November 23, 2020

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Evaluating Environmental Liabilities for Financial Management Reporting: The Final Frontier

By Jerry D. Worsham II, Shareholder with Ryley Carlock & Applewhite

The evaluation and disclosure of environmental liabilities is a key responsibility of environmental attorneys and environmental managers (EM). The financial reporting requirements of the Securities and Exchange Commission (SEC) associated with annual reports or financial statements for governmental and public companies help drive this effort. While private companies are not required to report publicly, they need to have regular reporting for their banking institutions and financial stockholders. This process has no real standardized framework, but the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), ASTM International, the SEC, and many other sources offer guidance documents to support this work.

Disclosure is guided by the scope and objective of the financial statement and, accordingly, by the materiality of the environmental liability and level of information available. ASTM E2173-16, “Standard Guide for Disclosure of Environmental Liabilities” (Oct. 1, 2016).


Materiality refers to the significance or impact of an omission or misstatement in a company’s financial statements on the judgment or conclusions of a user of that financial information. The primary rule for deciding materiality appears in the Generally Accepted Accounting Principles (GAAP):

Items are material if they could individually or collectively influence the economic decisions of users, taken from financial statements.

The GAAP definition is consistent with a more formal statement from the FASB responsible for GAAP:

The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

The ASTM International also has a helpful definition of materiality:

A material item is one that its omission or misstatement is of such a magnitude in the surrounding circumstances that either the judgment of a reasonable person relying on the financial statement would have been changed or influenced by its inclusion or correction or there is a substantial likelihood that the item, after assessing the inferences and their significance drawn from the given set of facts associated with the financial statement, would be viewed as significantly altering the information made available to the investor or shareholder. [Note that this definition is not intended to supersede the definition of materiality in SEC Staff Accounting Bulletin Topic 1.M, Financial Statements––Materiality.]

ASTM E2173-16, “Standard Guide for Disclosure of Environmental Liabilities” (Oct. 1, 2016).

In most instances, the EM will be given a fixed dollar amount as a cut off for establishing materiality for items of concern.


More detail is required in the documentation of environmental liability transactions than traditional transactions. Environmental liabilities are based on complex estimates that inherently have elements of uncertainty. For example, the final resolution of factual, technological, regulatory, judicial, or legislative matters can significantly alter the existence and projected amount of an environmental liability. In addition, reliance on estimates or work product of third parties (i.e., environmental consultants, outside attorneys) may or may not be completely accurate. Appropriate disclosure does not necessarily mean an exhaustive disclosure; estimators, auditors, and the reporting entity’s management use discretion and professional judgment in setting limits on the preparation cost, materiality, and volume of information worth disclosing as environmental liabilities.

Climate change

Pension funds and investors increasingly demand climate-change-related information in public disclosures. The SEC issued relevant guidance in 2010 about the evaluation and disclosure of environmental liabilities on climate-associated business or legal developments. The ASTM weighed in on providing climate-change-related information with ASTM E2718-16, “Standard Guide for Financial Disclosures Attributed to Climate Change” (Aug. 1, 2016). More recent information has been issued by the Task Force on Climate-Related Financial Disclosures in its 2017 Final Report.

An example of how corporations are responding is the recent announcement by Microsoft of the establishment of a $1 Billion Climate Initiative Fund to address global warming. Similarly, Exxon Mobil Corporation disclosed issues related to climate change in its Annual Report and 2019 SEC Form 10-K.

Practical approach

The initial step is to meet with legal and corporate management to establish the dollar value for materiality. This value will help eliminate minor or nonmaterial environmental issues and set limits to the preparation, cost, and volume of information that warrants potential disclosure.

The second step is to collect the appropriate data/records for an inventory of potential past and current operating facilities, Phase I Environmental Site Assessment (ESA) Reports, any Phase II ESA Reports, leases, purchase and sale agreements, liability cost sharing agreements, merger agreements, spinoff agreements, claim adjudications with insurance carriers, partnership agreements, processes, records, historical properties, assets, insurance, and contractual obligations believed to meet the materiality threshold. Other notable sources for identification of environmental risk are:

1. An asset retirement obligation (e.g., demolition, site remediation, surface reclamation, or abandonment) of a newly constructed facility;
2. Notice of insurance claims;
3. A regulatory determination of “imminent and substantial endangerment to human health and the environment” for a facility;
4. Violations of a permit, license, or regulation;
5. Lawsuits against a facility for an environmental obligation; and
6. Relationships to any company practices or sites, historical or current, with known liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act or a state equivalent.

The EM should review the various state statutes and environmental regulations for any required climate change or other environmental disclosures for a particular state, and confirm with legal and corporate management the preliminary inventory of identified environmental liabilities before going forward.

The third step is to separate the list of identified environmental liabilities into categories based on relative background information (e.g., information that is publicly available, obtainable from its source with reasonable time and cost constraints, and practically reviewable for confirmation), and the quality of the information available to provide the estimate. For example, environmental liabilities could be separated into those with known cost estimates from those requiring future relative cost estimates. An EM will likely also need to create a separate category for those sites with minimal information that will require some form of estimation approach. ASTM E2137-17, “Standard Guide for Estimating Costs and Liabilities for Environmental Matters” (Mar. 1, 2017).

The fourth step is to collect the environmental liabilities cost estimates for: (1) known costs, (2) future costs, and (3) future costs estimates using the various estimation techniques for a final tabulation. It is important to share the draft information with corporate management prior to completion of the final disclosure.

The last step is to complete the final report for inclusion in the financial disclosure.


Corporate financial management disclosure and reporting on environmental liabilities and climate change impacts continues to be sought by various groups within the environmental community, including nongovernmental organizations, pension funds, bankers, and environmental advocacy groups. The effects of any corporate supply chain on climate change will also be pursued for potential disclosure.

The first step in evaluating environmental liabilities for financial management reporting is understanding the level of materiality set by the corporate accounting or management’s regulatory policy decisions. Appropriate disclosure does not necessarily mean an exhaustive disclosure; discretion and professional judgment are tools of the process. The source of the base information and qualifications of the individual EM who completes the information for environmental disclosure must be documented.

Published in Trends November/December 2020, Volume 52, Number 2, ©2020 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

Jerry D. Worsham II is a shareholder with Ryley Carlock & Applewhite. He has an extensive practice in environmental compliance, related litigation, and natural resource development. His experience includes: Climate Change and Environmental and Social Governance (ESG) including comment on issues and regulation development; approvals and permits for natural resource development; litigation defense on numerous cases involving the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA); compliance with the Resource Conservation and Recovery Act (RCRA); civil and criminal liability defense on environmental matters; ASTM Phase I and Phase II Environmental Site Assessments coordination; emergency incident responses; Prospective Purchaser Agreement negotiations; creation of Conservation Easements; and due diligence associated with mergers, acquisitions and initial public offerings. Jerry reviews and comments on federal, state and local laws, rules and regulations on a regular basis and represents clients before federal and state environmental agencies. He can be reached at 602.257.6924 and