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Chapter 18 “ Environmental risk management 439

An enhanced awareness of the environmental aspects of running a busi-
ness will entail reviewing procedures and processes not only to make them
more environmentally sound but also to improve efficiency. Businesses across
the spectrum have been surprised at the cost effectiveness of measures to
reduce energy consumption and minimise waste generation. The use of low-
energy technology, improved insulation, the plugging of leaks, recycling of
materials and energy can all lead to significant savings.

Transboundary issues
Transboundary issues play an important part in the context of the environment,
risk and the corporation. Most of the global concerns have been laid at the respon-
sibility of the industrialised world, thereby enhancing the importance of the
debate over environment, risk and the corporation. While some have been more
important regionally the global repercussions have raised awareness of the public
and the need for pressure on business and government to take urgent steps.
The concept of ˜shared responsibility™ has been embraced by the EU since
the 5th Environmental Action Programme of the EU Commission ˜Towards
Sustainability™ which:
Promoted the partnership of government and industry as a team working
together; and
Emphasised the way forward regionally and globally as the implementation
of improved environmental standards through a mix of regulatory, voluntary
and economic instruments.
This fact, along with the concern that there should be a level playing field in
terms of international trade, has meant that there is an ongoing comparative
exchange of information both by government and industry in relation to com-
pulsory and voluntary standards. The principle of sustainable development as
endorsed by the 5th Action Programme of the EU “ and developed in the cur-
rent 6th Programme “ should be at the forefront of any corporate environmen-
tal policy. This principle recognises that world natural resources are either
renewable or finite. Renewable resources should be managed in order to pro-
vide a continuous stream for ongoing productivity. Finite resources should be
used only in the most productive and efficient ways in order to allow time for
the development of alternative sources once existing resources have been
depleted and/or for the development of comprehensive recycling schemes to
renew these resources if practicable.
While the EU is working towards harmonisation within its borders, juris-
dictional differences between member states do still exist and they maintain
separate legal systems, some having imposed stricter standards than those
enacted at EU level. The effectiveness of enforcement measures also varies
widely. Looking further afield, there is an undoubted need to fulfil interna-
tional environmental standards in order to compete globally in terms of trade,
tenders and the market. Sustainable development requirements have pushed
global business towards an enhanced proactive management approach.
Part D “ Overview of the Environmental Aspects of Business Risk

Institutions in the WTO are also aware of the need for environmental
understanding in the context of trade and competition. In addition the initia-
tives proposed in respect of emissions trading demonstrates the transboundary
nature of this debate.
Finally the trends in favour of a common approach to environmental
reporting also confirm the transboundary nature and interaction of the
environment, trade and competition.

The future growth and forward planning of any organisation requires crucial
budgeting of available resources, the most important being financial and
human resources. Management should consider projections in terms of a ˜green
budget™ in their effort to support a credible environmental protection policy
and to maintain a high marketing profile as well as to attract public support for
ongoing activities. Management standards are an increasing feature of business
life. ISO 14001 is now almost second nature and, beyond notions of quality,
verifiable standards are being extended into new areas such as the environment
under ISO 14001. In one sense the EU™s Eco-Management and Audit Scheme
has been another example of this trend, albeit with some novel aspects.

Regulatory approaches
UK background
The UK Environmental Protection Act 1990 (EPA) envisaged a comprehensive
regulatory scheme of integrated pollution control, this principle having since
been taken up as ˜the way forward™ by the EU. Historically, the EPA was influ-
enced by the growing volume of EU legislation on the environment. Since the
modifications to the original EEC Treaty (Treaty of Rome 1957) brought about
by both the Single European Act (SEA) signed in 1986 and the Treaty on
European Union 1991 (commonly known as the Maastricht Treaty), the institu-
tions of the EU have an express mandate for the development of comprehensive
environmental regulations with the support of all the member states, which has
major ramifications for the operation of businesses. The Environment Act 1995
established a single Environment Agency in England and Wales and added a
framework for dealing with contaminated land.

The US connection
In developing its environmental legislation the EU has taken into account estab-
lished environmental protection legislation and policy in the US. Liability for the
clean-up costs of such sites may fall not only on the owner/operator, but also on
companies who transported any waste to the site, previous owners of the site,
companies whose waste was dumped on the site at any time and even lenders to
those companies. The longstanding debate on environmental liability in Europe
Chapter 18 “ Environmental risk management 441

(the Commission published a Green Paper on the subject in March 1993) also
involves a stricter enforcement regime.

Developing world perspective
Many third world countries have sophisticated environmental legislation on the
books and when they commence effective implementation this will have a signifi-
cant impact on any business operating within their territories. For instance, India
has both environmental auditing and impact assessment regulations in place. In
order to minimise any impact it is important to be aware not only of existing regu-
lations but also of forthcoming regulatory developments and their enforcement.
Therefore from an international point of view the ideas behind an organi-
sation™s environmental policy are vital. At the very least the aim must be to
comply with minimum standards. Ideally the standards maintained should be
the strictest possible, bearing in mind the cost/benefit ratio. For international
companies, a single policy encompassing all the varying requirements found in
the jurisdictions in which they operate is an ambitious and potentially expen-
sive endeavour, although the Bhopal incident in 1984 demonstrated that if high
standards of management are not maintained, the consequences can be devas-
tating. That particular incident led to American businesses being forced to
maintain uniformly strict standards wherever they carry out their operations,
irrespective of local regulations. Where financial constraints do not allow such
an approach, a single minimum standard to be applied, with stricter standards
for those jurisdictions which have enacted such standards, is a viable option for
the effective management of an organisation™s environmental pollution control
efforts. This is true both of the developed and developing world. But by accept-
ing higher standards before they become compulsory, it may be possible to gain
market advantage.

Current trends
The current trend is for increasing implementation of environmental legislation
with stronger enforcement and tougher penalty provisions, including criminal
fines imposed on those having control of the polluting operation. By way of
example, the EPA 1990 strengthened the criminal penalty provisions within the
UK and gave sweeping powers to the Secretary of State for the Environment to
enact comprehensive regulations for the control of everything from air and water
pollution through to litter. The recent re-enactments by the US Congress of the
Clean Water Act, the Clean Air Act and the enactment of SARA in 1986 have
tightened US federal laws, at the same time imposing stiffer criminal and civil
penalties. Developments in Third World and Eastern European countries are
being closely monitored by international organisations, including the UN.
The imposition of penalties for environmental crimes moves by inter alia the EU
to impose strict liability on companies causing environmental damage, and
international monitoring of environmental protection efforts, should all be borne
in mind when developing corporate environmental policy.
Part D “ Overview of the Environmental Aspects of Business Risk

Further examples are provided in Chapter 3 of the trends and drivers
affecting these sustainability issues.

Being proactive: the advantages
One of the main reasons legislative developments need to be anticipated is the
necessity to budget for capital items such as new plant and process equipment.
It is particularly important to keep abreast of international initiatives, such as
the famous example of the phasing out of the use of CFCs, which eventually
have repercussions at regional and local level, in order for the business to
remain competitive by anticipating new measures and acting upon them.
Climate change is another vital issue that is engaging representatives of both
the public and private sectors.
A well thought out public relations approach to increase awareness of a
company™s green credentials is invaluable. For some time we have witnessed
the impact of organisations such as B&Q which have effectively dictated envir-
onmental management standards to would-be suppliers and, in some cases,
have actually sought to assist smaller organisations in their supply chain to
meet those standards.

Value supply chain
Greenness often equals quality in the eyes of consumers, but consumer interest
in the environmental performance of a business is no longer limited to those
living in the immediate area of the company™s activities. Moreover the debate
has broadened to matters of corporate social responsibility, corporate gover-
nance and best practice. Many companies now publish details of their environ-
mental policy in their annual report. The European Union believes that all
sectors of society must be made to feel a sense of shared responsibility for the
environment, and the drive to increase public access to environmental informa-
tion is seen as fundamental in this context. The EU™s ˜eco-labelling™ scheme had
a similar thrust. In the UK the Department of Trade and Industry has recom-
mended a ˜cradle to grave approach™ in relation to product stewardship, i.e. that
the supplier of a product which has the potential for contaminating a site or
causing pollution should take responsibility for it by developing environmen-
tally sound practices covering the use of that product even when no longer
within the supplier™s control (e.g. when the product is being transported, used
by the consumer or when it is sent for disposal). Recent examples of the impli-
cations of the WEEE and RHOS legislation demonstrate that these issues are of
continuing importance for a corporation and relevance to their risk management

Stakeholder dialogue
Wherever a corporation operates and is implementing a risk management strat-
egy communication is vital “ workers, shareholders, the local community,
green action groups and the press should be kept informed of how perceived
Chapter 18 “ Environmental risk management 443

environmental problems are being managed and solved and, if possible, given
a role in helping find solutions.

Environmental risks and trends
Environmental risks can have significant impacts upon an organisation and the
costs of production of goods and services. This has been assessed as 5.1% of the
market value of the 350 largest EU and US companies (source: SERM). This risk
to organisational value increases depending on the amount of legislation, vol-
ume of litigation and price of raw materials. There is also an increase in the
level of stringency in environmental regulations at governmental and intergov-
ernmental levels, as institutions like the EU make organisations (governments
and companies) and their officers (ministers and directors) more accountable
for their damage to the environment and people™s health. These regulations will
translate into increased levels of non-compliance fines and even personal
liability for directors.
In brief, the risks include pollution incidents and emissions to air, water
and land, as well as waste and hazardous substances like chemicals and asbestos.
The level of environmental risk inherent within a company is dependent upon
a range of issues, such as their sector of industrial activity and specific oper-
ational sites, or the countries they operate in. For example, exposure to litiga-
tion is much higher in the United States than in the EU, exposure to poor labour
standards is generally higher in Asia and the water risk profile is higher if com-
panies have operations in water-stressed countries.
The main types of risk reviewed here are liabilities, operational risks,
financial penalties and enforcement costs, the increases in the cost of resources
and the stakeholder perceptions of the company (see also Chapter 9).

Financial risks
One method of accessing risk focuses on material or financial threats to an organ-
isation™s value. The risk assessment methodology measures a company™s expo-
sure to fines; penalties; increased expenditure on pollution abatement,
compliance, clean-up and prevention measures; legal costs, increased resource
costs and staff time. These factors can be combined with a weighting for their
sector of activity, and their risk management activities. The resulting figure is
the total potential financial loss the company could suffer if the environmental
risk was to materialise. The average risk at stake is 5.1% of the market value of
the 500 top EU and US companies, 2.2% of this is due to direct risk, whereas
2.9% is due to indirect risk.
Business managers may not be aware of the level of potential losses that
could result from environmental risks, especially as many of these do not form
a part of the standard risk management practice. The management responsibil-
ity for these issues is often delegated to operational managers and receives lit-
tle strategic attention. There also has been a big rise in the number of directors
fined for pollution incidents, according to Environment Agency (EA) figures.
Part D “ Overview of the Environmental Aspects of Business Risk

In a recent survey by KPMG LLP results indicated a widespread lack of risk
assessment and management. Forty-two per cent of Europe™s largest companies
(involved in mergers and acquisitions) said that unforeseen environmental,
social and health and safety issues had led to higher operating costs; and that
21% of these companies had experienced direct financial liabilities.
Regulatory enforcement notices can mean a requirement to improve equip-
ment and processes leading to production time being lost in the handover. For
example, a large oil company received a £1 million health and safety fine, but
lost the equivalent of £30 million due to having to stop production and replace
the items stipulated in their enforcement notice. The ˜Polluter Pays Principle™
(see the box below) will come into greater prominence as companies are fined
a percentage of their turnover.
Environmental costs are being incurred indirectly in the form of insurance
costs due to general and specific environmental risks. A recent example has
been the flood losses, which are estimated (by Screentrade) as having cost £700
million during the floods of 2001“02. The AA says that premiums across the
entire home insurance industry have risen 1.5%. This situation will affect busi-
nesses as cover is being withdrawn in flood prone areas. New insurance prod-
ucts are being designed to cover environmental liabilities and insurance
premiums are increasing. Large loss experience levels have increased sensitiv-
ity to these risk issues, for example recent estimates of a repeat of the Exxon


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