Pressing FASB for Improved Disclosure on Social and Environmental Liabilities
This month, investors were presented with an unusual opportunity to weigh in on a proposed rule change designed to bring potential environmental and social liabilities to light. Trillium Asset Management Corporation (“Trillium”) is acutely aware that there is a long and troubled history of companies underestimating the likelihood of severe financial threats – Enron, the subprime lending crisis, and asbestos liabilities are three recent examples. All too often we have seen that these momentous issues were looming for many years and eventually resulted in catastrophic consequences for investors.
In light of the significant concerns raised by the impacts of climate risk and the long-term effects of toxic chemicals on our health and the environment, Trillium is very mindful of the future liabilities that may await investors over the horizon. Unfortunately, even though companies are often aware of the real possibility of these problems causing economic hardship to the companies, investors are kept in the dark through the accounting rules.
In July, the Federal Accounting Standards Board (“FASB”), which effectively establishes corporate accounting standards, invited comments on proposed rules that would require disclosure of all liabilities except those that meet certain narrow exceptions. In doing so, FASB took a positive step towards incorporating long term environmental and social factors into financial statements – a fundamental goal of the socially responsible investment (“SRI”) movement.
With the Social Investment Forum, the Investor Environmental Health Network and a number of other SRI firms, Trillium seized this opportunity to support the improvements and strongly encouraged FASB to go even further. Below is our comment letter. We are cautiously optimistic that FASB will take the right steps and will post any developments as this process moves forward.
July 22, 2008
Financial Accounting Standards Board
401 Merritt 7PO Box 5116
Norwalk, Connecticut 06856-5116
Re: Comment on Exposure Draft – Disclosure of Certain Loss Contingencies
Amending FAS 5 – File Reference No. 1600-100
Dear Mr. Golden,
Trillium Asset Management Corporation (“Trillium”) welcomes this opportunity to provide the Financial Accounting Standards Board (“FASB”) with our comments on the FAS 5 Exposure Draft. As an investment management company with one billion dollars of assets under management we feel strongly that it is critical to have accurate and complete information about liabilities in financial statements. Furthermore, we are guided by a belief that active investing can offer good returns to the investor, while also promoting social and economic justice. As fiduciaries with twenty-five years experience in integrating environmental and social factors into investment and management decisions, we believe this information is of the utmost importance.
Generally speaking, Trillium supports the direction in which FASB is proceeding and agrees with the finding that the current statement on disclosure of loss contingencies fails to “provide adequate information to assist users of financial statements in assessing the likelihood, timing, and amount of future cash flows associated with loss contingencies” (FAS 5 Exposure Draft, Summary, p. v). The changes proposed by the FAS 5 exposure draft Accounting for Contingencies to address this issue represent an important step in providing all investors with improved disclosures.
While we are pleased with this important step and supportive of the progress it represents, there are a few points of concern that we would like to take this opportunity to raise briefly. In particular, Trillium is concerned with how the draft treats severe long-term risks. At FAS 5 Exposure Draft paragraph 6, the draft only requires disclosure of severe financial threats that a company deems remotely probable if the issue is expected to be resolved within a year. As a long-term investor we are acutely aware that there is a long and troubled history of companies underestimating the likelihood of severe financial threats – Enron, the subprime lending crisis, and asbestos liabilities are three recent examples.
All too often we have seen that these momentous issues were looming for many years and eventually resulted in catastrophic consequences for investors. For these reasons, we believe FAS 5 should require companies to disclose all known severe threats whether or not they are expected to be resolved within a year. Recognizing the need to ensure that disclosures are made in a cost-effective manner, Trillium would like to suggest that “remotely probable” risks that are not expected to be resolved within one year be described in a narrative form, but would not need to be quantified other than to specify that they may be severe.Finally, Trillium believes that in an effort to improve investor access to reliable information, FASB should also do the following:
- Implement the proposed draft language that would require disclosure of all loss contingencies except those that meet certain narrow criteria (FAS 5 Exposure Draft para. A12).
- Implement the proposed draft language that would require a reporting company to quantify the maximum potential loss in circumstances where it cannot estimate the likely loss (FAS 5 Exposure Draft para. 7a).
- In light of the significant concerns raised by the impacts of climate risk, Trillium believes that FASB should expand the scope of both the expanded population of required disclosures, as well as the maximum loss disclosure requirement to include asset impairments. These loss contingencies should be disclosed using the same standards as loss liabilities.
- To the extent possible, limit the use of the “prejudicial” information nondisclosure exemption to the quantification requirement. Trillium believes that this exception should be used rarely. Trillium also believes FASB should retain the proposed requirement that filers must in any event quantify their liabilities even if other information does qualify for the prejudicial exemption (FAS 5 Exposure Draft para. 11).
Thank you for considering our comments.
Cheryl I. Smith, Ph.D., CFA
Executive Vice President