Decommissioning, other environmental costs often underestimated – study

Coal mining in North-Rhine Westphalia, Germany. (Reference image by tomwieden, Pixabay).

Researchers at Sweden’s University of Gothenburg analyzed the information provided by 164 European listed mining, oil and gas and nuclear power companies and found that most of them give sparse information on future environmental liabilities in their annual reports.

In detail, the experts used computerized text analysis to examine information on environment-related restoration costs in the notes to annual reports, over a 12-year period. Among 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. 

“The future environmental liabilities such as decommissioning costs are often underestimated and few understand the burden these costs might impose on future generations,” Mari Paananen, a professor of business administration who led the study, said in a media statement. “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.”

Only 60% of the companies provided information about discount rates and 65% disclosed the time horizon for the expected future cash outflow

According to Paananen, even though the disclosure of environmental information in the annual reports has increased over time, at present only 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, just over a third provided information about both.

In the researcher’s view, since there is no clear claimant for this type of future obligations,  there is also little demand for information. Thus, she believes that the International Accounting Standards Board needs to provide clearer requirements about what data 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,” she said.

Paananen and her team also investigated whether the level of disclosure increased when companies faced media exposure focusing on environmental issues or how companies 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,” the expert said. 

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