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April 08, 2002
Companies Skirt Disclosure of Environmental Liabilities
by William Baue
New study echoes social investors' call for the SEC to strengthen its rules regarding corporate
disclosure of environmental liabilities.
SocialFunds.com --
In a new study to be released next month, the Oakland-based Rose Foundation for Communities and the
Environment spotlights a pervasive corporate practice--the underdisclosure of environmental
liabilities. In the post-Enron landscape, the investment community has grown increasingly aware
that underdisclosure can negatively affect stock value. Last month the Social Investment Forum (SIF) sent a letter to Securities
and Exchange Commission (SEC) Chairman Harvey Pitt asking for companies to be held accountable for
not fully revealing their environmental liabilities. The Rose report offers readily available
industry guidelines that the SEC could adopt to increase environmental disclosure.
"Environmental factors do create real liabilities, and they do make a real incursion on
value--certainly on the negative side. Disasters really do cost you money," said Calvert
Group Director of Social Research Julie Gorte. "There are legitimate reasons why investors should
be concerned about environmental disclosure. This may sound funny, but thank God Enron at least
brought this whole matter of disclosure to the public's attention."
The primary fault with current disclosure
practices, said Dr. Gorte, is that companies do not aggregate their environmental liabilities.
This analysis concurs with the findings of the Rose report.
"Companies have enough
latitude to keep an awful lot of environmental liabilities off their 10-K," explained Dr. Gorte.
"For example, they'll look at SuperFund liabilities one by one rather than in the aggregate, and
decide that, since no single SuperFund site comes up to the minimal level of reporting, even if the
entire liability is ten times greater than the minimum level, that they don't have to report any of
that."
(A 10-K is a form all publicly traded companies must file with the SEC on an annual
basis. The 10-K contains a comprehensive review of the company for the past year and includes
detailed financial data that is often not included in the company's annual report.)
The
Rose report, entitled "The Environmental Fiduciary: The Case for Incorporating Environmental
Factors into Investment Management Policies," cites an Environmental Protection Agency (EPA) study
that concluded that the majority of companies were not complying with SEC rules on disclosure. The
1998 EPA study revealed that 74 percent of companies failed to meet SEC disclosure requirements
regarding environmental liabilities that exceed $100,000.
"You can give people a little
leeway for error, but when three-quarters of the companies that have fines and sanctions over
$100,000 are not disclosing them, then the problem is systemic," said Rose Foundation Executive
Director Tim Little.
In October 2001, the EPA's Office of Regulatory Enforcement released
an Enforcement Alert summarizing SEC disclosure requirements. However, this alert may be viewed
as having little backing: only once in the past 25 years has the SEC taken action to enforce the
disclosure of environmental liabilities. Although the SEC has clear authority, it lacks the
resources necessary to enforce its regulations effectively.
"Nobody's funding the police,
and they're driving cop cars from the 1950s," said Susannah Blake Goodman, author of the Rose
report, metaphorically characterizing the SEC's regulatory dilemma.
The Bush
Administration recently budgeted the SEC for "zero growth" in staffing, despite Chairman Pitt's
testimony before the Senate that the commission is under siege with regulatory action in the wake
of Enron. President Bush has also announced a ten-point plan to enhance corporate responsibility
that included being "mindful of the environment."
The Social Investment Forum cited this
phrase in appealing to Chairman Pitt to convene a roundtable discussion on environmental and social
disclosure. Recently, the SEC has hosted numerous roundtables on topics inspired by Enron, such as
financial disclosure and auditor oversight. The SIF letter specifically asks the SEC to consider
environmental liabilities in aggregate, as the Rose report suggests.
The Rose report
concludes with a set of suggested action steps. Most importantly, the foundation recommends that
the SEC adopt disclosure guidelines similar to those developed by the American Society for Testing
and Materials (ASTM). ASTM guidelines require that companies to aggregate environmental
liabilities.
"These guidelines don't come from some bureaucrat at the EPA, they're not
some government prosecutor's dream--these come from industry," said Mr. Little. "The standards are
just voluntary right now, but if the SEC could meet tomorrow and say, 'Let's adopt these into
regulation,' then we'd get much clearer environmental disclosure."
©
SRI World Group, Inc. All Rights Reserved.
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