Report: Pulp and Paper Companies Infringe SEC Rules
The World Resources Institute (WRI) has released a report showing some pulp and paper companies are not disclosing prospective environmental risks that may significantly affect their financial performance.
The World Resources Institute (WRI) has released a report showing some pulp and paper companies are not disclosing prospective environmental risks that may significantly affect their financial performance.
"This lack of disclosure infringes Securities and Exchange Commission (SEC) rules and directly threatens investors in these pulp and paper companies," said WRI economists Robert Repetto and Duncan Austin in their new report, "Coming Clean: Corporate Disclosure of Financially Significant Environmental Risks."
"Although environmental issues can affect financial performance, company reporting falls short of the full and adequate disclosure required for material issues, as set out in SEC rules and guidelines," they said.
The new report is a follow-up to an earlier award-winning study, "Pure Profit: The Financial Implications of Environmental Performance," in which Repetto and Austin 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.
At least half the companies studied face expected negative impacts from environmental issues of at least 5 percent of total shareholder value, while several face expected impacts approaching or exceeding 10 percent.
Despite evidence that environmental issues can affect a company's financial performance, a review of company's financial statements reveals that disclosure of such material risks and uncertainties has been inadequate.
For Coming Clean, Repetto and Austin reviewed the financial statements -- 10K, 10Q, and 8K statements -- filed by these companies in 1998 and 1999. 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.
This lack of disclosure infringes SEC rules designed to protect investors. An extensive set of guidelines and rules requires companies to report not only information about current conditions affecting the firm, but also any known risks and uncertainties that are likely to have future significant financial effects.
In particular, Item 303 of Regulation S-K requires a Management Discussion and Analysis (MD&A) in which companies are required to disclose known future uncertainties and trends that may materially affect financial performance.
However, Coming Clean indicates that known financially material risks and uncertainties stemming from such environmental exposures are not being adequately disclosed.
Moreover, this lack of disclosure cannot be explained by a lack of relevant information among companies within the industry. Company representatives participated in identifying important impending environmental trends affecting the industry and in estimating probable outcomes of those issues.
"The failure of companies to disclose information on pending environmental risks means that securities will be mispriced andinvestors will be endangered," said the authors.
Despite explicit statements promising vigorous enforcement of disclosure requirements for financially material environmental risks, the SEC's enforcement efforts in this area have been minimal.
Of more than 5,000 administrative proceedings initiated by the SEC over the last 25 years, only three are based on insufficient disclosure of environmental risks or liabilities. Over the same period, the SEC has brought only one civil action against a company on the grounds of inadequate environmental disclosure. This dates to 1977.
Although Coming Clean examines only one sector, there is no reason to believe that pulp and paper is the only sector in which company reports are incomplete concerning environmental risks and differentials in environmental exposure between companies. Many other sectors are materially affected by environmental issues and regulations and would likely exhibit similar patterns of environmental exposure and nondisclosure.
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:
"This lack of disclosure infringes Securities and Exchange Commission (SEC) rules and directly threatens investors in these pulp and paper companies," said WRI economists Robert Repetto and Duncan Austin in their new report, "Coming Clean: Corporate Disclosure of Financially Significant Environmental Risks."
"Although environmental issues can affect financial performance, company reporting falls short of the full and adequate disclosure required for material issues, as set out in SEC rules and guidelines," they said.
The new report is a follow-up to an earlier award-winning study, "Pure Profit: The Financial Implications of Environmental Performance," in which Repetto and Austin 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.
At least half the companies studied face expected negative impacts from environmental issues of at least 5 percent of total shareholder value, while several face expected impacts approaching or exceeding 10 percent.
Despite evidence that environmental issues can affect a company's financial performance, a review of company's financial statements reveals that disclosure of such material risks and uncertainties has been inadequate.
For Coming Clean, Repetto and Austin reviewed the financial statements -- 10K, 10Q, and 8K statements -- filed by these companies in 1998 and 1999. 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.
This lack of disclosure infringes SEC rules designed to protect investors. An extensive set of guidelines and rules requires companies to report not only information about current conditions affecting the firm, but also any known risks and uncertainties that are likely to have future significant financial effects.
In particular, Item 303 of Regulation S-K requires a Management Discussion and Analysis (MD&A) in which companies are required to disclose known future uncertainties and trends that may materially affect financial performance.
However, Coming Clean indicates that known financially material risks and uncertainties stemming from such environmental exposures are not being adequately disclosed.
Moreover, this lack of disclosure cannot be explained by a lack of relevant information among companies within the industry. Company representatives participated in identifying important impending environmental trends affecting the industry and in estimating probable outcomes of those issues.
"The failure of companies to disclose information on pending environmental risks means that securities will be mispriced andinvestors will be endangered," said the authors.
Despite explicit statements promising vigorous enforcement of disclosure requirements for financially material environmental risks, the SEC's enforcement efforts in this area have been minimal.
Of more than 5,000 administrative proceedings initiated by the SEC over the last 25 years, only three are based on insufficient disclosure of environmental risks or liabilities. Over the same period, the SEC has brought only one civil action against a company on the grounds of inadequate environmental disclosure. This dates to 1977.
Although Coming Clean examines only one sector, there is no reason to believe that pulp and paper is the only sector in which company reports are incomplete concerning environmental risks and differentials in environmental exposure between companies. Many other sectors are materially affected by environmental issues and regulations and would likely exhibit similar patterns of environmental exposure and nondisclosure.
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.
