Coming Clean: Corporate disclosure of financially significant environmental risks

In Coming Clean: Corporate disclosure of financially significant environmental risks, WRI economists Robert Repetto and Duncan Austin examine the extent to which one group of companies are failing to disclose their exposure to financially material environmental issues. This lack of disclosure runs counter to Securities and Exchange Commission (SEC) rules and prevents investors from accurately valuing these companies.

The report is a follow-up to Pure Profit: The financial implications of environmental performance in which the same authors assessed how pending environmental issues could affect the performance of 13 leading U.S. pulp and paper companies. Their analysis revealed that environmental issues could markedly influence input costs, revenues, asset values, competitive advantage and, hence, shareholder values.

Now, in Coming Clean, Repetto and Austin reviewed the financial statements that these companies filed in 1998 and 1999.

The authors found that although companies differed in the thoroughness of their reporting, few companies adequately disclosed the financial risks or potential competitive impacts arising from their exposures to known environmental uncertainties.

According to the authors, “This lack of disclosure infringes Securities and Exchange Commission (SEC) rules and directly threatens investors in these pulp and paper companies.”

The WRI study raises questions about the state of corporate reporting on environmental risks, and the degree to which the SEC is adequately enforcing rules and guidelines set up to protect investors. To remedy this, the WRI study makes the following recommendations:

• The SEC should issue a general guidance document reinforcing and clarifying existing rules regarding disclosure of material environmental exposures under Item 303, Regulation S-K, and informing registrants that these rules will be enforced. In addition, the SEC should clarify its guidance regarding the reporting of uncertain financial risks posed by prospective environmental regulations and liabilities.

• Without waiting for SEC action, registered companies should begin to disclose more fully their known, financially material environmental risks and uncertainties.

• The SEC should honor its previous commitments by allocating additional enforcement resources specifically to ensure that companies comply adequately with environmental disclosure requirements.