The dark side of solar and compensation tactics

On Thursday solar company JinkoSolar (s JKS) issued a lengthy explanation about an environmental controversy surrounding its solar cell factory in China that recently incited a huge protest and a 36 percent drop in its shares on the New York Stock Exchange. The explanation included a mention that it had previously offered to compensate villagers for any harm that its waste disposal practice might have caused them. The disclosure raises questions about how JinkoSolar should have made this information public as a public company.

JinkoSolar outlined a series of events this year that eventually led to the 500-person protest and caused it to suspend its solar cell factory last week. But the Shanghai company never talked about offering to compensate the villagers, at least not here in the U.S., where it’s bound by the U.S. Securities and Exchange Commission’s rules on disclosing information that might affect shareholders or potential shareholders in their decision to invest in the company. There were no press releases about its waste disposal problems and offers of payments to villagers on its website or in SEC filings.

While the payments won’t make a big dent on the company’s finances, they do cast a negative light on a company that promotes itself as an environmentally conscientious manufacturer and a transparent company. An investor may not want to put money into a company that runs afoul of environmental regulators, offers to pay the victims and discloses it after the fact.

Now, the SEC rules on disclosure aren’t cut-and-dried and are therefore subject to interpretations by companies and their attorneys. The disclosure rules are there to protect shareholders by making sure that companies divulge positive or negative information that could affect their investment decisions.

In a report filed with the SEC in May, JinkoSolar outlined a list of risk factors that might impact its finances and operations. Among them is a discussion about its compliance with Chinese environmental regulations, specifically the local rules in Zhejiang Province, where the factory that drew protests is located. The report made a vague mention of how the company is waiting for an environmental approval for part of its factory and that if it didn’t get it, it could be subject to fines or disruption of its operation.

The revelation

Fast-forward to Thursday, Sept. 15, when about 500 villagers converged at the cell factory to protest fluoride-containing waste in a nearby river that they said came from JinkoSolar. The villagers contended the pollution killed fish and pigs, according to news reports. Media outlets, including those from the government-run Xinhua News Agency, reported (via Reuters) that JinkoSolar had failed pollution control tests since April and was supposed to suspend its operation until it could figure out how to comply with waste disposal regulations.

News of the protest made international headlines and has pushed JinkoSolar’s shares down by 36 percent this week. After a press conference and the press release early on Thursday, the company’s stock rebounded nearly 6 percent to close at $6.10 per share. Clearly, the company’s environmental compliance had a big impact on its stock.

The company said it didn’t intentionally allow the waste to flow into the river and outfitted its factory with equipment designed to “minimize environmental impact.” There was a one-day event in May when it found higher-than-acceptable fluoride levels, but the company said that wasn’t usual when starting a new production line, and it lowered the level to below the limit. JinkoSolar said it did have to store wastes in outdoor bins temporarily and suspected that heavy rains in August caused some of the fluoride waste to flow into the river.

Compensation coming

On Thursday the company said it knew about the waste disposal issue before the protest and in fact agreed on Sept. 7 to pay “compensation for the crop damage as well as for the death of any livestock and wildlife arising from the pollution incident, if any.” JinkoSolar expects the payments and cleanup costs to be less than 8 million yuan ($1.3 million). It said there is no evidence that the company’s operation caused a cluster of cancer cases.

JinkoSolar suspended the factory operation on Sept. 17 and now expects to restart the factory in early October.

Being a good environmental steward is particularly crucial for cleantech companies, because they often tout their products as eco-friendly. Even tech companies who are not in the cleantech world, such as Apple, are facing growing scrutiny(s aapl) over the environmental practices of companies that make its products in China. For a cleantech company, being forthcoming about its struggles with pollution control and offering solutions to overcome them is a more responsible strategy.

Images from JinkoSolar and Inyucho via Flickr