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GAO Identifies Financial Downside of Underreporting Environmental Risks
Greenbiz.com Aug. 18, 2004
Source WRI Features

WASHINGTON, Aug. 17, 2004 - While companies are required to disclose all information considered important or "material" to investors in their annual reports to the U.S. Securities and Exchange Commission (SEC), there is currently no standard for reporting environmental risks. Yet, environmental liabilities ranging from hazardous waste contamination to greenhouse gas emissions, can pose significant financial burdens to corporations.

A recent report by the U.S. Government Accountability Office (GAO), "Environmental Disclosure: SEC Should Explore Ways to Improve Tracking and Transparency of Information," identified this inconsistency and has led to federal action to improve the tracking and transparency of corporate environmental costs. As a result of the report, the SEC has agreed to work more closely with the U.S. Environmental Protection Agency (EPA) to systematically track problems involving corporate environmental disclosure, which had only warranted infrequent attention in the past.

Senators Joseph Lieberman, Jon Corzine, and Jim Jeffords requested the report from the GAO in the light of the broad securities reforms now underway in the federal government. The survey claimed that it is difficult to determine the exact extent to which companies are divulging (or suppressing) their environmental liabilities because of the current flexibility in the disclosure requirements.

World Resource Institute analyses and experts served as critical references for the GAO report. WRI studies -- including "Coming Clean: Corporate Disclosure of Financially Significant Environmental Risks" and "Changing Oil: Emerging Environmental Risks and Shareholder Value in the Oil and Gas Industry" -- represented three of the 15 surveys used by the GAO in reaching their conclusion. WRI economists Duncan Austin and Robert Repetto were two of the 30 authorities consulted by the GAO study.

In WRI's report "Coming Clean," which was cited by the GAO, economists Duncan Austin and Robert Repetto clearly define the issue. "Unless financial market valuations of risk and return accurately reflect the financial risks that companies incur through their environmental management decisions," the authors write, "investors will be endangered and an important market incentive for prudent environmental management will be lacking." Companies surveyed by the GAO believe the scope of the existing requirements and guidance is sufficiently well-defined and claim they need flexibility to accommodate their individual circumstances. However, investors and environmentalists disagreed, saying that the flexible definition allows companies to evade disclosure of some potentially important risks.

"Moving the SEC and Wall Street to pay attention to these issues is like scaling huge mountains," says Elizabeth Cook, director of WRI's Sustainable Enterprise Program. "After more five years of WRI effort, we are finally at base camp. The federal government and investors are starting to take the financial impact of corporate environmental performance seriously, but there is still a challenging climb ahead."

Take the case of the auto industry. A 2003 WRI report, "Changing Drivers: The Impact of Climate Change on Competitiveness and Value Creation in the Automotive Industry," revealed that U.S. automakers are poorly positioned, in relation to companies like Honda and Toyota, to adapt their cars to forthcoming emissions regulations designed to tackle global warming. In a July 25, 2004 New York Times article about the report, Merrill Lynch analyst John A. Casesa warned of risks to companies like Ford and General Motors.

"As a U.S. auto analyst," Casesa said, "I'm very concerned about the risk side of the equation. For the domestic auto companies, we've had an accommodating energy policy, but there are new issues like climate change ... which [could] lead back to higher fuel-economy standards."

The oil industry presents another example. In 2002, Austin and WRI staff economist Amanda Sauer, wrote in "Changing Oil" that none of the 16 leading oil companies studied attempted to quantify the financial implications of the environmental impacts and resulting government regulations in their annual SEC filings.

"The EPA has been sitting on valuable reporting data for years, and if this government report will encourage the SEC to use the available data to improve environmental disclosure, then we are certainly taking a step in the right direction," said Sauer. "More needs to be done, however, to better define vague terms such as 'material' and to establish strong common standards by which companies should disclose their environmental liabilities."

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