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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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