Environmental Disclosure Committee
2007 Highlights
Senate Committee holds hearing on Climate Disclosure
On October 31, 2007, the Senate Committee on Banking, Housing and Urban Affairs held a hearing on "Climate Disclosure: Measuring Financial Risks and Opportunities." Environmental Disclosure Committee member Jeffrey A. Smith, Partner at Cravath, Swaine, & Moore LLP, gave testimony. Download his article, in The Review of Securities & Commodities Regulation, based on his testimony: Disclosure of Climate Change Risks 1.08. Following the hearing, Senator Chris Dodd, D-Conn., Chairman of the Senate Committee on Banking, Housing and Urban Affairs, and Senator Jack Reed, D-R.I., Chairman of the Subcommittee on Securities, Insurance and Investment, wrote to Securities and Exchange Commission Chairman Chris Cox on December 6, 2007, urging the SEC to issue guidance on climate disclosure requirements: Final Cox letter on Climate Disclosure
Environmental Disclosure Committee holds “Quick Teleconference” on Environmental Issues to Consider for 2008 10-K Preparation
On December 4, 2007, the Environmental Disclosure Committee held a Quick Teleconference to discuss practical steps registrants should take to address environmental issues in their 10-Ks and financial statements for 2008. Notable developments that were discussed in the teleconference included:
- Subpoenas issued to public electric utilities by the NY Attorney General about the adequacy of climate change disclosure in SEC filings;
- Congressional consideration of climate change disclosure in SEC filings;
- A petition by Ceres, other environmental groups, institutional investors and state pension fund managers, and a petition by the Free Enterprise Action Fund, requesting the SEC to clarify when and how registrants should disclose information about climate change. Download the petition: Full Petition and SEC 2nd Petition;
- SEC enforcement actions concluded during the past 12 months about environmental reserve issues;
The moderator was Maureen M. Crough, Partner at Sidley Austin LLP, New York, NY. Panelists were Mindy S. Lubber of Ceres, Boston, MA. Download her presentation: ML ABA Presentation 6, Greg Rogers, of Guida, Slavich & Flores, P.C., Dallas, TX, and Jeffrey A. Smith, Partner at Cravath, Swaine & Moore LLP, New York, NY. Handouts also included the CERES' Global Framework for Climate Risk Disclosure: Global Framework
Major Investors, State Officials, Environmental Groups Petition SEC to Require Full Corporate Climate Risk Disclosure
On September 18, 2007, a broad coalition of investors, state officials with regulatory and fiscal management responsibilities, and environmental groups filed a landmark petition asking the Securities and Exchange Commission (SEC) to require publicly-traded companies to assess and fully disclose their financial risks from climate change. The coalition also formally asked the Commission's Division of Corporation Finance to immediately begin "[c]losely scrutinizing the adequacy of registrants' climate disclosures" under existing law. Access the Ceres announcement for additional information.
Separately, on October 23, 2007, the Free Enterprise Action Fund filed its own petition with the SEC. The fund, which is advised by Action Fund Management LLC in Potomac, Md., wants disclosure to shareholders of the business risks of laws and regulations intended to address global warming: SEC 2nd Petition
New York Attorney General Launches Investigation into Energy Company Emissions Disclosure
On September 14, 2007, New York Attorney General Andrew Cuomo sent subpoenas to top executives of five energy companies with plans to build coal-fired power plants: AES Corporation, Dominion, Dynegy, Peabody Energy and Xcel Energy. Letters accompanying the subpoenas asked whether investors received adequate information about the potential financial liabilities of carbon dioxide emissions. See the New York Times article.
2006 Highlights
FASB Issues Standard on Fair Value Measurement
On September 6, 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 157, Fair Value Measurements. The new accounting statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. FAS 157 applies under other accounting pronouncements that require or permit fair value measurements, including statements relevant to financial reporting of environmental liabilities such as FAS 141-R, FAS 143, FAS 144, FIN 45, and FIN 47. The new FASB pronouncement does not require any new fair value measurements. However, for some entities, its application will change current practice. [Full Text] (Excludes Appendix E) (Appendix E—Amendments to APB and FASB Pronouncements will be posted to the FASB website on or before September 21, 2006) [Summary]
Environmental Liability Disclosure Survey Shows an Array of Inconsistent Practices
The Brattle Group's web-based survey benchmarks current attitudes, practices, challenges, and trends relating to environmental and product liability estimation and disclosure. Download a summary of the survey, which focuses on the extent to which companies disclose liabilities, define what is “material,” and are aware of recent and proposed changes in disclosure standards, guidance, and procedures.
Ashland Inc. Announces Possible SEC Civil Action for Environmental Remediation Reserves
On April 25, 2006, SEC staff notified Ashland of the staff's intent to seek authorization to pursue a civil action against Ashland relating to adjustments that reduced the company's environmental remediation reserves for 1999 and 2000. Read Ashland's 8-K filing for more details.
New Study on Impact of FIN 47
The Controllers' Leadership Roundtable at the Corporate Executive Board has released an Executive Briefing on "The Impact of FIN 47 (Thus Far)." Major findings include:
- Financial Statement Impact Varies Widely Across Companies – Within and without industries, companies are reporting quite disparate impact from the implementation of FIN 47. Take, for example, the Industrial Manufacturing industry, where United Technologies reported a $95 million impact in 2005, while the impact on Caterpillar Inc. was immaterial.
- FIN 47 Resource Consumption Varies Widely Across Companies – Based on our recent survey of Roundtable members, the number of man-hours spent implementing FIN 47 varies greatly – as man-hours reported ranges from six (6) to 5,000.
- Not all Companies are Estimating the Value of Identified Conditional AROs – The vast majority of disclosure language either quantifies the fair value of identified conditional AROs or states that any such additional obligations are immaterial to the business – however, a select few companies have affirmatively stated that conditional AROs have been identified but remain un-estimable.
The Controllers' Leadership Roundtable provides best practices research, tools, and executive education to a membership of Controllers at the world's leading corporations and not-for-profit institutions.
2005 Highlights
IFAC Issues New Guidance on Environmental Management Accounting
The International Federation of Accountants (IFAC) has issued new guidance on environmental management accounting (EMA). The document, commissioned by IFAC and supported by the Division for Sustainable Development of the United Nations Department of Economic and Social Affairs (DSD/UNDESA), recognizes the increasing importance of environmental issues and the difficulty of managing these issues.
The guidance is aimed primarily at professional accountants within organizations, but IFAC says it will also be of interest to professional accountants and auditors who are becoming more involved in tracking or verifying environment-related information in financial and other reports.
The objective of the guidacne document is to reduce confusion and provide a framework and set of definitions that is comprehensive, yet as consistent as possible with other existing environmental accounting frameworks with which EMA must coexist.
Whereas financial reporting focuses on satisfying the information needs of external stakeholders, such as investors, tax authorities and creditors, management accounting focuses on satisfying the information needs of internal management. Whereas financial reporting of environmental liabilities and risks is regulated by national laws (e.g., the U.S. federal securities laws) and national and international accounting standards (a/k/a generally accepted accounting principles), environmental management accounting is largely unregulated. Although there are accepted good practices in the realm of EMA, these practices are generally not regulated by law. Each organization can determine which EMA practices and information are best suited to its organizational goals and culture.
For more information, download the IFAC press release and the EMA Guidance Document.
Accounting for Emissions Allowances
Citing the increasing international use (and planned use) of schemes designed to achieve reduction of greenhouse gases through the use of tradable permits, credits and allowances, the International Accounting Standards Board voted at its September 2005 meeting to begin work on writing new rules on accounting for such pollution emission allowances.
The announcement follows the IASB’s decision in July to formally withdraw guidance on emissions allowances, known as IFRIC 3 Emission Rights, developed by the International Financial Reporting Interpretations Committee. The IASB noted that there was a risk of diverse accounting practices for emission trading schemes following the withdrawal of IFRIC 3 and stated that this could impair both the comparability and the usefulness of financial statement information. The new rulemaking process will enable the IASB to address the underlying accounting in a more comprehensive way than originally envisaged by the IFRIC.
Currently, there is no standard for treatment of emission allowances under U.S. accounting principles, and the Financial Acccounting Standards Board (FASB) has not announced plans to develop such a standard.
For more information, see the IASB’s July 2005 summary on the withdrawal of IFRIC 3 and its September 2005 meeting summary regarding Emissions Trading.
ASTM Meeting on Environmental Estimation and Disclosure Standards
The ASTM task force for standards E 2137 (environmental cost estimation) and E 2173 (environmental disclosure) will meet to initiate review of these standards on October 19, 2005 in Dallas, Texas. The meeting is scheduled for 1:00 pm to 4:00 pm at the Hyatt Regency Hotel, 300 Reunion Blvd, Dallas, Texas, Room 357, 3rd floor.
Proposed topics include:
- The impact of Sarbanes-Oxley on E 2173
- The impact of FASB's proposals on fair value measurements
- The impact of FASB Interpretation No. 47 (an interpretation of FASB Standard No. 143) on accounting for asset retirement obligations
- Reactions to SEC's review of the standards based on the Rose Foundation's proposal for adoption
- The impact of GAO's 2004 report
- Update on reporting of insurance coverage
- Update on use of the standards and issues raised by users
The meeting is open to non-ASTM members. Persons interested in attending who are not registered ASTM members should RSVP to Dan Smith at ASTM (email: dsmith@astm.org) to ensure adequate space and seating for all attendees. Interested persons are invited to submit comments and ideas for other agenda topics to Gayle Koch (email: gayle_koch@brattle.com).
Accounting for Business Combinations
On June 30, 2005, the Financial Accounting Standards Board (FASB) issued an Exposure Draft for a proposed new standard for accounting for business combinations. The new accounting standard would have significant implications for the recognition and measurement of environmental liabilities assumed in mergers and acquisitions.
If adopted in its current form, the new standard would require, subject to limited exceptions, that assets acquired and liabilities assumed in business combinations be measured and recognized at their fair values as of the acquisition date. Of special relevance to environmental liabilities, the new standard would eliminate the FASB Statement No. 5, Accounting for Contingencies, approach to recognizing contingencies. For more information, click here.
Fair Value Measurement
On June 23, 2004, the Financial Accounting Standards Board (FASB) issued an Exposure Draft for a new accounting standard on fair value measurement (FVM). The new standard will define fair value and establish a framework for applying the FVM objective under generally accepted accounting principles (GAAP). The new standard will be especially relevant to measurement of environmental asset retirement obligations and environmental liabilities assumed in business combinations. FASB has stated its intention to issue a final FVM Statement in the 4th quarter 2005.
The FVM Statement will focus on "how" to measure fair value, not "what" to measure at fair value. What must be measured at FVM will continue to be determined under other authoritative accounting pronouncements such as FASB Statement No. 143, Accounting for Asset Retirement Obligations (FAS 143), FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, and proposed FASB Statement 141-R, Accounting for Business Combinations.
The FVM Statement will supersede and amend the limited FVM guidance in several existing pronouncements, including FAS 143. Changes to current FVM practice resulting from the application of the new FVM Statement will relate principally to the processes and methods for measuring fair value and expanded disclosure requirements.
For more information, click here.
Environmental Liabilities: EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup Obligations
A new U.S. Government Accountability Office (GAO) report says that EPA should do more to ensure that liable parties meet their cleanup obligations under CERCLA and RCRA. The release of the GAO's report coincides with news releases that Asarco, which recently filed for bankruptcy, could be liable for more than $1 billion in cleanup costs at more than 30 sites nationwide.
One of the GAO's recommendations is that EPA implement a 1980 statutory mandate under Superfund to require businesses handling hazardous substances to demonstrate their ability to pay for potential environmental cleanups—that is, to provide financial assurances. EPA has cited competing priorities and lack of funds as reasons for not implementing this mandate, but GAO found that EPA's inaction has exposed the Superfund program and U.S. taxpayers to potentially enormous cleanup costs at gold, lead, and other mining sites and at other industrial operations, such as metal-plating businesses.
The GAO report, entitled "Environmental Liabilities: EPA Should Do More to Ensure That Liable Parties Meet Their Cleanup Obligations, GAO-05-658," August 17, 2005 is available on the GAO's web site.
Full Report Abstract Highlights-PDF
2004 Highlights
GAO Issues Report on Adequacy of Environmental Disclosure in SEC Filings
On July 15, 2004, the Government Accountability Office (the new name of the General Accounting Office) released a report entitled Environmental Disclosure - SEC Should Explore Ways to Improve Tracking and Transparency of Information. On the same day, Senators Corzine, Lieberman and McCain sponsored a symposium on the report and on the adequacy of environmental disclosure.
The report concluded that "little is known about the extent to which companies are disclosing environmental information in their filings with the SEC." Accordingly, "the adequacy of SEC efforts to enforce compliance with environmental disclosure requirements cannot be determined without better information on the extent of environmental disclosure." On the basis of the record before the GAO, "one cannot determine whether a low level of disclosure means that a company does not have existing or potential environmental liabilities … or is not adequately complying with disclosure requirements."
The symposium featured remarks from: John Stephenson of GAO; SEC Commissioner Roel Campos; Steven Shimberg, EPA; Dale McCormick, Treasurer, State of Maine; corporate governance expert Nell Minow; and Steve Lydenberg, Chief Investment Officer, Domini Social Investments. Senator Corzine and Representative Donald M. Payne (D-NJ) made opening remarks, and Michelle Chan-Fishel from Friends of the Earth moderated the program.
The SEC and EPA generally concurred with the GAO report and agreed to take steps to improve the process.
Friends of the Earth and the Rose Foundation also released new reports on environmental disclosure in conjunction with the release of the GAO report and the symposium.
A detailed summary of the report and symposium has been posted to the Committee's website: http://www.abanet.org/environ/committees/environdisclosures/gao.shtml. The summary includes links to all three reports.
Shareholder Activism On Climate Change Leads to Corporate Voluntary Reporting
Corporate stakeholders, including institutional investors, have recently exerted increasing influence in the shareholder resolution process in an effort to force corporate reform in the environmental arena. According to a recent report by the Social Investment Forum, shareholder resolution filing on social responsibility matters increased by 15% between January 2001 and June 2003. The most dramatic growth rate during this period was exhibited by resolutions pertaining to climate change. In 2002 alone, approximately 21 resolutions addressing climate change were introduced at corporate shareholder meetings. Perhaps more notable than this raw number, however, is the substantial support such resolutions have received. For example, recent climate change resolutions at General Electric and Eastman Chemical received support of 22.6% and 29.4%, respectively, from the voting shares.
There is strong recent evidence that support for a resolution, and not necessarily a majority vote, may be sufficient to get the attention of management and bring about significant changes to disclosure practice and policy. For example, as a result of shareholder proposals seeking greater transparency regarding the effects of global warming, American Electric Power and Cinergy, two of the nation's largest electric power companies (and greenhouse gas emitters), announced on February 19, 2004 that they will provide voluntary disclosure to shareholders by September 2004 on the potential financial risks that could result from future regulation imposing carbon dioxide emission caps. The effectiveness of this shareholder activism campaign suggests strongly that the number of climate change shareholder resolutions will continue to rise in the coming months.
