Environmental degradation will continue if the corporate continues to misbehave. This study offers evidence for whether environmental violators are more likely to disclose if they are in sensitive industries, faced higher penalties, and required to implement an environmental project. This chapter examines how environmental violations have shaped the mandatory and discretionary environmental disclosures of oil and gas companies in 10-k reports filed with the US Securities and Exchange Commission from 2011 to 2020. Using the Leximancer text mining tool, the violators' annual reports were examined before and after the violations. The results suggest that disclosure tended to be discretionary, and it is possible that selective information was traded off with other discretionary non-financial information for the sake of legitimacy. This chapter provides evidence of the effectiveness of regulators' efforts for higher mandated disclosures to encourage firms to deal with environmental matters proactively to prevent further environmental misbehaviour.
Top1. Introduction
Escalating environmental and climate change-related risks associated with extractive industry activities have intensified lobbying for increased environmental disclosure regulations by influential investor groups and non-governmental organisations. An analysis of shareholder voting trends from 2000 to 2018 was conducted by ISS Analytics, the research arm of the major proxy advisor Institutional Shareholders’ Services (ISS). It concluded that the most significant change in investors’ voting behaviour pertains to environmental and social issues (William and Nagy, 2021). The environmental and social justice rights of stakeholders are better safeguarded with more information about fossil fuel producers’ potential contributions to environmental and climate change-related risks (Griffin and Jafee, 2018).
In the last decade or so, the two main regulators—the US Securities and Exchange Commission (SEC) and US Environmental Protection Agency (EPA)—have intensified their efforts towards higher mandated disclosures to encourage firms to deal with environmental matters proactively and prevent environmental misbehaviour (Peters and Romi, 2013). Anti-fraud provisions in federal laws require firms to disclose environmental violations imposed by the EPA in 10-k filings (EPA, 2001). In the settlement of civil cases, the EPA allows the violating firm to propose potential Supplementary Environmental Projects (SEP) to lessen the imposed penalty (Monti and Deason, 2012). Starting in 1998, the key principle of the SEP program was to implement environmentally beneficial projects that compensated the environment and the community where the alleged violation occurred beyond what firms were required to do by law (EPA, n.d). Undertaking SEPs is an initiative that promotes restorative justice (Lee and Xiao, 2020). If a firm agrees to implement a SEP as part of a settlement, then the amount of the EPA penalty does not exceed 80% of the estimated cost of the SEP implementation (EPA, 2015). Although the EPA’s Clean Air Act and the Clean Water Act (CWA) mandate disclosure while the SEC’s Regulation S-K (SEC, 2019, 2010) contains several provisions that directly address the disclosure of environmental liabilities, there is a lack of conclusive evidence that such disclosures help firms gain legitimacy in addressing environmental degradation.
The SEC’s Regulation S-K Item 103 requires that SEC registrants disclose significant pending lawsuits or other legal proceedings known to be under consideration by a government authority to which they are a party if they arise under federal, state, or local provisions that have the primary purpose of protecting the environment (EPA, 2001). Environmental disclosures under Item 103 are initiated if at least one of the three conditions are met: (i) material proceedings; (ii) the relief sought amounts to over 10% of the registrants’ current assets; or (iii) if government sanctions would amount to more than $100,0001 (Pfund, 2004). The purpose of mandated SEC environmental disclosure is to reduce information asymmetry. If the size of the proposed penalty reaches the SEC’s materiality threshold, the likelihood of the final penalty to be decided by the EPA tends to increase; thus, non-disclosure of the violations would only increase the probability of litigation by shareholders (Peters and Romi, 2013).