Lippman doesn’t see a difference between general liability disclosures that require a “fair representation” of a risk and environmental disclosures. “The fact that a risk affects the environment does not mean that the impact is less real,” he says.
AEP’s Buonaiuto also favors a straightforward approach to disclosures. The finance executive says that claiming that information is too abundant or complicated to present to investors is no reason to omit information from filings. “It’s incumbent upon the corporation to find a way to disclose complex information in a meaningful way,” contends Buonaiuto.
At the same time, Buonaiuto doesn’t think the FASB or SEC rules need clarification. Rather, he thinks companies can bridge the disclosure gap by thoroughly grasping their own environmental liabilities, then judiciously applying the appropriate accounting rules.
McGladrey & Pullen’s Hanson says the challenge is to strike a balance in the 10-K between too much and too little information about a company’s pollution exposures. He explains that if financial statements are weighted down with frivolous information, the document becomes incomprehensible and irrelevant. Yet if you ask a user of financial statements what they would want to give up, “they invariably say, nothing.”
Hanson, however, shuns the notion of bright-line environmental accounting rules. He likes to cite advice given to him by SEC staffers: a two-page, forthright, numerically uncluttered explanation of a complex issue is worth more than 25 pages of meaningless facts and figures.
In light of the Sarbanes-Oxley Act’s apparent mandates of transparency and fair representation in financial reporting, it would seem that the Rose Foundation petition might have garnered a mainstream following. That hasn’t happened yet. The issue “has yet to generate a groundswell of support,” notes Doug Cogan, deputy director of social issues at the Investor Responsibility Research Council, one of the 30 experts the GAO polled for its study.
However, Cogan sees some headway being made. For instance, sell-side analysts who traditionally have paid little attention to potential environmental liabilities — with the exception of the long-term effects of asbestos litigation — are putting pollution disclosures on their priority list. Recently, officials from 11 international brokerage houses, including Goldman Sachs, ABN AMRO Equities, Deutsche Bank, HSBC, Nikko-Citigroup Japan, and WestLB, noted that their sell-side analysts consider “social, environmental, and corporate governance issues … relevant to long-term shareholder value.”
What’s more, on Capitol Hill, senators Jon Corzine (D-N.J.), John McCain (R-Ariz.) Joe Lieberman (D-Conn.), and other lawmakers held a reception for the GAO report at a symposium called “Coming Clean: Corporate Disclosure of Environmental Issues in Financial Statements,” which gave a platform to the SEC, the Environmental Protection Agency, the Rose Foundation, and SRIs.
Gimme Credit’s Adams says disclosures related to environmental liabilities have always been important to credit analysts, but he stresses that such information is meaningful to him only insofar as it records the liabilities’ effects on future free cash flow. As a result, “speculative numbers [such as overblown aggregate estimates] do nothing but make 10-Ks weigh more.” Adams, who covers the utility sector, also maintains that he’s always found that 10-Ks provide enough information for his analysis.