Pulp fiction? Firms hide liabilities, group asserts

Some leading U.S. paper and pulp companies could be headed for the woodshed.

An environmental research group claims they are failing to fully disclose potential liabilities and financial risks to shareholders.

The Washington-based World Resources Institute claims that at least half of the 13 companies it studied face potential environmental liabilities that could cost shareholders as much as 10% of their equity.

Their report, titled “Coming Clean,” calls on the Securities and Exchange Commission to reinforce and clarify federal regulations governing disclosure of material issues.

The report also reflects the $2.2 trillion social investment industry’s increasing sophistication in getting the attention of investment analysts and developing new research aimed specifically at environmental and social concerns.

A second organization, known as the Corporate Sunshine Working Group, also plans to lean on the SEC.

The alliance of environmental groups and community, labor and social investment organizations is working with public pension plans to send the SEC a proposal to require broader disclosures on environmental, labor and consumer issues.

Compliance costs

The concern is over undisclosed liabilities created by environmental regulations.

For example, Environment Protection Agency rules require companies to take steps to reduce emissions of nitrogen oxides that lead to smog.

The paper and pulp companies also face various logging restrictions, and some will soon be required to reduce effluent emissions into waterways.

Duncan Austin, a senior associate with World Resources Institute and co-author of the report, says institute officials met in the spring with the SEC’s general counsels and lawyers in its division of corporate finance to discuss the issue.

SEC officials indicated they only have time to examine specific companies on an infrequent basis.

“It is very difficult for them to know what it is they don’t know,” concerning disclosures of potentially material environmental liabilities, Mr. Austin adds.

SEC spokesman John Heine would only say that the SEC is not planning any new disclosure rules.

financially material

“We did put out a staff accounting bulletin about a year ago on materiality,” Mr. Heine says, but it did not deal with environmental or social liabilities.

“These things are financially material,” Mr. Austin says. “To the extent the financial markets are silent about them, the management of these companies are not facing appropriate incentives to avoid financially material liabilities.”

Linda Descano, director of social awareness investment at Salomon Smith Barney Asset Management in New York, met with researchers from the institute and other Wall Street analysts earlier this year to discuss WRI’s findings.

“What we found valuable were the scenarios that WRI came up with” for how environmental regulations could adversely affect the companies, she says. “Their specific conclusions on the magnitude of the financial impact were less important than the scenarios themselves. We think they’ve raised some good points.”

Smith Barney manages $2.2 billion in social investments.

Barry Polsky, spokesman for the American Forest and Paper Association in Washington, says paper and pulp companies have followed the law concerning SEC filings.

Newground Investment Services, a Seattle investment adviser that works with socially responsible investment groups, has asked five of the 13 companies in the report to put the issue before shareholders.

Newground wants them to vote on resolutions that would require companies to give more information about their potential environmental liabilities.

Bruce Herbert, Newground’s president, says he is contacting the other companies to discuss the issue.

getting noticed

Overall, the mainstream investment community has pretty safely ignored social investing, says Lloyd Kurtz, senior analyst with Harris Bretall Sullivan & Smith LLC, an investment management firm in San Francisco.

But he says the WRI study, as well as an earlier report from a University of Oregon researcher, has “raised eyebrows. [The studies] definitely are enough to shake some people out of complacency.”