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August 21, 2002
SEC Urged to Strengthen Rules Governing Corporate Disclosure of Environmental Risks
by William Baue
The Rose Foundation is petitioning the SEC to require more comprehensive disclosure of
environmental liabilities, allowing investors to assess the potential effect on shareowner value.
SocialFunds.com --
Today, the Rose Foundation for Communities and
the Environment filed a petition with the U.S.
Securities and Exchange Commission (SEC) proposing a new rule to govern corporate disclosure of
environmental liabilities. More than twenty environmental and community foundations representing
over two billion dollars in combined assets signed a supporting letter sent to SEC Chair Harvey
Pitt. In conjunction with these submissions, the Rose Foundation released a report that documents
how corporate environmental liabilities can impair shareowner value.
"Despite the recent accounting reform prompted by
the Enron and WorldCom scandals, American investors are still at risk to lose their hard earned
savings because corporations cook their books by keeping environmental costs off the balance
sheet," said Tim Little, co-founder of the Rose Foundation.
Both the report, entitled
The Environmental Fiduciary: The Case for Incorporating Environmental Factors into Investment
Management Policies, and the petition hinge on two key U.S. government findings.
In
1998, the Environmental Protection Agency (EPA)
Office of Enforcement and Compliance Assurance completed a study that reported significant
underdisclosure of corporate environmental liabilities. The study was entitled Guidance on
Distributing the Notice of SEC Registrants' Duty to Disclose Environmental Legal Proceedings in EPA
Enforcement Actions. Among other findings, it revealed that 74 percent of companies failed to
comply with SEC regulations governing the disclosure of environmentally related legal proceedings
that could result in sanctions exceeding $100,000.
"This is a flagrant violation of the
law and clearly leaves investors at a distinct disadvantage because they cannot otherwise fully
assess a corporation's assets and liabilities," Mr. Little and co-authors Susannah Blake Goodman
and Jonas Kron state in The Environmental Fiduciary.
The SEC had "no comment" on
the EPA findings, according to SEC spokesperson John Heine.
The second key finding was in
a 1993 General Accounting Office (GAO) study that
discovered very low levels of insurance company disclosure of Superfund toxic cleanup liabilities.
The report, entitled Environmental Liability: Property and Casualty Insurer Disclosure of
Environmental Liabilities, reviewed 16 insurance company annual reports. In 1990, five
insurance companies stated that they were involved in potentially costly environmental claims that
could have negative financial impacts on their bottom lines, but only two of these companies
disclosed the dollar amounts of these claims. In 1991, eight companies admitted such environmental
claims, but only three disclosed dollar amounts in their annual reports.
 The insurance companies claimed in the GAO report that
the lack of guidelines and rules for estimating potential costs of environmental liabilities
prevented them from disclosing this information. The insurance industry responded to the report by
contracting the American Society for Testing and Materials (ASTM) to develop a set of guidelines
for environmental disclosure. After a seven-year, full-consensus process based on industry input,
the ASTM proposed a protocol for disclosing environmental liabilities. The Rose Foundation
proposes employing the ASTM's guidelines as the template for a new SEC rule governing disclosure of
environmental liabilities.
The petition received substantial institutional support, as
more than 20 environmental and community foundations signed the supporting letter sent to SEC Chair
Harvey Pitt.
"Corporations oftentimes have real environmental liabilities that translate
into both harm to the environment and harm to shareholder value," said Lee Wasserman, director of
the Rockefeller Family Fund, a signatory of
the letter to SEC Chair Harvey Pitt. "By requiring corporations to disclose potential liability,
shareholders will get a better idea of how such activity could influence the likely direction of
their holdings. We think this is critical to make corporations more accountable for their
actions."
The SEC will respond to the petition after reviewing it, according to Mr. Heine.
In addition to documenting corporate underdisclosure of environmental liabilities,
The Environmental Fiduciary also presents substantial evidence of a positive correlation
between financial performance and environmental performance. Mr. Little stresses the importance of
this correlation to institutional investors.
"Prudent fiduciaries, responsible for
millions of dollars of shareholder money, need to take affirmative steps to reduce environmental
risk and unlock environmental value," said Mr. Little. "They should not only insist that their
portfolio companies disclose environmental risks and liabilities, they can proactively engage with
the companies they own to encourage strong environmental performance."
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SRI World Group, Inc. All Rights Reserved.
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