We have scoured the notes to corporate financial statements produced since 2003, the first year of reported asset retirement cost data for U.S. companies, to search for information about corporate environmental liability and risk. Like many other discoverers, we stumbled on surprising facts while looking for something else.
The first surprising fact is that year after year these companies’ financial statements repeatedly admit that their prior reported environmental debt estimates were way too low. The companies are not intentionally understating these liabilities. It’s just that the methods used to estimate them for financial reporting purposes are seriously flawed. The second surprising fact is that payments on environmental debt are growing at alarmingly high rates.
The implications of these facts are magnified by climate risk. A climate change scenario of growing concern to central bankers and financial regulators, aptly dubbed “Too Late Too Sudden”, suggests that the transition to a low-carbon economy could happen abruptly rendering vast amounts of petroleum reserves suddenly stranded and worthless. In that event, the environmental debts associated with these assets would become immediately due and payable.
To help you understand our findings and their implications we explain how oil companies estimate their asset retirement and cleanup liabilities, why estimates for financial reporting purposes predictably understate actual costs, why auditors and regulatory authorities accept cost estimates that are self-evidently unreliable, how markets can re-price the industry’s environmental debt, and why it’s critical that this be done sooner rather than later.