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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.

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.

Governance and Public Policy ArticlesThe 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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