Investor Groups Fight for Stronger Severe Risk Reporting

Investors are "mad as hell" over failures in product safety relating to toxic chemicals -- and they're not going to take it anymore. A record number of shareholder resolutions on toxic chemicals and product safety have been introduced by corporate shareholders this proxy season, according to Investor Environmental Health Network (IEHN), a partnership of investment managers who control more than $41 billion in assets.

"Investors and businesses are waking up to the fact today that the risks posed by unaddressed toxic chemicals and the failure to adequately address them can jeopardize a company's bottom line and long-term wealth of investors," says Richard A. Linoff, founder and executive director of IEHN. Linoff says that the collapse of the retail market for polycarbonate baby and sport bottles containing the chemical BPA shows why companies and investors can't avoid the threats posed by products that are unsafe due to toxic chemicals. "It's a long-term strategic issue that goes far beyond short-term news headlines about lead in children's toys made in China, " he says.

The long-term nature of the problems relating to toxic chemicals is at the heart of IEHN's concern that the Financial Accounting Standards Board (FASB) doesn't go far enough with proposed changes to "FAS 5," which will be closed for comment letters on August 8. IEHN advocates a stronger disclosure rule beyond the one-year horizon for severe risk reporting, which the group believes is too short. "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," says IEHN attorney Sanford Lewis. Lewis points out that severe financial threats such as Enron, subprime lending, and asbestos liabilities developed over many years, with eventual catastrophic consequences for investors and that FASB should recognize the importance of long-term risk disclosure and require companies to disclose all severe impact threats, even if the management believes they are only remotely possible.

Other large institutional investors agree that as long-term investors they need improved disclosure of these types of liabilities. And as the ripples of the subprime debacle -- which was far more than one year in the making -- continue to move through the world's financial markets, it's hard to argue against them.