Expand Risk Disclosure, Group Urges FASB

An investor group that urges manufacturers to eliminate toxic chemicals said it has asked the organization developing new U.S. corporate accounting standards to expand requirements for company disclosure of severe long-term risks.

Some product health effects may not reveal themselves until 10 or 20 years down the road, explained Sanford Lewis counsel for Investor Environmental Health Network.

His Falls Church, Va.-based organization has written the Financial Accounting Standards Board arguing that the disclosure of a remotely probable risk should not be limited to those to be resolved within a year.

The comment period on FASB's proposed new rules, which become Generally Accepted Accounting Procedures, is due to close Friday and Mr. Lewis said he expects other investment firms will seek expanded disclosure of long-term risk including contractual liability.

As an example of the kind of risk IEHN is concerned about, Mr. Lewis mentioned the use of nanotechnologies, which are employed to build tiny products on the scale of molecules.

He said some lab tests have shown these processes to have negative health effects that resemble those from asbestos.

"A company's investors could be blind-sided because health effects could take 10 or 20 years to manifest," he said.

Mr. Lewis said companies could say that such risk is only remotely likely and they have seen other science that says it is not a risk, but "it should nevertheless be put on the table. Many times companies say 'it's only remotely likely' and they have been wrong."

Disclosure of remote risk, he said, should also be voiced concerning a contract with questionable language that could be invalidated.

IEHN said it is urging concerned parties to write to FASB in support of a stronger disclosure rule before the comment period deadline this week.

The FASB proposal would implement changes to "FAS 5," an accounting statement on "loss contingencies" that has not been amended since its adoption in 1975, according to IEHN.

Mr. Lewis said some FASB proposed changes will be a step forward to improve existing disclosure by requiring corporations to disclose more to investors regarding their potential losses due to product toxicity, environmental remediation and other liabilities.

But "under the proposed standard, companies are allowed to avoid disclosing severe threats in their financial statements if they believe that a loss is only remotely likely, and that the issue would not be resolved during the coming year, " which IEHN objects to.

In addition to improving the disclosure of long-term risks, IEHN said it wants to ensure that FASB does not open up new legal loopholes for disclosure.

Mr. Lewis said the proposal may allow corporate lawyers to routinely block disclosure of almost any information that they designate as potentially damaging to the company, or prejudicial. "This discretionary withholding of information will surely impact investors."

Cheryl Smith, chair of the board of the Social Investment Forum and executive vice president of Trillium Asset Management (a member of the Investor Environmental Health Network) has already commented to FASB on these disclosure standards.

She said that the opportunity to comment to FASB provides "an unusual opportunity to bring off-balance sheet environmental and social liabilities to light. Improved disclosure of these liabilities will significantly improve our ability to analyze companies and thus to act as long term investors."

IEHN in a position statement posted on its Web site said, "When investors are unaware of impending financial pain at companies in which they hold stock, they often face expensive surprises. Securities laws and related financial accounting principles are supposed to arm investors with information to avoid these shocks, but these safeguards are proving inadequate to the task."

Earlier this year IEHN published a report on corporate disclosure related to product toxicity, The Toxic Stock Syndrome, online at http://iehn.org.

IEHN describes itself as a collaborative partnership of investment managers who manage more than $41 billion in assets and are concerned about the financial and public health risks associated with corporate toxic chemicals policies.