An environmental think tank and a socially responsible investment firm have joined forces to press corporations on reporting environmental risks. And theyve called on the Securities and Exchange Commission for muscle.
The World Resources Institute and Calvert called on corporate managers recently to fully comply with government requirements on reporting their environmental risks, and asked the SEC to strengthen its enforcement of rules intended to protect investors.
A Calvert spokesperson said the groups actions were promted by findings in two recent WRI reports, Coming Clean: Corporate Disclosure of Financially Significant Environmental Risks, and Pure Profit: The Financial Implications of Environmental Performance.
According to Julie Fox Gorte, Calvert’s senior environmental and technology analyst, few companies do a good job of reporting on environmental liabilities and risks. Gorte said Calverts research shows that companies with significantly different environmental performance and risks often are indistinguishable from each other when evaluated by their annual reports.
This lack of transparency could pose a heightened risk for investors," Gorte said.
WRI developed a rigorous method for assessing a corporation’s environmental risks and tested it on 13 pulp and paper companies. WRI’s research revealed that environmental issues could markedly influence input costs, revenues, asset values, competitive advantage and shareholder values, Gorte said.
At least six of the 13 companies analyzed came up likely to face negative impacts from environmental issues valued at least 5 percent of total shareholder value, while several face negative impacts approaching or exceeding 10 percent.
Yet a review of the 10K, 10Q, and 8K statements filed by the companies in 1998 and 1999 revealed that few companies adequately disclosed these financial risks or potential
competitive impacts arising from their exposures to known environmental uncertainties, Gorte said.
According to the reports co-author, Robert Repetto, although the WRI research examined only pulp and paper companies, this is not the only sector in which company reports are incomplete concerning their environmental exposure.
"Many other business sectors that are materially affected by environmental issues and regulations would typically have similar patterns of environmental exposure and nondisclosure," Repetto said.
This lack of disclosure disregards several SEC rules designed to protect investors. The SEC’s guidelines and rules require companies to report not only information about current conditions affecting the firm, but also any known risks and uncertainties that are likely to have future significant financial effects.
In particular, Item 303 of Regulation S-K requires a Management Discussion and Analysis (MD&A) in which companies are required to disclose known future uncertainties and trends that may materially affect financial performance.
According to the reports, corporations’ lack of disclosure cannot be explained by a lack of relevant information among companies within the industry. Company representatives traditionally participate in identifying important environmental trends affecting the industry and in estimating probable outcomes of those issues.
Despite explicit statements promising vigorous enforcement of disclosure requirements for financially material environmental risks, the SEC’s enforcement efforts in this area have been minimal, Repetto said.
Of more than 5,000 administrative proceedings initiated by the SEC over the last 25 years, only three were brought based upon alleged insufficient disclosure of environmental risks or liabilities. Over the same period, the SEC has brought only one civil action against a company on the grounds of inadequate environmental disclosure, Repetto said.
To remedy this problem, WRI and Calvert recommend several changes:
The SEC should issue guidelines to reinforce and clarify existing rules regarding disclosure of material environmental exposures under Item 303, Regulation S-K, committing to vigorous enforcement of these rules. In addition, the SEC should clarify its guidelines regarding the reporting of uncertain financial risks posed by prospective environmental regulations and liabilities.
Without waiting for SEC action, corporations should begin to disclose more fully their known, financially material environmental risks, as well as other known future trends and uncertainties.
The SEC should honor its previous commitments by bolstering its enforcement resources to ensure that companies fully comply with environmental disclosure requirements.