S&P calls for better environmental disclosure

London, 27 September: Standard & Poor’s has accused European chemicals, mining and oil and gas companies of poor disclosure of environmental provisions and decommissioning costs. The credit rating agency is calling for standardised terminology to aid analysis of these costs, which it says represent “sizable future obligations” for companies in these sectors.

Such provisions are made for the clean-up of contaminated sites, the toughening of environmental legislation, or to decommission existing facilities, S&P says. However, “poor disclosure is making understanding the basis and reasons for changes in such provisions guesswork”, it says, in a report, Poor Disclosure By Europe's Chemicals, Oil & Gas, And Metals & Mining Companies Gives Limited Insight Into Decommissioning And Environmental Provisions, published today.

"Companies are setting aside provisions for those future cash outflows and the size of such provisions tends to be based on management judgment rather than third-party appraisals," said Standard & Poor's credit analyst Anton James. "This contrasts with pension provisions, where third parties provide significant input as to obligations for future payments."

S&P is calling for standard industry terminology to be used throughout disclosure and disclosure of the discount rates applied.

“Current disclosure makes comparative assessment difficult as the details on timing and nature of the decommissioning and environmental provisions is opaque,” said James.

The agency treats decommissioning provisions as additions to company debt. It said that, for metals, mining and oil and gas companies, these provisions “represent a substantial part of the overall future debt burden”, equating to about 40% of company’s reported debt. “Decommissioning provisions represent a significant part of the financial risk of these companies, because the majority of [costs] occur at the end of the project's life,” S&P said.

However, S&P does not adjust for environmental provisions, as these tend to be funded from ongoing business operations. Of the three industries, oil and gas companies face the highest obligations for decommissioning and environmental liabilities, equivalent to 50% of companies’ reported debt obligations in 2006. The chemical industry, however, faces provisions representing about 9% of their reported financial debt and these provisions are mainly environmental.