Researchers from the University of Gothenburg believe stricter guidelines are required as the lack of information put forward by companies may lead to an “underestimation of environmental liabilities”
European-listed energy and mining companies provide “sparse information” on future environmental costs in their annual reports, a study claims.
Researchers from the School of Business, Economics and Law at the University of Gothenburg in Sweden analysed environmental disclosures between 2005 and 2016 from 164 active European firms in oil, gas, nuclear power and mining.
They believe stricter guidelines are required as the lack of information put forward by the companies may lead to an “underestimation of environmental liabilities”, resulting in future generations potentially having to “bear the burden of clean-up costs”.
“I believe that the future environmental liabilities such as decommissioning costs are often underestimated and few understand the burden these costs might impose on future generations,” said Mari Paananen, associate professor of business administration at the School of Business, Economics and Law at the University of Gothenburg.
“If, for example, an oil and gas company fails, it costs an incredible amount to clean up after old oil wells and the risk is great that the taxpayers will have to pay the bill. Therefore, it is important that environmental obligations are made visible to investors, lenders and the public so that we can discuss the problem.”
Energy and mining companies’ environmental costs information has increased – but still “not very forthcoming”
But Paananen suggests there is “no clear claimant” for this type of future obligation and that there is “little demand for information either”.
She called upon the International Accounting Standards Board, which works to improve the quality of international financial reporting, to provide “clearer requirements about what information should be included in the annual reports” in order to “make it possible to assess environmental liabilities”.
“I think that such guidelines would make companies inclined to disclose more information and would also provide, for example, auditors a mandate to demand specific information,” added Paananen.
The researchers used computerised text analysis to examine information on environment-related restoration costs in the notes to annual reports.
Amongst other things, they searched for information about the discount rate and estimated time horizon for payments – key information needed to assess the size of environmental liabilities.
“Even though we could see that the disclosure of environmental information in the annual reports has increased over time, companies are, on average, not very forthcoming with information,” said Paananen.
“About 60% of the companies provided information about discount rates and 65% disclosed the time horizon for the expected future cash outflow. On the other hand, only just over a third provided information about both.”
The researchers also investigated whether the level of disclosure increased when companies faced media exposure focusing on environmental issues or how they take responsibility for the environment.
“We clearly saw that if companies were exposed in the media, the environmental information increased and the companies provided more specific disclosure on environmental liabilities in the following annual report,” said Paananen. “Above all, there was more information if the media used an uncertain or litigious tone.”