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.
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."
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
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.
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."
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
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."