Thursday, March 20, 2008

Environmental Disclosure for Public Companies

Environmental disclosure for public companies is becoming a formal policy for companies subject to regulation of the Ontario Securities Commission (link to PDF of report). Probably not an exciting topic to most people.

The basics of the policy are that companies must explain their potential environmental liabilities in their financial statements and commentary to investors. In my opinion, this could change investment decisions. Investors who may not understand the risk or be willing to accept it look to other investments. Ethical funds may need to change where they put their money. Household brands may report environmental liabilities that tarnish their image.

According to lawyers interviewed by the Globe and Mail, one of the main problems is that nobody really knows how to quantify the risk. I can see this being a problem and if you know how you can make fortune. They also say that the risk of lawsuits will increase if these companies do not make adequate disclosures to investors. I guess the possibility also exists that if people don't know that a company has an environmental liability that is harming their health or neighborhood they could find out and sue as well.

I do see an upside for companies and the public. If environmental liabilities are difficult to quantify and improper valuation or disclosure creates serious liability then one solution will unfold: sustainable practices. If companies operate in a sustainable manner then they will not be generating environmental reporting issues that they can't quantify. Might be wishful thinking but if they don't do it I'm sure many class action lawyers will be scouring those financial reports.


BBC said...

"In my opinion, this could change investment decisions."

And this has what to do with greed?

FeButterfly said...

My hope is that companies will change the investment decisions they make based on environmental risk exposure. If they are unable to quantify a risk maybe they won't take it. Alternatively, investors may put their money elsewhere and companies may change their position on how they conduct business. Will it reduce greed? I don't know but if people and companies think before they act it may change the decisions that are made.