Reporting watchdog lacks bite, say campaigners

The Financial Reporting Review Panel’s investigation into reporting failures at Rio Tinto shows the watchdog is too secretive and consensual, says campaign group Client Earth

Campaigners have criticised the corporate reporting watchdog, the Financial Reporting Review Panel (FRRP), for its investigation of failures by Rio Tinto to fully disclose information about its environmental impacts. They also raise concerns that the government is preparing to weaken reporting requirements.

In March, the FRRP published the results of its investigation into complaints by lawyers Client Earth that Rio Tinto had breached reporting requirements in the Companies Act 2006.1 In a brief statement it concluded that, as a result of discussions, the company has agreed to include more information in its 2010 report.

The act requires companies to publish a review of their social and environmental impacts in annual financial reports. The purpose is to inform investors how companies are managing the regulatory and reputational risks on their financial performance.

The law requires the review to be fair, balanced and comprehensive. The FRRP, part of the Financial Reporting Council, is the regulatory body set up to enforce the requirements.

Client Earth says the way in which the FRRP conducts its investigations and publicises the results is inadequate. Discussions and correspondence between the FRRP and companies are private and it does not publish any detailed reports on its findings.

In 2009/10, the FRRP reviewed 308 sets of accounts and wrote letters to 146 companies that it believes did not comply with the act’s requirements. But the identity of the companies and the results of discussions is confidential.

The FRRP only publishes statements on cases where a company has accepted there were shortcomings in its reports which it has agreed to redress. In 2009/10 the panel published just three statements.

Ben Bundock, Client Earth legal adviser, said: “The closed-door and consensual manner of this investigation and its conclusion don’t provide any clarity as to what this law means for all UK companies. It fails to send a strong message to other companies that to comply with the law they must report about their environmental and social impacts with detailed and balanced information.”

A spokeswoman said its investigations were subject to confidentiality due to “commercial and market sensitivities” associated with its enquiries.

However, other regulators such as the Health and Safety Executive publish detailed investigation reports into incidents such as the Buncefield disaster (ENDS Report, March 2011).

In March’s Budget, the government announced it is to simplify corporate reporting requirements in order to reduce the burden on business. The decision backtracks on the government’s previous commitment to improve corporate transparency and accountability (ENDS Report, September 2010).

Client Earth says the social and environmental review requirements in the Companies Act need to be strengthened, not weakened. For instance, it would like the regulations to specify the types of impacts companies should report, and to require companies to use quantitative performance indicators to measure them.

A business department (BIS) spokesperson said: “The current review into narrative reporting aims to drive up the quality of reporting including on social and environmental issues, empower shareholders to act as effective owners in the longer term and to reduce the regulatory burden on business.”

Client Earth’s complaint about Rio Tinto concerned its 2008 annual report.2

In 2008, the Norwegian Sovereign Wealth Fund sold its £500m shareholding in Rio Tinto because of ‘severe environmental damage’ at its Grasberg copper mine in West Papua, Indonesia. Rio Tinto failed to mention the divestment in its report despite its relevance to investors.

Rio Tinto jointly owns the mine with US company Freeport McMoRan. Although Rio Tinto does not manage the operation it has a 40% share of mine production and is represented on the joint venture’s operating committee.

Grasberg’s environmental impacts include water pollution and wildlife damage from mining wastes. But Client Earth says Rio Tinto’s discussion of the pollution did not provide a fair, balanced or comprehensive review as required by the Companies Act.

The 2008 report says only that: “The mine continues to refine its strategic management of its tailings discharge, including understanding revegetation and long term closure options.”

Client Earth says this superficial comment did not provide investors with enough information about the effectiveness of the company’s policies at managing the pollution risks at Grasberg.

Client Earth’s complaint to the FRRP detailed further failings by Rio Tinto to disclose information about social and environmental impacts at three other mines.

In a statement, Rio Tinto said it had agreed with the FRRP to include additional material in its 2010 report. But it added that the additional material had previously been available on its website.

The 2010 report contains greater recognition of the social and environmental issues at Grasberg and mentions the Norwegian divestment. It also discloses that the World Bank Group does not consider that mining waste management at Grasberg meets its environmental guidelines.