A recent study published by a doctoral student at the University of Arkansas finds that most companies either under-report or outright lie in their disclosures to SEC about environmental fines and liabilities. Public companies hit with environmental sanctions are required by law to disclose that information to investors but apparently many fail to do so.
The study reviewed the public filings of over 300 companies that received notice from the Environmental Protection Agency (EPA) between 1996 and 2005 and found that over 70% of these companies omitted information on their filing forms, a violation of federal law.
According to Andrea Romi, the author of the study, the likely reason for these material omissions is that the stock market regularly punishes public companies hit with EPA related fines. She found that negative announcements related to EPA fines and violations were followed by a decline in the value of a company’s share price by an average of 1.6%.
Why does this continue? According to Ms. Romi, those that omit the information are unlikely to suffer any consequences because the level of enforcement by the SEC is so negligible. This arrangement provides perverse incentives for corporations to game the system by not disclosing this important information to the market. It also perpetuates “greenwashing” – the practice of marketing positive environmental policies and news while obscuring negative news that might harm a company’s brand.
The findings of this study support a 1998 internal review by the EPA’s Office of Enforcement and Compliance Assurance which found that 74% of corporations failed to comply with this requirement.
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