Cooking the Books: Scorching the Planet

A new report by Friends of the Earth shows how companies are hiding climate change-related risks from their investors in violation of Securities and Exchange Commission (SEC) disclosure rules. The report, which is the third such annual survey performed, reviewed climate change disclosure in 2003 SEC filings of companies likely to be impacted by climate change (i.e. companies in the automobile, integrated oil and gas, property and casualty insurance, petrochemicals and electric utilities sectors). It found that compared with last year, the overall rate of climate change reporting has stayed the same (39 percent), and the quality of climate disclosure has generally improved.

Climate reporting among the electric utilities sector is strong (with over 90 percent of the largest utilities disclosing climate issues), while almost half of all publicly-traded integrated oil & gas companies reveal climate risks to shareholders. Reporting among automobile, insurance and petrochemicals companies remains poor at 22 percent, 22 percent and 11 percent, respectively.

“Climate change and climate policies are a bottom-line issue for companies and investors,” said Michelle Chan-Fishel, coordinator of Friends of the Earth’s Green Investments Program. “A growing number of companies are complying with SEC disclosure rules and are admitting this risk to shareholders. But many corporations are taking an all-too familiar approach of painting a rosy picture of themselves while hiding their true risks and liabilities.”

The survey, available at www.foe.org/camps/intl/corpacct/wallstreet/secsurvey2004.pdf, is to be released at a Congressional symposium on the SEC and environmental disclosure, hosted by Sen. Corzine (D-N.J.) on July 15, 2004 .

Among reporting companies, the majority forecast that climate risks will adversely impact their firms, while 14 percent maintain that global warming poses little to no risks. About 11 percent state that the impact of climate change cannot be estimated, while 23 percent of reporting companies avoid addressing the issue of financial risk altogether. The quality of company disclosure tended to increase as well, with more companies creating separate climate change sections of their reports, or including climate change in their discussion of key risks. One reason for this improvement may be the new Sarbanes-Oxley Act.

“Under Sarbanes-Oxley, corporate directors, especially audit committees, must guarantee that companies have adequate internal controls to identify, manage and disclose material risks,” said Chan-Fishel, “Boards that fail to ensure appropriate climate reporting – particularly when a company’s competitors are coming clean -- may be in breach of Sarbanes-Oxley and their fiduciary duty.”

The survey supports recent evidence that environmental disclosure among publicly traded companies in the United States is weak and poorly enforced. An SEC review of Fortune 500 companies’ 2001 10-K filings found that many companies did not provide adequate disclosure on environmental issues. Similarly, a 1998 study by the Environmental Protection Agency found that 74 percent of companies do not report legal proceedings contemplated and/or initiated by environmental agencies that are likely to result in monetary penalties of over $100,000, despite clear SEC rules requiring this disclosure.

Source: Friends of the Earth press release