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Europe Tightens Financial Environmental Reporting Rules


I am submitting my report on financial environmental reporting in Europe for
your review and I look forward to commentary.

Best Wishes,
Donald Sutherland
Member of the Society of Environmental Journalists

Europe Tightens Corporate Financial Environmental Accounting Rules
By Donald Sutherland

The European Commission (EC) has issued stricter guidelines for all
financial environmental costs and liabilities reporting by companies covered
by European Union (EU) accounting directives.

The voluntary Recommendation published in June 2001 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 by the
Commission comes as part
of the EU Financial Reporting
Strategy to harmonize the European accounting field and require the
application of International Accounting Standards (IAS) by listed EU
companies from 2005 onwards.

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

According to the Commission, there is currently little guidance for
corporate filing of environmental issues under IAS accounting standards and
the absence of a common set of rules and definitions has resulted in
unreliable and inadequate environmental performance information disclosed by

"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," states the Commission.

Ms Rieko Yanou, assistant project manager for the International Accounting
Standards Board, states the IAS will not comment on the criticisms made by
the European Commission, but she did point out that IAS 37, Provisions,
Liabilities and Contingent Assets, deals to some extent with provisions
relating to environment liabilities.

No environmental/financial stakeholder organizations are campaigning for
stricter financial environmental reporting by EU companies which raises the
question who is calling for the stricter financial environmental

"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
DG ENV B.2 - Sustainable Development (Economics, Science and Methodologies).

"However, it was developed in consultation with the accounting
standards regulators and the professional accountancy bodies of the EU
Member States," says Madeira.

Accounting standards regulators claim they were motivated to satisfy
internal Commission demands and the Recommendation was largely drawn up from
a position paper issued by the United Nations Conference on Trade and
Development (UNCTAD) 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 (now-defunct) Accounting
Advisory Forum," says  Roger Adams
head of technical services for the London based Association of Chartered
Certified Accountants (ACCA).

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

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

"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 ( www.fee.be ) 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
spokeswoman for the Institute for Environmental Management and Economics
(IOW) who also sits on FEE's sustainability working party.

"This is a recommendation only and they have not much impact," says Jasch.

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 General
Direction F : Financial Markets - Unit F.4 : Financial reporting and Company

"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.

EU Member States governments are free to enforce national
codified financial environmental accounting standards which go beyond what
is strictly required at 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 Mikael

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 US 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 US Environmental Protection Agency (EPA) the US SEC's
directive for financial environmental accounting is a nonevent for many
publicly traded companies.

A 1998 EPA study 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 L. 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.

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,
Wellngton 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' (accounting bodies) want this for a very specific
reason, at least in the UK," says Camilla Hair, a corporate accountability

" We have one main driver here:  risk management.  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' (environmental, social and reputational
risks are specifically mentioned), in all annual reports issued after
mid-December 2000," she says.

>From a FEE perspective, there has been little response at the IAS to the
develop IAS standards for environmental financial accounting and auditing to
assist the newly developed risk management transparency rules .

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

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

(c) Donald Sutherland 2001