Will Markets Force Stricter Environmental Disclosure?

International investor confidence has been shaken by allegations of massive corporate accounting and disclosure irregularities and recent high-profile bankruptcies. The response has been swift and punishing. Doubts about the accuracy of a company’s disclosure now inflict instant pain in terms of a stock’s value in the markets. The public and Congress are pressing the Securities and Exchange Commission (SEC) to tighten rules and get tough on non-compliance. The Financial Accounting Standards Board is working feverishly to soften the blow to its constituency.

We may soon see a secondary wave of investor scrutiny concerning companies’ disclosure of environmental liabilities (please see related article and survey on page 12). Fiduciaries of institutional investment funds and major foundations, such as the Rockefeller Family Fund, are already calling on the SEC to close reporting loopholes and tighten enforcement of existing reporting requirements. They contend, based on a 1998 EPA study, that too many companies are under-reporting material environmental liabilities and risks, thus exposing and misleading unknowing investors. Are the financial markets about to force stricter environmental disclosure?

Current corporate reporting of environmental risks and liabilities is driven by several mechanisms, including SEC rules, insurance coverage stipulations, and various voluntary reporting initiatives. Critics argue that the system needs reform, while investor pressure on the SEC may result in substantially tightened disclosure requirements and enforcement. Furthermore, markets may increasingly reward or penalize companies on the basis of environmental disclosure practices. Company reputations may ride even more on matters of environmental performance and risk.

In light of these emerging issues, how can a corporate risk manager or vice president of environment best position a company to preserve and enhance shareholder value? The first step is to conduct an internal review of the corporation’s current environmental liability portfolio, which will reveal any material gaps that may exist in areas of liability identification, valuation, or disclosure. If no gaps are found, the risk manager has discharged his duty of care. If previously unknown or inadequately characterized liabilities are identified, they can be properly valued and included in subsequent reports. Requisite assurance systems can be put in place to improve future liability management.

Battelle’s environmental management consultants are experienced in performing liability reviews and financial valuations for mergers and acquisitions, insurance cost recovery efforts, and corporate reporting. They have experience in a broad range of liability matters, including: litigation, site contamination, toxic tort, natural resource damage assessment, climate change, as well as installation and process safety. Our work includes the full range of liabilities: past and current, incurred but not reported (IBNR), contingent and future.

For more information on Battelle’s liability management and reporting capabilities, contact Dr. Bernhard Metzger at (781) 895-4886, metzgerb@battelle.org or Mr. Donald Salmond at (781) 895-1053, salmondd@battelle.org.