We now live in a world that requires corporate disclosures from CEOs and CFOs regarding their company's financial condition. Companies such as Enron Corp. and WorldCom Inc. have devastated investors due to the fraudulent behavior and unethical financial practices of greedy individuals. In an effort to take a stand against the corporate deceit, President Bush proclaimed, "If you're a CEO and you think you can fudge the books in order to make yourself look better, we're going to find you, we're going to arrest you and we're going to hold you to account." But have we just begun to uncover the deception? Are CEOs and CFOs responsibly reporting, or even aware of, their company's environmental liabilities and conditions?
It is believed that many companies today are misstating and underreporting their environmental liabilities. A 1998 U.S. Environmental Protection Agency (USEPA) study found that 75% of publicly traded companies fail to properly disclose governmental fines of $100,000 or more and 96% of publicly traded companies facing federally-imposed toxic clean-up expenses fail to properly disclose these liabilities to their shareholders.
For years companies have cited inadequate means by which to properly estimate their environmental liabilities. Others simply ignore these requirements altogether. In either case, this places companies meeting these obligations at a distinct disadvantage to those dodging the issue and prohibits investors from accurately comparing one company to the next in order to make sound financial decisions. This perpetual loop is not only self-serving to companies that poorly manage environmental exposure, but it also compounds the financial risk to unsuspecting investors.
Unfortunately, this risk hits closer to home than many of us would like to believe. For example, take a look at the holding companies that comprise many of today's most popular mutual funds. Many of these companies are carrying substantial environmental risk, which could be financially demanding or even devastating. Some of these companies are facing fines and cleanup settlements in the hundreds of millions of dollars. Worse yet, with global consumer pressure to be "green," negative environmental publicity often results in decreased market share and outraged consumers. There are no signs that this type of financial risk is subsiding. The only things diminishing are investor confidence and respectable returns.
In an effort to better protect the innocent investor, The Rose Foundation for Communities and the Environment and several other concerned parties have urged the Securities and Exchange Commission to enforce current regulations, which mandate public disclosure of environmental liabilities and adopt additional guidelines and regulations, such as ASTM's Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters.
Although the tools and procedures for disclosing environmental liabilities are available, another proactive approach has emerged as an option for concerned investors. Some financial institutions have created Socially Responsible Funds intended to minimize investor risk and bring overdue attention to well-managed, financially sound companies that have made significant commitments to be both socially and environmentally responsible. Profitable companies that make the grade generally have respectable employee relations, strong community involvement, exceptional environmental impact policies and practices, and safe and useful products.
Today investment firms such as Pax World Funds, Calvert Group and Green Century Funds offer over 230 mutual funds that successfully incorporate socially and environmentally responsible investing. Contrary to outdated management perceptions that environmentally and socially responsible companies somehow "give-up" profit for cause, Socially Responsible Funds are at least as competitive (on average) as traditional funds and provide the foundation for a stronger portfolio that allows the investor to weigh known risks.
The USEPA is optimistic that enforcing current regulations requiring public disclosure of environmental performance and liability information will positively influence corporate behavior. Nonetheless, whether you're an environmentally conscious investor or just concerned with the bottom line, it may pay in more ways than one to recognize how corporate environmental behavior and liability can impact the performance of your portfolio and how the proposed ASTM standards, along with progressive ideas like socially responsible investing, may begin to help minimize investor risk.
If you are interested in more information on the proposed ASTM regulations or would like to voice your concern, log onto The Rose Foundation's website at www.rosefdn.com.
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