Are you being honest with your investors?

Are you being honest with your investors? There are a host of pitfalls facing companies that are reporting on the impacts of climate change and energy transition on their business, and failing to do so can open these companies and their investors to losses. Are you at risk?

This was the theme of a presentation by Alice Garton, company and financial project leader at law firm ClientEarth, at the Financial Times Climate Finance Summit in London’s West End on Tuesday. Firms are obliged to report honestly on potential liabilities for investors, but the potential financial impacts of climate change and energy transition are an area where many can fall short, either intentionally or unintentionally. So, do any of these apply to your firm?

Garton said widespread discussion in society about the impacts of climate change said there was no excuse for firms to not review their risks, and put them in three categories: failing to mitigate the impacts of climate change, where possible; failing to adapt in situations where mitigation is impossible; and failing to report honestly to investors on these risks.

She started by talking about that last group, which focuses on the inconsistencies between what management knows about risks facing their firms and what they report to investors. Typically, these risks would fall into the following categories:

Failing to report known risks: Firms are responsible for giving investors an accurate view of the current risks facing their business, but some will be tempted to hide or downplay issues that could damage their share prices. This could open them up to liabilities.

ClientEarth last year accused oil exploration companies Cairn Energy and Soco International of failing to tell investors enough about the risks that climate change poses to their business models. Both companies denied the accusations, and have since improved their reporting.

Misrepresenting the future: This is where companies give investors an unrealistic view of how their market will develop, and therefore understate the risks caused by climate change. In the last week, for example, ClientEarth has warned that BP and Glencore are exposed to lawsuits from investors because of forecasts about the future of fossil fuels that it said are too optimistic, and are at odds with their rivals and independent industry analysts.

The firms have said their predictions tally with their long-term projections: for example, BP said it based its forecast on lower take-up of electric vehicles than its rivals in the industry.

Cheating industry standards: Firms that give a misleading picture that they are complying with industry standards risk major legal and financial repercussions if they are found out to be falling short of those standards, as with the Volkswagen emissions scandal from 2015.

Garton said these companies might be the exceptions – the “black swans” – but also warned that she expected similar legal claims, which could mean major financial liabilities for those firms. An overly bullish forecast on fossil fuels now could lead to a big legal battle later.

It is not easy to accurately predict the shape of the global energy market, and we should not automatically assume any firm making a prediction that differs from the consensus has got things wrong. Just because most people say something, that doesn’t mean they’re correct. Businesses are fallible, and so are predictions. We – and investors – know and accept that.

But what investors will not accept is being misled, especially if this leads to financial losses. Companies that report on the risks to their business in an open and honest way now help investors to make informed decisions, and saves everyone from legal battles later on.

The Financial Times Climate Finance Summit is part of the FT Clean Energy Week