The 450 Scenario is often used as shorthand for a ‘2°C scenario’. It sets out an energy pathway consistent with a 50% probability of limiting the global increase in temperature to 2ºC (by limiting the concentration of GHGs in the atmosphere to around 450 parts per million of CO2e):

25. According to analysis undertaken by the NGO Carbon Tracker, to have an 80% chance of limiting warming to 2ºC (i.e. to have an 80% chance of achieving the 450 Scenario shown in the graph above), 80% of existing fossil fuel reserves must remain unused.16

26. Similarly, a recent study from University College, concluded that, to have a 50% chance of limiting warming to 2ºC, one third of oil reserves, half of gas reserves, and over 80% of coal reserves should remain unused.17

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"Stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations, or conversion to liabilities and they can

be caused by a variety of risks. Increasingly risk factors related to the environment are stranding assets and this trend is accelerating, potentially

representing a discontinuity able to profoundly alter asset values across a wide range of sectors." (Smith School of Enterprise and the Environment,

2016. What are Stranded Assets? [Online] Available at: http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/background.php

[Accessed 25 May 2016]). [Folder 1/Tab 9] 15

International Energy Agency, 2014. World Energy Investment Outlook. p.85. [Folder 1/Tab 10] 16

Carbon Tracker, 2011. Unburnable Carbon - Are the world’s financial markets carrying a carbon bubble? [Online] Available at:

http://www.carbontracker.org/wp-content/uploads/2014/09/Unburnable-Carbon-Full-rev2-1.pdf [Accessed 22 December 2015], p.6. Carbon Tracker’s

carbon budget was grounded in peer-reviewed scientific literature on emissions and warming pathways. See Meinhausen et al., 2009. “Greenhouse-

gas emission targets for limiting global warming to 2°C” Nature, 458, 1158-1162. [Folder 1/Tab 11] 17

McGlade, C., Ekins, P., 2015. “The geographical distribution of fossil fuels unused when limiting global warming to 2ºC” Nature, 517, 187-190.

[Folder 1/Tab 12]

http://www.smithschool.ox.ac.uk/research-programmes/stranded-assets/background.php

http://www.carbontracker.org/wp-content/uploads/2014/09/Unburnable-Carbon-Full-rev2-1.pdf


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27. According to a recent report by Barclays, the 450 Scenario means that both investment in, and revenues from, the oil, gas and coal industries are at risk. Under the 450 Scenario Barclays estimates $22 trillion of lost revenues from lower sales of oil over 2015 - 40.18 Other research indicates the total value at risk for some oil and gas companies individually could be 40-60% of company market capitalisation in a 2ºC scenario.19 Further, research by Citibank estimates that the value of unburnable reserves could amount to $100 trillion by 2050.20

28. These are obviously very serious predictions for the oil and gas industry and those who invest in it. However, what's more, even the 450/2 ºC Scenario is now considered to be too generous in terms of the level of GHG emissions it allows for. In December 2015, 195 nations came together in Paris to agree a universal goal on climate change. In that agreement, those 195 nations agreed to work together to limit global average temperature increase to 'well below 2ºC' above preindustrial temperatures. The stated aim of the agreement is in fact to keep the increase to 1.5ºC above pre-industrial levels.21

29. The commitment in the Paris Agreement is therefore more ambitious than the previous 2010 Cancun goal of 'below 2ºC' and therefore more ambitious than even the 450 Scenario in the graph above. The Paris Agreement commits all 195 nations to reduce their net GHG emissions to zero sometime between 2050 and 2100.

30. It goes without saying that oil and gas companies should have been (and most likely have been) carefully monitoring these risks for some time now. It is also vitally important that oil and gas companies make adequate disclosure of these risks to their investors so that investors can make informed economic decisions about which companies to invest in, and how best to engage in stewardship with the most at-risk companies, as the landscape in which they operate continues to fundamentally shift.

31. A failure to properly assess, manage and disclose these risks could have very serious consequences for coal, oil and gas companies, their employees (the recent collapses of the world's largest listed coal companies, Peabody Coal and Arch Coal, and the dire consequences for their employee pension funds provide examples of what can happen when things go wrong22) and the investors that invest in them - including many pension funds in the UK and around the world.

1.3.2 Physical risks

32. The second category of climate related risk relevant to SOCO's business is the physical risks associated with climate change. These are 'the physical impacts of climate change and the extent to which these may destroy economic value'23 including for example:

a. Extreme weather events that could damage oil and gas exploration or installations24;

18

Barclays, 2015. Climate Change: Warming up for COP-21. p.8. [Folder 1/Tab 13] 19

Spedding et al., 2013. Oil and carbon revisited: Value at risk from ‘unburnable’ reserves. [Folder 1/Tab 8] 20

Citi, 2015. Energy Darwinism II Why a Low Carbon Future Doesn't Have to Cost the Earth [Online] Available at:

https://ir.citi.com/hsq32Jl1m4aIzicMqH8sBkPnbsqfnwy4Jgb1J2kIPYWIw5eM8yD3FY9VbGpK%2Baax [Accessed 10 August 2016] p.82 and p.86.

[Folder 1/Tab 14] 21

Article 2, Paragraph 1(a), Paris Agreement. [Folder 2/Tab 15] 22

Miller, John, 2016. Peabody Energy Files for Chapter 11Bankruptcy Protection. [Online] Available at: http://www.wsj.com/articles/peabody-energy-

files-for-chapter-11-protection-from-creditors-1460533760 [Accessed 11 August 2016] [Folder 2/Tab 16] 23

2 degrees investing initiative, [Undated] Reviewing the Evidence: 10 Questions for the FSB Climate Disclosure Task force. p.3. [Folder 2/Tab 17]

https://ir.citi.com/hsq32Jl1m4aIzicMqH8sBkPnbsqfnwy4Jgb1J2kIPYWIw5eM8yD3FY9VbGpK%2Baax


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b. Extreme weather that could disrupt operations and supply chains;

c. Sea level rises that could impact coastal infrastructure25; and

d. Water scarcity that could impact exploration activities and power generation.26

33. These risks could expose SOCO to, for example:

a. increased operational costs;

b. increase employees and/or sub-contractors exposure to health and safety risks;

c. disruption to sourcing of raw materials, supply chain and logistics (e.g. supply of water, energy and materials, resilience on vulnerable transport networks); and

d. reduced stock market valuation.

34. Given the exposed physical environments that oil and gas companies, and SOCO in

particular, operate in, these risks also need to be properly assessed, managed and disclosed

to investors where appropriate.

1.4 Overview of SOCO's 2015 strategic report

35. This complaint relates to SOCO's 2015 Strategic Report (the Strategic Report).

36. The Strategic Report is contained within SOCO's Annual Report and Accounts 2015 (the Annual Report).27 The Annual Report covers the financial year ending 31 December 2015.

37. The Strategic Report was signed on behalf of the directors by Company Secretary Cynthia Cagle on 16 March 2016.28

38. Other than the mandatory disclosure of GHG emissions for which the company is responsible, the Annual Report (including the Strategic Report) does not mention the term "climate change" (or anything similar) at all. The Annual Report makes no reference at all to the company facing any risks associated with climate change.

24

International Energy Agency, 2013. Redrawing the Energy-Climate Map. World Energy Outlook Special Report. [Online] Available at:

http://www.iea.org/publications/freepublications/publication/weo_special_report_2013_redrawing_the_energy_climate_map.pdf [Accessed 8 August

2016] [Folder 2/Tab 18] 25

International Energy Agency, 2013. Redrawing the Energy-Climate Map. World Energy Outlook Special Report. [Folder 2/Tab 18] 26

International Energy Agency, 2013. Redrawing the Energy-Climate Map. World Energy Outlook Special Report. [Folder 2/Tab 18] 27

SOCO International Plc, 2016. [Folder 1/Tab 3] 28

SOCO International Plc, 2016 p.33 [Folder 1/Tab 3]

http://www.iea.org/publications/freepublications/publication/weo_special_report_2013_redrawing_the_energy_climate_map.pdf


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2 The relevant law

39. The law relevant to this complaint is set out in the Companies Act 2006 (CA 2006), and primarily in S414C CA 2006.

2.1 Law governing the strategic report

40. Under S414A(1) CA 2006 the directors of SOCO are required to prepare a strategic report for each financial year of the company.

41. S414C CA 2006 sets out the law on the contents of the strategic report:

"414C Contents of strategic report

(1) The purpose of the strategic report is to inform members of the company and help them assess how the directors have performed their duty under s 172 (duty to promote the success of the company).

(2) The strategic report must contain -

(a) a fair review of the company's business, and

(b) a description of the principal risks and uncertainties facing the company.

(3) The review required is a balanced and comprehensive analysis of -

(a) the development and performance of the company's business during the financial year, and

(b) the position of the company's business at the end of that year,

consistent with the size and complexity of the business.

…

(7) In the case of a quoted company the strategic report must, to the extent necessary for an understanding of the development, performance or position of the company's business, include -

(a) the main trends and factors likely to affect the future development, performance and position of the company's business, …

…

(8) In the case of a quoted company the strategic report must include -

(a) a description of the company's strategy,


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(b) a description of the company's business model,

(c) …

42. SOCO is a 'quoted company' for the purpose of these provisions.29

43. In 2014, the FRC published non-mandatory Guidance on the strategic report (the FRC Guidance). Relevant extracts from the FRC Guidance are included where appropriate below.30

44. Under S414D CA 2006, the strategic report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.

2.2 Other related legal duties

2.2.1 S172 Duty to promote the success of the company

45. The reference in S414C(1) above to the purpose of the strategic report being to help members assess how the directors have performed their duty under S172, is a reference to S172 CA 2006, which provides:

"172 Duty to promote the success of the company

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole, and in doing to have regard (amongst other matters) to -

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,

(c) the need to foster the company's business relationships with suppliers, customers and others,

(d) the impact of the company's operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company."

46. As this is the purpose of the strategic report, S172 CA 2006 needs to be kept in mind when determining whether the Strategic Report complies with the relevant legal requirements.

29

S385 CA 2006 [Folder 2/Tab 19] 30

A copy of the FRC's Guidance on the Strategic Report can be seen at [Folder 2/Tab 33]


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2.2.2 S174 Duty to exercise reasonable care and skill

47. Also relevant is S174 CA 2006. This requires the directors of a company to 'exercise reasonable care, skill and diligence' when performing their duties. Accordingly, a director must exercise reasonable care, skill and diligence when approving the strategic report.

48. The standard of care to be exercised under S174 CA 2006 is:

"… the care, skill and diligence that would be exercised by a reasonably diligent person with -

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b) the general knowledge, skill and experience that the director has."31

49. As part of this duty, the directors of a company are required to proactively monitor risks to the business. In Secretary of State for Trade and Industry v Baker (no 5) (Re Barings) [1999] 1 BCLC 433 the Court stated (at 489) that:

'(i) Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them to discharge their duties as directors.

(ii) Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.

(iii) No rule of universal application can be formulated as to the duty referred to in (ii) above. The extent of the duty, and the question whether it has been discharged, must depend on the facts of each particular case, including the director's role in the management of the company.'

31

S174(2) CA 2006 [Folder 2/Tab 20]


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3 SOCO's failure to comply with the law

3.1 Overview of relevant legal breaches

50. By failing to make any disclosures about climate change (other than the mandatory GHG emissions reporting) and/or its associated risks, the Strategic Report fails to meet SOCO's mandatory reporting obligations under CA 2006.

51. In particular, the Strategic Report does not contain:

a. Breach 1: 'a fair review of the company's business', as required by S414C(2)(a) CA 2006 and does not contain a proper account of 'the main trends and factors likely to affect the future development, performance and position of the company's business', as required by S414C(7)(a) CA 2006; and

b. Breach 2: a proper 'description of the principal risks and uncertainties facing the company', as required by S414C(2)(b) CA 2006.

52. We provide full particulars of each of these breaches of the law in the following sections.

3.2 Breach 1 - Failure to provide a fair review of the company's business

3.2.1 The legal test - 'fair review'

53. Under S414C(2)(a) CA 2006, the Strategic Report must contain 'a fair review of the company's business'.

54. S414C(3) CA 2006 expands on this by providing that:

"(3) The review required is a balanced and comprehensive analysis of -

(a) the development and performance of the company's business during the financial year, and

(b) the position of the company's business at the end of the year,

consistent with the size and complexity of the business."

55. S414C(7) CA 2006 expands on this further in the case of 'a quoted company' (which SOCO is):

"(7) In the case of a quoted company the strategic report must, to the extent necessary for an understanding of the development, performance or position of the company's business, include -

(a) the main trends and factors likely to affect the future development, performance and position of the company's business, …"


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56. The FRC Guidance explains that:

"7.18 Trends and factors affecting the business may arise either as a result of the external environment in which the entity operates or from internal sources. They may have affected the development, performance or position of the entity in the year under review, or may give rise to opportunities or risks that may affect the entity's future prospects.

7.19 The strategic report … should … cover … significant features of its external environment (e.g. the legal regulatory, macro-economic and social environment) and how those influence the business.

…

7.21 Where practicable and relevant, the trend or factor should be quantified and the course of the evidence underpinning it identified."

3.2.2 The legal test - materiality

57. To meet its legal obligations, SOCO must disclose information 'to the extent necessary for an understanding of the development, performance or position of the company's business' (S414C(7)(a) CA 2006).

58. The FRC Guidance explains that 'where information is required 'to the extent necessary for an understanding', it should be included in the strategic report when it is material to shareholders' (Para.5.6).

59. The FRC Guidance also explains that 'information is material if its omission or misrepresentation could influence the economic decisions shareholders take on the basis of the annual report as a whole' (Para.5.1).

60. The FRC Guidance goes on to state that "materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the actual or potential effect of the matter to which the information relates … It requires directors to apply judgment based on their assessment of the relative importance of the matter to the entity's development, performance, position or future prospects. … Materiality in the context of the strategic report will depend on the nature of the matter and magnitude of its effect, judged in the particular circumstances of the case" (Para.5.3-5.4).

61. The FRC Guidance also provides guidance on the relevant time horizons for considering whether an issue is material: in terms of time horizons 'where relevant to an understanding of the development, performance, position or future prospects of the entity, ‘the strategic report should give due regard to the short-, medium- and long-term implications of the fact or circumstance being described’ (Para.6.12).

3.2.3 Application of the legal test to SOCO's strategic report

62. It is apparent from the above that the decision as to how much information to put in the Strategic Report in relation to climate change and its associated risks is a decision that the directors must exercise their judgment on, based on:


16

a. the likelihood of climate risks having an impact of the future of the business (i.e. whether it is a trend or factor likely to affect the business), in the short-, medium- and long-term;

b. the nature or magnitude (or both) of the actual or potential effect of the risks and whether it omission or misrepresentation could influence the economic decisions of shareholders (i.e. its materiality);

c. in good faith, having regard to (amongst other things) the desirability of the company maintaining a reputation for high standards of business conduct and the need to act fairly as between members of the company (i.e. S172 CA 2006); and/or

d. exercising reasonable care and skill (i.e. S174 CA 2006).

63. We submit that in failing to include any information in the Strategic Report on climate change (other than the mandatory GHG reporting), the directors of SOCO have failed to meet any or all of these legal tests.

64. In particular, in light of all the publically available information on climate change and its risks, any reasonable director of any UK listed oil and gas exploration company - and certainly a reasonable director standing in the shoes of SOCO's directors - would or should conclude that climate change is a material trend or factor likely to affect the business and should therefore be properly disclosed in the Strategic Report.

65. This is based on a wealth of publically available evidence including:

a. The history and publically available studies that we have referred to in section 1.3 above;

b. The strategic reports and CDP responses of other FTSE oil and gas companies show that climate risk is clearly regarded as a material trend and/or principal risk by the directors of other FTSE oil and gas producers. For example, although no endorsement is made of the adequacy of the disclosures, the following companies do at least refer to climate risks in their annual reports:

i. Royal Dutch Shell (a much larger - FTSE 100 - oil and gas producer than SOCO and therefore expected to report in greater detail than SOCO, but nevertheless facing material risks from climate change) identifies climate change as a "Risk Factor" in its 2015 strategic report, stating:

"Rising climate change concerns have led and could lead to additional legal and/or regulatory measures which could result in project delays or cancellations, a decrease in demand for fossil fuels and additional compliance obligations, and therefore could adversely impact our costs and/or revenue. … There is continued and increased attention to climate change from all sectors of society. This attention has led, and we expect it to continue to lead, to additional regulations designed to reduce greenhouse gas (GHG) emissions and potential demand for fossil fuels. Furthermore, we expect that a growing share of our GHG emissions will be subject to regulation, resulting in increased compliance costs and operation restrictions. If our GHG


17

emissions rise alongside our ambitions to increase the scale our business, our regulatory burden will increase proportionally. …We also expect that GHG regulation will focus more on suppressing demand for fossil fuels. This could result in lower revenue. … If we are unable to find economically viable, as well as publically acceptable, solutions, that reduce our GHG emissions and/or GHG intensity for new and existing projects or products, we could experience additional costs or financial penalties, delayed or cancelled projects, and/or reduced production and reduced demand for hydrocarbons, which could have a material adverse effect on our operational performance, earnings cash flows and financial condition."32

ii. Tullow Oil Plc, a FTSE 250 oil and gas exploration and production company of a similar size and complexity to SOCO, makes the following disclosures in its 2015 Annual Report and Accounts33:

1. 'we now apply notional carbon pricing to test the viability of major capital projects for Full Field Development under a range of scenarios'34;

2. 'it has been suggested that, as governments adopt stricter climate change policies, the majority of coal, oil and gas deposits will remain undeveloped as investments in alternative energy sources grows'35;

3. 'Climate change legislation is going to become an increasingly important factor in determining the price of all fossil fuels'36;

4. 'Tullow recognises the potential risks in light of this issue and the Group will adopt a business strategy that is responsive to legal and regulatory developments designed to address climate change'37;

5. 'Tullow acknowledges the global threat posed by climate change and recognises the need to reduce greenhouse gas (GHG) emissions'38;

6. 'Our activities and products contribute to climate change and we accept our responsibility to comply with emerging climate change legislation and regulation'39;

7. 'We also expect new policies, laws and regulations aimed at reducing emissions of GHGs, and we will adopt a business strategy that responds to these developments'40; and

32

Shell, 2016. Strategic Report (forming part of Annual Report and Form 20-F). [Online] Available at: http://reports.shell.com/annual-

report/2015/servicepages/download-centre.php [Accessed 16 August 2016] pp.9-10. [Folder 2/Tab 37] 33

Tullow Oil Plc, 2016. 2015 Annual Report & Accounts. [Online] Available at: http://www.tullowoil.com/Media/docs/default-source/3_investors/2015-

annual-report/tullow-oil-2015-annual-report-and-accounts.pdf?sfvrsn=2 [Accessed 8 August 2016]. [Folder 2/Tab 21] 34

Tullow Oil Plc, 2016, p.7. [Folder 2/Tab 21] 35

Tullow Oil Plc, 2016. p.11. [Folder 2/Tab 21] 36





Tullow Oil Plc, 2016. p.47. [Folder 2/Tab 21]

http://reports.shell.com/annual-report/2015/servicepages/download-centre.php

http://reports.shell.com/annual-report/2015/servicepages/download-centre.php

http://www.tullowoil.com/Media/docs/default-source/3_investors/2015-annual-report/tullow-oil-2015-annual-report-and-accounts.pdf?sfvrsn=2

http://www.tullowoil.com/Media/docs/default-source/3_investors/2015-annual-report/tullow-oil-2015-annual-report-and-accounts.pdf?sfvrsn=2


18

8. 'Tullow will aim to minimise GHG emissions both in project design and in our operations, and adopt a business strategy that is responsive to legal and regulatory developments designed to address climate change'41.

Tullow Oil's disclosures obviously go far beyond those of SOCO.

iii. Cairn Energy PLC (a company with a similar business model to SOCO) provides a CDP response42 which includes the following assessment of the risks to its business associated with climate change:

Risk category

Risk driver Potential impact Timeframe Likelihood Magnitude of impact

Transition risk

Carbon taxes

Increased operation costs

3-6 years Likely Medium

Transition risk

Uncertainty surrounding new legislation

Increased capital cost (including potential for stranded assets)

3-6 years Very likely High

Transition risk

Cap and trade schemes

Increased operational cost

3-6 years Virtually certain

Medium

Physical risk

Snow and ice


Unknown Virtually certain

Medium

Physical risk

Changes in precipitation extremes and droughts

Challenging working environment/disruptive to activities

3-6 years More likely than not

Medium-high

Transition risk

Reputation (increased pressure from NGOs and investors)

Reduced stock price (market valuation)

Up to 1 year Virtually certain

Medium-high

iv. Whilst the level of reporting required from each of the companies above will of course vary accordingly to the size of the company and the complexity of the business, all of these businesses face material risks from climate change. Whilst the larger companies like Shell might be expected to report on those risks in greater depth than smaller companies like SOCO, SOCO's oil and gas exploration business nevertheless faces risks of a material nature from

41


See Cairn Energy PLC's response to CDP's Climate Change 2015 Information Request (Question CC 5.1a-c) [Folder 2/Tab 38]


19

climate change and those risks should at the very least be acknowledged in the Strategic Report.

c. The response of regulators in other jurisdictions. In 2015, the New York Attorney General entered into an "Assurance of Discontinuance Agreement"43 with Peabody Energy Corporation (a coal company) requiring it make disclosures about the "increased regulation of coal combustion in many jurisdictions, unfavourable lending policies by government-backed lending institutions and development banks towards the financing of new overseas coal-fueled power plants and divestment efforts affecting the investment community, which could significantly affect demand for our products or our securities."

d. In addition, in 2015, 822 investors with over US$95 trillion in assets backed CDP’s 2015 climate change information request, which asks for more detailed disclosure of climate risks. This indicates that investors consider climate change to be a trend or factor likely to affect their investments. For all the reasons we have set out above, oil and gas companies like SOCO operate in one of the industries most exposed to this trend or factor.

e. Further initiatives demonstrating materiality to shareholders include:

i. The Aiming for A investor coalition engages with the ten largest UK-listed extractives and utilities companies on the systemic risks associated with climate change through filing shareholder resolutions and other stewardship initiatives.'44

ii. CDP's Carbon Action investor-led initiative, which represents 304 investors with US$22 trillion in AUM, has called on the world's highest emitting companies to take specific actions in response to climate change.45

iii. The Institutional Investors Group on Climate Change coordinated a letter on behalf of 51 investors representing over 4.4 trillion AUM which asks for companies' positions on climate policy issues in relation to their business strategy.46

iv. The Montréal Carbon Pledge, where investors committed to measure, disclose and reduce the carbon footprint of their investment portfolios.47

v. Ceres' Carbon Asset Risk Initiative which aims to demonstrate how climate risk poses an existential threat to fossil fuel companies' business models and puts trillions of capital expenditure at risk.48

43

Available at: http://ag.ny.gov/pdfs/Peabody-Energy-Assurance-signed.pdf [Folder 2/Tab 22] 44

Helen Wildsmith, 2015. BP and Shell Voting Declarations: an 'Aiming for A' pre-AGM update [Online] Available at https://www.responsible-

investor.com/home/article/helen_wildsmith_bp_and_shell_voting_declaration/s [Accessed 17 March 2016]. [Folder 2/Tab 23] 45

CDP, [Undated] Carbon Action [Online] Available at: https://www.cdp.net/en-US/Programmes/Pages/Initiatives-CDP-Carbon-Action.aspx [Accessed 3

August 2016]. [Folder 2/Tab 24] 46

IIGCC, [Undated] IIGCC Initiative on EU Company Climate Lobbying [Online] Available at http://www.iigcc.org/corporate/programme/iigcc-initiative-

on-eu-company-climate-lobbying#sthash.1oWcaYNE.dpuf [Accessed 3 August 2016]. [Folder 2/Tab 25] 47

See Montréal Carbon Pledge, 2014, Available at http://montrealpledge.org/. [Accessed 3 August 2016] [Folder 2/Tab 26] 48

Ceres, [Undated]. Carbon Asset Risk [Online] Available at http://www.ceres.org/issues/carbon-asset-risk [Accessed 3 August 2016]. [Folder 2/Tab

27]

https://www.responsible-investor.com/home/article/helen_wildsmith_bp_and_shell_voting_declaration/s

https://www.responsible-investor.com/home/article/helen_wildsmith_bp_and_shell_voting_declaration/s

https://www.cdp.net/en-US/Programmes/Pages/Initiatives-CDP-Carbon-Action.aspx

http://www.iigcc.org/corporate/programme/iigcc-initiative-on-eu-company-climate-lobbying#sthash.1oWcaYNE.dpuf

http://www.iigcc.org/corporate/programme/iigcc-initiative-on-eu-company-climate-lobbying#sthash.1oWcaYNE.dpuf

http://montrealpledge.org/

http://www.ceres.org/issues/carbon-asset-risk


20

vi. Ceres' Shareholder Initiative on Climate and Sustainability, which coordinates investors seeking to engage companies on climate, clean energy and related sustainability risk and opportunities.49

f. In addition, it is apparent that CEO's more generally consider climate change to present business risks. For example:

i. the United Nations Global Compact-Accenture CEO Study (the world's largest program of CEO research on sustainability) reveals that 91% of CEOs see climate change as an urgent priority for business. 57% of CEOs believe investment in climate solutions is critical to achieve competitive advantage in their industry (and this figure is 90% in the mining and metals sectors).50

ii. The Caring for Climate initiative (facilitated by UN Global Compact, UNEP and UNFCCC) sees over 400 companies from 60 countries recognise that:

1. 'Climate Change is an issue requiring urgent and extensive action on the part of governments, business and citizens if the risk of serious damage to global prosperity, sustainable development and security is to be avoided'; and

2. 'Climate change poses both risks and opportunities to businesses of all sizes, sectors and regions of the world.'51

iii. PwC's CEO pulse on climate change, which surveyed 142 CEOs across Europe, Latin America, Asia Pacific, Africa, North America and the Middle East in July 2015, revealed that 61% of CEOs are changing how they manage climate change related business risks.52

66. It is not clear whether SOCO's directors have their 'heads in the sand' on this issue, or whether their internal thinking on the issue is more developed than they have reflected in the Annual Report. SOCO's CDP Response includes the following assessment of the risks to its business associated with climate change53:

Risk category

Risk driver Potential impact Timeframe Likelihood Magnitude of impact

Transition risk

Fuel/energy taxes and regulations

Reduced demand for goods/services

Unknown Unknown Unknown

49

See Ceres Shareholder Initiative on Climate & Sustainability. [Online] Available at http://investorsonclimatechange.org/portfolio/ceres-shareholder-

initiative-climate-sustainability/ [Accessed 3 August 2016] [Folder 2/Tab 28] 50

UN Global Contact, Accenture, 2015. The United Nations Global Compact- Accenture CEO Study, Special Edition: A Call to Climate Action [Online]

Available at https://www.accenture.com/t20151111T221550__w__/us-en/_acnmedia/Accenture/Conversion-

Assets/DotCom/Documents/Global/PDF/Strategy_7/Accenture-UNGC-CEO-Study-A-Call-to-Climate-Action.pdf#zoom=50 [Accessed 17 March 2016].

[Folder 2/Tab 29] 51

UN Global Compact, UNEP and UNFCCC, [Undated] Caring for Climate: The Business Leadership Platform. [Online] Available at:

http://caringforclimate.org/ [Accessed 10 August 2016] [Folder 2/Tab 30] 52

PwC, [Undated] CEO pulse on climate change, [Online] Available at: http://download.pwc.com/gx/ceo-pulse/climatechange/index.htm [Accessed 11

August 2016]. [Folder 2/Tab 31] 53

See SOCO's response to CDP's Climate Change 2015 Information Request (Question CC 5.1a-c). [Folder 1/Tab 2]

http://investorsonclimatechange.org/portfolio/ceres-shareholder-initiative-climate-sustainability/

http://investorsonclimatechange.org/portfolio/ceres-shareholder-initiative-climate-sustainability/

https://www.accenture.com/t20151111T221550__w__/us-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Strategy_7/Accenture-UNGC-CEO-Study-A-Call-to-Climate-Action.pdf#zoom=50

https://www.accenture.com/t20151111T221550__w__/us-en/_acnmedia/Accenture/Conversion-Assets/DotCom/Documents/Global/PDF/Strategy_7/Accenture-UNGC-CEO-Study-A-Call-to-Climate-Action.pdf#zoom=50

http://download.pwc.com/gx/ceo-pulse/climatechange/index.htm


21

Transition risk

General environmental regulations, including planning

Increased capital cost


Other: Reputational disadvantage

Unknown

Unknown

Unknown

Unknown

Unknown

About as likely as not

Unknown

Unknown

Unknown

Physical risk

Sea level rise


Reduction/disruption in production capacity

Unknown

Unknown

Unknown

Unknown

Unknown

Unknown

Physical risk

Tropical cyclones (hurricanes and typhoons)


Reduction/disruption in production capacity

Unknown

Unknown

Unknown

Unknown

Unknown

Unknown

Physical risk

Changes in precipitation extremes and droughts



Transition risk

Changing consumer behaviour


>6 years Unknown Unknown

Transition risk

Reputation Other: Reputational disadvantage


67. The CDP Response also states54 that climate change risks are monitored by the board of directors (or an individual/sub-set of the Board or other committee appointed by the board) every 6 months or more frequently, and are considered 3 to 6 years into the future.

68. This suggests that the directors have identified that climate change presents risks to the business but have not engaged in an assessment of the likelihood or potential magnitude of impact of those risks. As we have set out above, directors are required to exercise

54

See SOCO's response to CDP's Climate Change 2015 Information Request (Question CC1 & 2). [Folder 1/Tab 2]


22

reasonable care, skill and diligence when performing their duties - this includes in carrying out risk assessment and management.

69. In our submission, and in light of all of the above, no 'reasonable director' or reasonable board of directors standing in the shoes of the directors of SOCO and exercising reasonable, care, skill and diligence in accordance with S174 CA 2006 would consider that the Strategic Report provides a fair review of the business, or that it properly describes the main trends and factors likely to affect the future development, performance and position of SOCO's business. We submit that a reasonable board of directors of an oil and gas exploration company like SOCO would (i) perform a proper assessment of the risks to the business associated with climate change, and (ii) make at least some disclosure of those risks and/or their potential impact in the Strategic Report.

70. As a consequence of SOCO's lack of disclosure on climate change in the Strategic Report, SOCO's members are not properly informed and are unable to assess how the directors have performed their duty under S172 CA 2006 (duty to promote the success of the company). This means that investors are not provided with material information to enable them to perform their own stewardship role by engaging in appropriate dialogue with the board and they are exposed to the risk of financial loss which they have not been informed of.

3.3 Breach 2 - Failure to describe principal risks and uncertainties facing

the company

71. Under S414C(2)(b) CA 2006, SOCO's Strategic Report must contain "a description of the principal risks and uncertainties facing the company".

72. The FRC Guidance states that "the risks and uncertainties included in the strategic report should be limited to those considered by the entity's management to be material to the development, performance, position or future prospects of the entity. They will generally be the matters that the directors regularly monitor and discuss because of their likelihood, the magnitude of their potential effect on the entity, or a combination of the two" (Para.7.24).

73. As to what is a 'principal' risk, the FRC Guidance states (at Para.5.7) "the terms 'key' … and 'principal' … refer to facts or circumstances that are (or should be) considered material to a shareholder's understanding of the development, performance, position or future prospects of the business".

74. In Stephen Haddrill's (CEO of the FRC) December 2015 letter to Audit Committee Chairmen, he stressed that:

"Companies are required to consider materiality in reporting their 'principal' risks as part of their Strategic Report. We and investors encourage companies to disclose how the risk specifically affects them and the steps they are taking in mitigation.


23

Investors certainly do not seek a long list of all possible risks, however, they have recently expressed surprise that risks relating to data protection in IT systems/cyber risk and risks from climate change are not reported more often as principal risks."55

75. The 'Risk Management Report' section of the Strategic Report (pp.21-23) where the company reports on the principal risks and uncertainties facing the business makes no reference at all to climate change or any of the associated risks that we have described above.

76. We submit that a reasonable director standing in the shoes of the directors of SOCO and exercising the reasonable skill, care and diligence required by S174 CA 2006 would and should regard climate change as a risk that is material to shareholders' understanding of the business and that this should be properly reflected in the Strategic Report as a principal risk or uncertainty facing the company.

77. We refer to the substantial evidence that we have set out at paragraph 65 above. This evidence demonstrates that directors of other (and similar) oil and gas companies, investors, the New York Attorney General and CEOs more widely all consider climate risks to be relevant and/or material to their businesses. Oil and gas companies like SOCO are amongst the companies that are most exposed to the transition risks associated with climate change. We submit that SOCO (and companies like SOCO) should by now be making (at the very least) some reference to climate risk when reporting on their principal risks and uncertainties in their Strategic Reports and that it is a breach of S414C(2)(b) CA 2006 for them to fail to do so.

78. As a consequence, SOCO's members are not properly informed and are unable to assess how the directors have performed their duty under S172 CA 2006 (duty to promote the success of the company). This means that investors are not provided with material information to enable them to perform their own stewardship role by engaging in appropriate dialogue with the board and they are exposed to the risk of financial loss which they have not been informed of.

55

FRC. 2015. Summary of key developments for 2015 annual reports. [Online] Available at: https://www.frc.org.uk/Our-Work/Publications/FRC-

Board/Year-end-advice-to-preparers-larger-listed-compa.pdf [Accessed 8 August 2016]. [Folder 2/Tab 32]

https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Year-end-advice-to-preparers-larger-listed-compa.pdf

https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Year-end-advice-to-preparers-larger-listed-compa.pdf


24

4 Request to the FRC

79. The FRC is the independent regulator responsible for promoting high-quality corporate governance and reporting to foster investment. The FRC has been authorised and appointed to exercise functions with a view to ensuring that company accounts and financial and other reports comply with the law and relevant reporting requirements.

80. It is vitally important that SOCO makes adequate - and legally compliant - disclosures of its exposure to climate risks to its investors in the Strategic Report.

81. Investors need this information to enable them to make informed economic decisions about which companies to invest in, and how best to engage in stewardship with the most at-risk companies.

82. At present, investors and potential investors who have not read SOCO's CDP Response do not have proper or adequate information on SOCO's exposure to climate risks available to them, and are therefore making their investments and stewardship decisions based on inaccurate or incomplete information.

83. A failure by companies to disclose these risks could have serious consequences for investors in the future - these include UK pension funds (and many other pension funds around the world). Climate change is now widely recognised as a serious systemic financial risk56. Proper disclosure of the risk by the most-exposed companies is a key part of ensuring that it can be properly addressed.

84. Given the potentially very serious implications of SOCO's failure to comply with the requirements of CA 2006, we urge the FRC Conduct Committee to open an enquiry and appoint a review group to investigate the matter.

85. Further, if the FRC's Conduct Committee agrees that SOCO is in breach of its legal obligations in failing to properly disclose these risks, we urge the Committee to issue either:

a. a Committee Reference; or

b. a Press Notice.

86. Alternatively, the FRC also has available to it the power to make an application to the court for a declaration that the report does not comply with the requirements of CA 200657 if it considers that action to be appropriate.

87. A failure by the FRC to take steps to publically address this issue and/or a failure to publically communicate its findings to investors (in the ways suggested above), could have significant consequences for investors who invest in SOCO in reliance on the disclosures

56

See e.g. The Bank of England Prudential Regulation Authority, 2015. 'The impact of climate change on the UK insurance sector' [Folder 2/Tab 34]

The World Economic Forum, 2016. The Global Risks Report 2016 [Folder 2/Tab 35] European Systemic Risk Board, 2016. Reports of the Scientific

Committee February 2016 [Folder 2/Tab 36] 57

The FRC's Conduct Committee has been authorised by the Supervision of Accounts and Reports (Prescribed Body) and Companies (Defective

Accounts and Directors' Reports) (Authorised Person) Order 2012/1439, for the purposes of S456 CA 2006, to make an application to court for a

declaration that the strategic report of a company does not comply with the requirements of CA 2006 and for an order requiring the directors of the

company to prepare a revised report.


25

made in its Strategic Report. SOCO's next strategic report is not due to be published until April 2017. In the meantime, it is important to correct the information that in the public domain to ensure that it is accurate and in compliance with the law.

88. Please not hesitate to contact us if we can be of any further assistance in relation to this complaint.


26

David Cooke

Lawyer

030 3050 5932

[email protected]

www.clientearth.org

Alice Garton

Senior Lawyer

030 3050 5937

[email protected]

www.clientearth.org

Elspeth Owens

Barrister

030 3050 5955

[email protected]

www.clientearth.org

ClientEarth is a non-profit environmental law organisation based in London,

Brussels and Warsaw. We are activist lawyers working at the interface of law,

science and policy. Using the power of the law, we develop legal strategies

and tools to address major environmental issues.

ClientEarth is funded by the generous support of philanthropic foundations,

institutional donors and engaged individuals.

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