Tag Archives: financial reporting

New Guide Published on Conflict Minerals

MetalMiner.com, one of the world’s foremost on-line publications on global procurement of metals and related products, including global pricing trends, capacity constraints, supply market M&A activity, today published its guide to planning compliance with the US Conflict Mineral Law and the (soon to be final) implementing regulations under the Securities and Exchange Commission (SEC).

This guide, titled What Your Company Should Know About Conflict Minerals, is a concise resource containing:

  • Elm’s insights from having conducted audits under a leading industry association program for conflict minerals supply chain traceability, and
  • MetalMiner’s expertise in metals trading/sourcing, with a unique perspective on how the scrap loophole may become exploited by operations in the conflict region.

The date is looming for SEC promulgation of the final regulation and over 160 comment letters were submitted to SEC on the proposal.  To help you prepare for these new program requirements, this report provides valuable substantive information based on first hand knowledge of conflict minerals programs and issues.

MetalMiner.com was founded more than four years ago and since then has become a recognized leader in providing unique insight, analysis, and tools for buyers, purchasing professionals, and everyone else for whom metals and their related markets matter.

Click here to obtain a copy of this report from MetalMiner.

Elm Prepared for US Securities and Exchange Commission (SEC) Auditor Standards for Conflict Minerals Audits

The Elm Consulting Group International LLC (“Elm”) will deliver independent third-party Conflict Minerals Supply Chain Traceability Audit services aligned with the SEC mandates for auditor independence to companies across the range of industries impacted by the US Conflict Minerals Law, enacted as part of the Dodd-Frank Wall Street Reform Act.

In 2010, Elm was engaged by a leading US-based electronics manufacturer industry association to conduct the first independent third-party Conflict Minerals supply chain traceability audits supporting the association’s “Conflict Free Smelter” designation for tantalum. Those audits were the first of their kind, resulted in the first “Conflict Free Smelter” designations issued, and generated significant improvements to the initial audit tools/scope  created by other stakeholders.

Patrick Doyle, Managing Director in Elm’s New Haven, CT office: “Elm is a world leader in conducting Conflict Minerals supply chain traceability audits to support the new Conflict Minerals Law in the U.S.  We saw significant value in bringing our experience to assist a broad range of industries and companies.  However, we were concerned about potential conflicts of interest with being engaged by a trade association consisting of multiple corporate members that also may have relationships with other Elm clients.  In our 2011 strategic planning, we decided to withdraw from our relationship with the association and eliminate the conflict of interest risk for them, their members and Elm.  The association will continue to move forward using other available resources, so our withdrawal will not negatively impact their program.”

Lawrence Heim, Director of Elm in Atlanta, Georgia:  “The US Conflict Minerals Law empowers the SEC with authority for the law’s oversight and enforcement.  Therefore, related audit activities will be subject to audit standards under the SEC, the Government Accounting Office Government Accounting Standards (GAO GAS) and American Institute of Certified Public Accountants (AICPA) Statements on Standards for Attestation Engagements (SSAE).  Eliminating auditor conflict of interest is absolutely critical for conflict mineral reviews/audits. SEC’s December 15, 2010 proposed regulation gave specific direction on this.  We don’t feel this will change even with the extension of the comment period and possible delay in the finalization of the rule.”

Heim continued, “We are hearing from some companies that internal procurement standards are already mandating that material be purchased only from sources that have been audited and verified by independent third parties as ‘conflict free'”.

Since its inception in 2001, Elm has focused its business on independent health, safety and environmental auditing services.  “Conforming to the SEC auditing standards does not require us to do anything significantly different from our long-standing processes and procedures,” Doyle stated.

In Tampa, a Mining Company Shutdown Highlights Business Interruption Risk from Environmental Issues

In Tampa Bay, an all-to-real demonstration is playing out of the trickle-down economic impact of a company operation being shut down for environmental reasons.  The Tampa Bay Business Journal reported this story.

The Mosaic Co. is a publicly-traded company with over $6billion in annual revenue reported last fiscal year.  Mosaic mines phosphate ore.  The company has been mining in Polk County since 1995 and recently filed for an expansion of operations to access reserves in Hardee County.  These ore reserves represent about 10 years of active mining operations.

The Sierra Club, along with other NGOs challenged the issuance of a federal permit that would allow Mosaic to expand, alleging that the expanded operations would cause environmental damage to the headwaters of the Peace River and other streams that drain into the Charlotte Harbor estuary.

On July 30, in response to the challenge

U.S. District Judge Henry Lee Adams Jr. in Jacksonville issued a preliminary injunction against the expansion, saying the Army Corps had failed to adequately explore alternative plans that would cause less environmental damage to the area.

The article reports that, if the Mosaic expansion does not move forward, the economic impact would be dramatic.

At least 18 companies that do business with Mosaic would be out at minimum of $80 million in combined annual revenue, and about 400 of their employees would lose their jobs, in addition to the 221 Mosaic workers who would be laid off …

“If Mosaic is prohibited from further mining, it will mean that Bul-Hed Corporation would cease to exist sometime in the near future,” Ronnie Hedrick, president, said in a court filing.

Mosaic has estimated it would lose $250 million to $300 million in operating earnings in a worst-case scenario.  In its fiscal year ended May 31, Mosaic had earnings of $1.75 billion before interest, taxes, depreciation and amortization on net sales of $6.76 billion.

Business Interruption Planning

The company’s most recent 10-Q (Item 1A – Risk Factors), filed April 1, 2010, did  disclose this potential risk:

Expansion of our operations also is predicated upon securing the necessary environmental or other permits or approvals. Over the next several years, we and our subsidiaries will be continuing our efforts to obtain permits in support of our anticipated Florida mining operations at certain of our properties. In Florida, local community participation has become an important factor in the permitting process for mining companies, and various local counties and other parties in Florida have in the past and continue to file lawsuits challenging the issuance of some of the permits we require. In fiscal 2009 environmental groups for the first time filed a lawsuit in federal court against the U.S. Army Corps of Engineers with respect to its issuance of a federal wetlands permit and similar lawsuits could be brought in the future. A denial of, or delay in issuing, these permits or the issuance of permits with cost-prohibitive conditions could prevent us from mining at these properties and thereby have a material adverse effect on our business, financial condition or results of operations.

Even so, how should the company – and its business partners – respond to such a risk?  And did business partners understand, assess and plan for such a contingency?  In many discussions we have had with clients about potential shut downs, it is common for companies to plan production volume shifts across other operating locations to make up for the lost volume and continue operating.  In Mosaic’s case, however, the article states:

Although Mosaic has four other mines in Florida, their output would not offset the impact of a shutdown at South Fort Meade, the company said.

Even where a company has the physical capacity at other locations to make up for lost production at one plant, environmental restrictions may not allow timely production increases at others.  Wastewater and air permits typically contain conditions limiting production.  These limits can take various forms:

  • Direct limits.  For example, plant operating hours or volume; emissions limits for production equipment or material use; wastewater flow or contaminant concentration limits.
  • Indirect restrictions.  For example, fuel use or emissions limits on supporting equipment such as generators or boilers; wastewater treatment capacity/retention time for adequate treatment.

Suppliers, contractors and vendors may attempt to recover losses from Mosaic through the contractual obligations in place between the parties.  However, in this case, Mosaic has notified at least some of their business partners that this is a “force majeure” event – an extraordinary circumstance beyond their control – which releases Mosiac from contractual obligations.

Has your company evaluated/assessed the myriad business continuity risks associated with environmental matters in your supply chain?  And what contingency plans do you have in place to protect yourself?

When It Spills, It Pours

In years past, we have seen a small – but growing – amount of shareholder activism in publicly traded companies concerning sustainability and environmental matters.  Several Fortune 500 companies have faced and defeated these attempts at requiring greater environmental risk assessment and disclosure.

2010 looks to be dramatically different.

Setting the stage in 2008, TVA experiences a catastrophic failure of an ash pond in Tennessee that also prompts EPA to initiate their own risk assessment of similar ash ponds across the country.

Then, SEC published its Interpretive Guidance on climate risk assessment/disclosure that is effective beginning this year.

On the H&S front, Massey Energy faces a mine disaster that claims 29 lives and raises the profile of MSHA enforcement gaps.

Now, BusinessWeek reports that investor groups are gearing up to require far more information and disclosure from the companies they invest in.  Some highlights of the article:

In the past, demands for risk disclosure tended to be viewed as hypothetical. In light of the Gulf disaster, [Robert Graham, founder and head of the environmental law practice at Chicago-based Jenner & Block] predicts that requests for such information will become more mainstream. “These issues are real and this disaster dramatically demonstrates how they impact a company’s balance sheet,” he says.

Companies will be pressed by shareholders to disclose more information about safety practices, the kinds of fail-safe mechanisms they have in place for high-risk operations, and their plans and prospects. Companies will have to reconsider the insurance they’ve arranged to better gauge how much and what kinds of coverage they need to cover potential risks. They’ll also need to figure out how much cash to set aside in reserve to cover unforeseen incidents that may cause environmental damage, he says. Shareholders will also start to insist on viewing companies’ safety records, including any sanctions received from federal or state agencies regarding their operations.

If your company is not already in the process of evaluating how to define and assess environmental matters in the context of “risk” rather than “compliance” or “management systems”, then you are probably behind.

Are Your Internal Accounting Processes Ready for the SEC’s Climate Risk Interpretive Guidance?

Sure, there are some business risks that are readily identifiable to conform to the SEC’s Climate Risk Assessment Interpretive Guidance.  Things like:

  • Property damage from storms and sea level changes
  • Increased costs related to new pollution controls and fuels
  • Changes in customer procurement requirements.

But read about the supply chain constraint that the UK energy company E.ON brought forward in a Reuters report:

Lack of investment in the vessels used to build offshore wind farms could hinder Britain’s ambitions to shift to renewable energy, the head of E.ON UK’s Robin Rigg wind project told Reuters at the operations center in Workington, northwest England.

Britain aims to install 32 gigawatts (GW) of offshore wind by 2020, enough to meet a quarter of the country’s electricity needs, and although there has been investment in turbines factories and ports, a lack of vessels could curtail targets.

“The targets are very ambitious and the supply chain isn’t there for it to materialize. It definitely has to grow,” Ian Johnson, Robin Rigg offshore wind farm project manager said. “Aside from turbines, vessels to install equipment are expensive,” said Johnson adding that a lack of predictability over upcoming wind farm projects in the past had caused a squeeze on construction vessels as builders rush to use the small stock already built.

Vessel builders in the past have asked: “When’s the next project going to come along? Where’s the continuity for me in the supply chain?”

Reliance on third parties – over which you have little control – to implement business plans could be an overlooked risk in the context of the Interpretive Guidance.  Further, entering into long-term contracts or guarantees with third parties to ensure infrastructure for deployment create additional financial risks.

“Surprised and Concerned” About Illegitimate Government-Sponsored CER Trading?

Environmental Leader has reported

that the Hungarian government sold 2 million previously used CERs, the market became tepid. Then when prices fell from more than 12 euro per credit to less than one euro, trading was suspended on two exchanges, Bluenext and Nord Pool.

The NYT provided more details of the transaction, stating

The credits appear to be part of massive blocks of CERs awarded to Eastern European states and Russia after the collapse of Soviet-era industry.  This created a loophole used by Hungary to reintroduce used CERs back into the market…

Carbon traders said countries like Hungary were exploiting the loophole to earn more money from the carbon trading system than they could by selling the credits that they had previously earned under the Kyoto system…

The traders said at least one other E.U. member state had acted similarly earlier this year.

The EU said they were “surprised and concerned” about the situation.  BusinessWeek quoted others who expressed more urgency about the matter:

“The supply and demand dynamics have been changed,” said Paul Kelly, chief executive officer of JPMorgan’s EcoSecurities unit. While the scope of the problem has yet to be determined, buyers are “questioning the authenticity” of what they are buying.

Unfortunately, this isn’t the only recent development that may cause market participants concern.  This is just the latest in a barrage of credibility and financial damage for GHG emissions trading, including:

  • Last year swindlers robbed governments of about 5 billion euros in revenues — about $6.8 billion — by selling carbon credits and disappearing before paying the required Value Added Tax on the transactions.
  • In January, swindlers used faked e-mail messages to obtain access codes for individual accounts on national registries that make up the bloc’s Emission Trading System, and then used the stolen codes to gain access to electronic certificates that represent quantities of greenhouse gases.
  • In Australia, recent fraud enforcement involved forcing a green power company, Global Green Plan, to purchase carbon credits it had promised to buy on behalf of customers, but never did.  The government is currently pursuing action against carbon capture company Prime Carbon over allegedly misleading claims made by the firm.
  • In Belgium, authorities have charged three Britons suspected of value added taxes (VAT) fraud on CO2 emissions permits.

In the U.S.,  the Regional Greenhouse Gas Initiative (RGGI), a group of Northeastern U.S. states that have a cap-and-trade program for utilities, faced its own demons.

  • The New Jersey government reallocated about $65 million in funds raised in the RGGI auction. The funds were intended for use in developing renewable energy projects, but instead are going to the state’s general fund, Reuters reports.
  • Last year, New York similarly took $90 million from its carbon fund.

So Now What?

Companies with a major stake in the GHG emissions game must conduct a detailed risk assessment of their GHG programs, solutions and exposures.  Given what has developed in the trading market in the past six months, it would be wide to carry out exposure identification, failure analyses, contingency planning and desktop exercises.

Such analyses and assessments may be critical for publicly traded companies in the United States due to SEC’s recent announcement and the newly effective EPA rule requiring reporting of greenhouse gas emissions from fossil fuel suppliers and industrial gas suppliers, direct greenhouse gas emitters and manufacturers of heavy-duty and off-road vehicles and engines.

Lawrence Heim, Director of The Elm Consulting Group International’s Atlanta office, said

Close to 10 years ago, I began posing the question ‘what if the GHG emissions trading market collapses?’  Assuming cohesive legally-enforceable emissions standards existed, the cost proposition presented by emissions trading in comparison to capital expenditures for pollution control equipment was quite attractive.  The impact of a material failure of the trading framework was significant.  This line of thought became incorporated into client risk assessments even back then.

In the US, we can look at the pollution control expenditures related to EPA’s New Source Review (NSR) enforcement initiative to provide insight into GHG control equipment costs.  Of course, NSR enforcement involves pollutants for which there are well-established and commercially-viable emissions control technologies.  We don’t have that luxury with carbon dioxide, which will likely translate into dramatically higher costs.

Further erosion of the viability of GHG emissions trading could have a significant impact on your company.  Please contact us if you would like to understand more about climate business risk assessments and potential risk mitigation options.

The Elm Consulting Group International, LLC and Sentiment360 Announce Solution to Reputational Risk Component of SEC Interpretive Guidance on Climate Risk Assessment

Use of New Technology Tracks Public Perception of Companies’ Sustainability/Climate Programs

In the Federal Register dated February 8, 2010 (75 Fed. Reg. 6290), The Securities and Exchange Commission (SEC) published its Interpretive Guidance on financial disclosure/reporting requirements as they apply to climate change matters, which is EFFECTIVE IMMEDIATELY.  Among the specific risk factors that SEC highlighted in this Interpretive Guidance is the potential business risk associated public opinion/reputational risk.  SEC stated:

Another example of a potential indirect risk from climate change that would need to be considered for risk factor disclosure is the impact on a registrant’s reputation. Depending on the nature of a registrant’s business and its sensitivity to public opinion, a registrant may have to consider whether the public’s perception of any publicly available data relating to its greenhouse gas emissions could expose it to potential adverse consequences to its business operations or financial condition resulting from reputational damage.

In response to this SEC mandate, The Elm Consulting Group International, LLC has partnered with Sentiment360, a global online monitoring company that delivers new media business intelligence SaaS solutions. With offices in the US, UK and the Philippines, Sentiment360 has a proven track record in collecting, analyzing, understanding and responding to online content, be it social media (mircrosites, blogs, forums, etc.), traditional media, video sites, image sites, and more.  Sentiment360 analysis can be delivered on-demand via a wide variety of customizable web dashboards.

“Combining the leading edge data tracking and analytics of Sentiment360 with Elm’s sustainability, climate and risk assessment expertise creates a unique solution to meeting SEC’s requirements,” said Lawrence Heim, Director in Elm’s Atlanta office.  “Our team can aggregate real-time unfiltered public opinion data without the need for surveys, screen it for relevance to sustainability/climate, and frame it in a business risk context. This will provide clients with ready-to-use information in a dramatic labor- and cost-saving manner.”

Heim continued, “Publicly-traded companies that sell products or services outside the US must assess their climate reputation risk globally to adequately determine their business risk and potential reporting needs.  Sentiment360’s worldwide data aggregation and tracking capabilities make this easy.  Elm’s global sustainability and risk expertise can assist in understanding cultural contexts of the subject matter as well.”

Sentiment360, with offices in the US, UK and the Philippines, delivers new media business intelligence SaaS solutions. As a spin-off from the Global Reach group of outsourcing companies, S360 has been offering new media analysis solutions through indirect channels since 2006. As of January 2010, S360 has begun selling directly to end-user clients under the Sentiment360 brand.

As a provider via 3rd party partners we have delivered new media analysis for a variety of entities including advertising and PR agencies, manufacturers, governments, law enforcement and more. As of January 2010, we have become the preferred provider for several global communications firms. More information is available at www.sentiment360.com.

SEC Votes to Require Public Disclosure of Financial Risk of Climate Change

The Securities and Exchange Commission (SEC) today voted to require public companies to disclose the financial risks they face related to climate change.

In her opening remarks, SEC Chairman Mary Shapiro emphasized that

we are not opining on whether the world’s climate is changing; at what pace it might be changing; or due to what causes. Nothing that the Commission does today should be construed as weighing in on those topics.

The Commission is also not considering amending well-defined rules concerning public company reporting obligations, nor redefining long-standing interpretations of materiality.

The vote requires that the SEC develop and issue an “interpretive release” – guidance that can help public companies in determining what does and does not need to be disclosed under existing rules.

Specifically, the SEC’s interpretative guidance highlights the following areas as examples of where climate change may trigger disclosure requirements:

  • Impact of Legislation and Regulation: When assessing potential disclosure obligations, a company should consider whether the impact of certain existing laws and regulations regarding climate change is material. In certain circumstances, a company should also evaluate the potential impact of pending legislation and regulation related to this topic.
  • Impact of International Accords: A company should consider, and disclose when material, the risks or effects on its business of international accords and treaties relating to climate change.
  • Indirect Consequences of Regulation or Business Trends: Legal, technological, political and scientific developments regarding climate change may create new opportunities or risks for companies. For instance, a company may face decreased demand for goods that produce significant greenhouse gas emissions or increased demand for goods that result in lower emissions than competing products. As such, a company should consider, for disclosure purposes, the actual or potential indirect consequences it may face due to climate change related regulatory or business trends.
  • Physical Impacts of Climate Change: Companies should also evaluate for disclosure purposes the actual and potential material impacts of environmental matters on their business.

Although the Commission ultimately voted in favor of the mandate, The NYT reported that Commissioner Kathleen L. Casey said it made little sense to issue such guidance “at a time when the state of the science, law and policy relating to climate change appear to be increasingly in flux.”

The SEC’s interpretive release will be posted on the SEC Web site as soon as possible.

Once the guidance is available, companies will need to review and evaluate the current risk assessment and reporting framework to determine if it is robust enough to comply with the new SEC action.  With our substantial experience with EHS risk assessment and management that extends well beyond basic regulatory compliance, Elm is uniquely suited to assist companies with this.  Please feel free to contact us to discuss further.

Will SEC Heed $500 Billion?

Under current SEC regulations, companies are required to disclose material information or information that an investor should posses in order to decide whether to buy a company’s stock.  But these companies do not routinely include climate-related risks in their filings, nor is the information consistent when it is provided at all.

The California Public Employees Retirement System, which manages $202 billion of assets, and the California State Teachers’ Retirement System, which manages $130 billion of assets, are among 20 investors and groups that petitioned the U.S. Securities and Exchange Commission to issue guidance telling companies to include risks related to climate change in their quarterly and annual filings.

“The SEC should strengthen and enforce its current requirements so investors’ decisions fully account for climate change’s financial effects,” Calpers Chief Executive Anne Stausboll said in a statement.

The initiative hopes to make the most out of the Obama administration’s renewed emphasis on environmental protection, climate change rhetoric and plans to propose an emissions reduction target at the December climate change conference in Copenhagen.

SEC Commissioner Elisse Walter, one of five members who makes decisions on federal securities rules, has said she believes that climate change is a very serious issue and this is the time for the SEC to issue so-called ‘interpretive guidance’ on this topic.

“This (petition) will be taken seriously and be one more piece of influence on the commission, to perhaps get bit more instructive on considering these issues,” said David Martin, a former SEC director of corporation finance — the division in charge of overseeing corporate disclosures. Martin is now in private practice at law firm Covington & Burling.