Europe Tightens Corporate Environmental Accounting Rules

By Donald Sutherland

BRUSSELS, Belgium, October 5, 2001 (ENS) - The European Commission has issued stricter guidelines for all financial environmental costs and liabilities reporting by companies covered by European Union accounting directives.

The voluntary recommendation clarifies existing European Union accounting rules and seeks to improve the quality, transparency and comparability of environmental data in EU companies' financial reports to stakeholders.

The tightening of corporate financial environmental accounting rules comes as part of the European Union Financial Reporting Strategy to harmonize the European accounting field and require the application of International Accounting Standards by listed EU companies going forward from 2005.

The International Accounting Standards Board is an independent, privately funded accounting standard body based in London. The board is committed to developing a single set of global accounting standards that require transparent and comparable information in general purpose financial statements.

money

United Kingdom coins (Photos courtesy Freefoto.com)
There is currently little guidance for corporate filing of environmental issues under International Accounting Standards Board standards, the commission says. The absence of a common set of rules and definitions has resulted in unreliable and inadequate environmental performance information disclosed by companies.

"This makes it difficult for investors and other users of financial statements to form a clear and accurate picture of the impact of environmental factors on a company’s performance or to make comparisons between companies," the commission says.

Rieko Yanou, assistant project manager for the International Accounting Standards Board, says the board will not comment on criticisms made by the European Commission.

No environmental/financial stakeholder organizations are campaigning for stricter financial environmental reporting by European Union companies. This raises the question of who is calling for the stricter financial environmental recommendation.

"The Commission recommendation was not prompted by any specific stakeholder activity, it was rather an autonomous initiative of the Commission," says Jose Madeira, spokesman for the European Commission. "It was developed in consultation with the accounting standards regulators and the professional accountancy bodies of the EU Member States," he says.

refinery

Oil refinery, Fawley, Hampshire, UK
Accounting standards regulators claim they were motivated to satisfy internal commission demands and the recommendation was drawn up from a position paper issued by the United Nations Conference on Trade and Development Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR).

"This paper has been kicking around for some years and it started life as a paper generated by something called the Accounting Advisory Forum," says Roger Adams, head of technical services for the London based Association of Chartered Certified Accountants (ACCA). That forum is now defunct.

"The actual financial accounting recommendations are drawn almost wholly from a position paper issued by the UNCTAD ISAR group in 1998," Adams says.

The European Commission environmental accounting guidelines to standardize the recording of environmental data in company annual accounts and reports should be mandatory, ACCA said in a statement.

"We believe that this recommendation will help achieve a greater prominence for environmental matters and will serve to alert the financial markets to the financial implications of environmental issues at the corporate level," says Adams.

Other accounting bodies and participants in the recommendation doubt the voluntary measure issued by the European Commission will lead corporations in the right direction.

"In the comment period, Austria as well as FEE, the European accountancy body based in Brussels, had some comments to the Commission, that their definition of environmental cost is very much end-of-pipe oriented and discouraging," says Christine Jasch, a spokesperson for the Institute for Environmental Management and Economics. She is also part of the sustainability working party created by FEE, the European Federation of Accountants.

factory

Allscott Sugar Factory, Telford, UK
"This is a recommendation only, and they have not much impact," says Jasch of the commission's move.

Commission officials counter that a mandate instead of a voluntary recommendation would not be as effective.

"True, the recommendation is a non-binding legal measure, but its real significance is political and moral," says Mikael Lindroos, spokesman for the European Commission Internal Market Directorate.

"A recommendation can have indirect legal effect, and it can also be a faster way forward, especially in a situation where the subject is still evolving and developing," he says.

The governments of European Union member nations are free to enforce national codified financial environmental accounting standards which go beyond what is strictly required at the EU level, provided the national standards are in compliance with EU accounting directives.

"It is difficult for us to say how the transparency of corporate financial environmental performance will be audited and enforced, because it will be up to the auditors and the member state to see to this," says Lindroos.

The only nation in the world which does have a government enforced codified directive for financial environmental accounting to shareholders by publicly traded companies is the United States.

Under the U.S. Securities and Exchange Commission's (SEC) Regulation S-K, publicly traded companies must file significant environmental material expenses quarterly and annually under the SEC's threshold accounting scheme.

But according to the U.S. Environmental Protection Agency (EPA), the SEC's directive for financial environmental accounting is a non-event for many publicly traded companies.

A 1998 study by the EPA found that 74 percent of publicly traded companies had failed to adequately disclose the existence of environmental legal proceedings in their 10-K registration requirements as mandated by the Securities and Exchange Commission.

While the SEC may not be focused on corporate financial environmental performance a market for the accounting data has emerged in the private business sector.

"The SEC may be ignoring corporate environmental performance, but that does not mean the financial industry is ignoring it also," says John Cusack, executive vice president of Innovest Strategic Value Advisors. Inc. a financial information service firm headquartered in New York City with offices in Toronto and London.

"Innovest is a company that produces environmental performance ratings of nearly 1,200 publicly traded companies around the world," he says.

"The rationale for our research is that good environmental performance is a proxy for, and indicator of, good management in general, and good management has always been seen by the investment community as an excellent indicator of good financial performance," says Cusak.

fabric

The dying of brightly colored textiles discharges pollutants. (Photo courtesy National Renewable Energy Lab)
Cusak claims financial clients using Innovest's corporate financial environmental data for fund benchmarking and research include ABN AMRO, Mellon Capital, T.R. Price, Schroders Asset Management, Newberger Berman, Lombard Odier, CALPERS, Rockefeller & Co., Brown Brothers Harriman, Glenmeade Trust, Fidelity, Credit Suisse, Zurich Scudder, Societie Generale, Wellington Capital, and State Street Global Advisors.

European accounting standards bodies actively lobbying for mandated corporate financial environmental accounting rules are also responding to the financial community's demands for risk management data.

"The bean counters want this for a very specific reason, at least in the UK," says Camilla Hair, a corporate accountability consultant.

"We have one main driver here - risk management," she says. The "Turnbull Report" now incorporated as part of the listing rules of the London Stock Exchange, requires all listed companies to make a statement on the management of the risks significant to the business in all annual reports issued after mid-December 2000, Hair says. Environmental, social and reputational risks are specifically mentioned.

From a FEE perspective, there has been little response at the International Accounting Standards Board to the development of standards for environmental financial accounting and auditing to assist the newly developed risk management transparency rules.

"IAS simply doesn't get the message," says Jasch, who is also part of the United Nations Environmental Management Accounting working group that is developing a network for implementation of environmental accounting worldwide.

"Some years from now, believe me," she says, "corporate environmental financial accounting will be just as common as environmental management systems are today."