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February 01, 2001
SEC Asked to Enforce Its Environmental Disclosure Rules
by Philip Johansson
Socially responsible financial firm and international think-tank believe shareholders need more
information about their companies' environmental risks.
SocialFunds.com --
Shareholders are being exposed to financial risk from corporate environmental performance, yet
companies inadequately disclose information about that risk. This is the claim being made by The
World Resources Institute (WRI), a Washington, D.C.-based environmental research group, and the
Calvert Group, a Bethesda, Maryland-based socially responsible mutual fund company. The two called
on the U.S. Securities and Exchange Commission (SEC) to clarify and bolster the enforcement of
existing rules, as well as issue disclosure guidelines for companies.
 "Few companies do a good job of reporting on
environmental liabilities and risks," declared Dr. Julie Fox Gorte, Calvert's senior environmental
and technology analyst. "Our research shows that companies with significantly different
environmental performance and risks are often indistinguishable from each other when evaluated by
their annual reports. This lack of transparency could pose a heightened risk for investors," she
added.
WRI's and Calvert's assertions are based on the findings of two reports issued by
WRI: "Pure Profit: The Financial Implications of Environmental Performance," and Coming Clean:
Corporate Disclosure of Financially Significant Environmental Risks." In the studies, WRI applied
its own method for evaluating environmental risks to 13 pulp and paper companies. Co-authors Dr.
Robert Repetto and Duncan Austin concluded that environmental issues had the potential to affect
input costs, revenues, asset values, competitive advantage and shareholder value.
Results
showed that over half of the companies could expect negative financial impacts from environmental
issues. These negative impacts were estimated to be at least 5 percent of total shareholder value.
Some companies faced negative impacts approaching or exceeding 10 percent.
In spite of
these findings, an examination of the 10K, 10Q and 8K reports filed by the companies with the SEC
in 1998 and 1999 showed that few companies sufficiently disclosed these financial risks or
competitive impacts arising from exposure to known environmental uncertainties. The 10K report is
an annual overview of a company's business, the 10Q is a quarterly report containing unaudited
financial statements and a continuing view of the company's financial performance, and the 8K is a
"current" report that includes any material events or changes not yet reported by the company.
These reports are in the public domain and can be viewed at SEC's website or freeedgar.com.
WRI and Calvert contend that the SEC is
not thoroughly enforcing Item 303 of Regulation S-K, which requires companies to disclose any known
risks and uncertainties that are likely to affect future financial performance. They point to the
fact that of the more than 5,000 proceedings initiated by the SEC over the last 25 years, only
three were based on alleged insufficient disclosure of environmental liabilities. During that same
period, the SEC has filed only one civil action against a company on the grounds of inadequate
environmental disclosure.
John Heine, spokesperson for the SEC, said the agency is aware
of the studies, and "we appreciate that interested parties have brought this issue to our
attention." He also said the SEC did not have a formal proposal at this time regarding rulemaking
in this area, and he refused to comment about possible SEC responses.
As a solution, WRI
and Calvert suggest that the SEC issue guidelines to clarify and strengthen the rules regarding
disclosure under Item 303 of Regulation S-K. According to Duncan Austin, this has already been
done for SuperFund-related reporting. WRI and Calvert also are urging the SEC to fulfill previous
commitments to allocate more resources to enforcement, and ensure that companies comply with
environmental disclosure requirements.
The results of the WRI studies indicate that
information affecting financial performance is not being adequately disclosed to shareholders.
Clarifying environmental liability and risk may be a complex task, but it is a task worthy of the
effort. Investors need, and deserve, increased transparency.
http://www.wri.org
http://www.calvert.com
http://www.sec.gov
http://www.sec.gov/edgarhp.htm
http://www.freeedgar.com
©
SRI World Group, Inc. All Rights Reserved.
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