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Valdez spill have been placed at double the original loss of $2.8 billion.



Example 1: financial penalties
In the UK the Environment Agency produces an annual review of business
environmental performance called the ˜Spotlight™ report. This report looks
at environmental performance on a sector-by-sector basis and highlights the
key prosecutions that have occurred within those business sectors in the
past year. The most recent Spotlight review (for 2004) provides statistical
evidence showing that the courts are imposing more fines of a higher value
on companies who are found to be in breach of environmental law. For
example, in 2004, 233 limited or public limited companies and 13 directors
were fined a total of £2.3 million for environmental offences. However, the
average fine of £8524 was £546 less than it was in 2003.
Although the average level of fines in the UK is low the long-term trend
is for a large increase to parity with the level of fines in the US. It is possible
to get an idea of what the future may hold for organisations in the UK which
fall foul of environmental law. A New York company that spilled thousands
of gallons of oil off the Massachusetts coast will have to pay a $10 million
fine alone, and a large US retailer agreed to pay $3.1 million in order to set-
tle charges of excessive storm water runoff at its store construction sites, in
violation of the US Clean Water Act (1972, with amendments in 1977 and
1987) (Environmental News Service, 14 May 2004). Both of these incidents
are equal to or greater than the entire total for all UK fines.
Chapter 18 “ Environmental risk management 445




It is arguable that the biggest impact is not directly financial but indir-
ectly via negative publicity as the EA Spotlight series is also used to ˜name
and shame™ those organisations that have breached environmental law.
Given the growing public interest in environmental matters, incidents of
poor environmental performance are also widely reported in the popular
media often using this document as the original source.




Operational environmental risks
Operational environmental risks are explored in depth in Chapters 19 et seq
below.


Legal risks
A company exposes itself to environmental risks on a regular basis. From water
and energy use to disposal of waste, compliance with discharge consents to the
management of its transport fleet, almost everything that any organisation does
can have an impact. There is a growing body of international and domestic
legislation, which means companies must properly consider and deal with
the environmental consequences of business decisions. The range of reasons
includes:
Compliance failure can lead to the criminal prosecution of both the company
and its officers;
The organisation may be subject to civil claims by third parties;
The costs of enforcement notices and remedial actions if clean-up costs have
to be borne by the offending organisation. This may entail disruption to the
business as well as costs; and
There may also be damage to an organisation™s reputation if there is a failing
to properly manage environmental risk.
Operational activities give rise to legal obligations set by civil society and stake-
holders. These include civil damages, criminal penalties, enforcement and pro-
hibition notices, as well as other methods of ensuring compliance with
environmental and health and safety laws.


Implementation risks
There are risks with the implementation of environmentally sustainable pro-
grammes. These may include:
Public relations backlash if projects don™t provide the estimated savings, or
improvements. This can lead to allegations of ˜greenwashing™ the public;
Employees may think that improved environmental performance may lead to
efficiencies which will cost them their jobs;
Part D “ Overview of the Environmental Aspects of Business Risk
446



The criteria for measuring improvements may not capture the real benefits of
the programmes;
Improved performance may lead to managers fearing further pressures (both
internally and externally) for further improvement; and
The measurement of environmental impacts and organisation™s performance
are based on moving concepts of what is ˜right™. Our understanding of our
impacts changes rapidly and the difficulty is having an EMS that responds to
˜real™ risks while still appearing to adhere to prescribed or historical targets
for reductions.

Human health risks
Environmental risks and human health cannot be easily separated, but these
issues are dealt with in more depth in Chapters 16 and 17.

Stakeholder and reputational risks
A company has stakeholder value which is a combination of the variables of a
particular company™s stakeholders and other interested parties. This also
includes brand and reputational values, elements of goodwill and takeover pre-
miums. It helps companies attract capable staff and retain existing talent. The
following stakeholder framework can be used for assessing the stakeholder per-
ceptions of a particular company (full review in Chapter 9).


The SERM stakeholder template
* Academic and research organisations;
* Business partners, suppliers and trade bodies;
* Customers and their representatives;
* Direct action groups and NGOs;
* Employees and their representatives;
* Financial institutions (banking, investor and insurance criteria);
* Governmental organisations;
* Local and regional governmental organisations;
* International governmental organisations;
* Journalists and media organisations;
* Key competitors; and
* Local communities.


A selection of the main stakeholders driving environmental legislation and risk
mitigation practices is analysed below. Your organisation could complete a full
stakeholder analysis though to view all potential indirect risks.
Customers and business partners: the purchasing power of individuals
and companies increases the pressure on suppliers of products and services to
improve their environmental performance. There is a continuing growth of
Chapter 18 “ Environmental risk management 447



consumer environmental awareness and awareness of the impact that environ-
mental problems can have. This can lead to brand and reputation damage.
Several large companies are making their supply chain ˜green™ by develop-
ing Supplier Management Systems (SMSs). These can involve excluding sup-
pliers, reducing the number of suppliers, or introducing extensive performance
criteria and evaluation processes for suppliers. Requirements for supplier dec-
larations on sustainability which outline minimum expectations of behaviour
on environmental, health, safety and labour issues are becoming increasingly
common. The range of information and ˜green™ consumer labels is also increasing.
Direct action groups, including NGOs: it is primarily large companies that
attract the negative attention of non-governmental organisations (NGOs) and
the media. However, the UK has always been at the forefront of developments
in environmental activism and legislation (e.g. the Clean Air Act 1956). It is the
birthplace and home to some of the most active NGOs, such as Greenpeace,
Friends of the Earth, Oxfam and Christian Aid.
On the other hand, NGOs can be sources of good news and recognition for
award-winning businesses. In 2003, five of Europe™s six best reporters were UK-
based and the Co-operative Bank was voted the world™s best reporter and most
sustainable organisation.
International organisations: these are developing agreements on limiting
pollution (e.g. Montreal Protocol to Eliminate Ozone-depleting Chemicals) and
are becoming the main drivers of environmental legislation. The influence of
the EU has been responsible for raising the profile of the environmental agenda
and for environmentally focused directives like the Integrated Pollution
Prevention and Control (IPPC) Directive 96/61/EC which facilitates Europe-
wide comparisons of environmental performance of business operations.
An example of recent international agreement is the ratification in May
2004 by 50 countries of the 2001 Stockholm Convention on Persistent Organic
Pollutants. This makes illegal the use of a range of pesticides, dioxins and poly-
chlorinated biphenyls. This trend of banning substances will increase as the
˜Precautionary Principle™ is adopted.



The ˜Precautionary Principle™
One of the main developments from international analysis of environmen-
tal risk is the ˜Precautionary Principle™. This principle has been a driving
force in how the EU views environmental risk since 1993, allowing pre-
ventive action on issues if analysis of the best scientific evidence suggests
preventive action. It perceives issues based upon a risk assessment
approach. The primary idea is to avoid the use of known damaging agents,
like heavy metals and endocrine disruptors (gender altering compounds).
Key elements include the analysis of:
* Perceived risk level, and whether this is of a significant nature;
* Scientific assessment of this risk;
Part D “ Overview of the Environmental Aspects of Business Risk
448




* Potential future impacts and mitigating factors;
* Potential measures for mitigating the risk; and
* Positive and negative implications of these countermeasures.
Dr Roberto Bertollini of the World Health Organisation (WHO) said: ˜I
believe that what we do know now must guide us in our review and
approval processes, and should become the basis of a bold new precau-
tionary approach that puts the burden of evidence on safety first.™




This principle is beginning to be applied to environmental issues as the EU
begins to restrict some of the 130 000 manmade chemicals on a human health
basis. For example, recent research indicates that various pesticides increase
the risk of Parkinson™s disease. More research indicates that the risk is even
higher in patients with a certain gene variant. This trend will continue and
bring substantial improvements in the ability of environmental and health
enforcement agencies to prosecute on the basis of this new scientific evidence.
Financial institutions: the financial community is becoming more engaged
in the environmental risk issues as discussed in more depth in Chapter 9. With
regards to environmental issues there are particular developments.
Banks are tightening their lending criteria as larger loans and projects have
to undergo environmental impact assessments. There are new voluntary codes
of practice being developed which ensure that banks do not lend to environ-
mentally damaging projects, the first of these, the ˜Equator Principles™, have
been signed by the majority of the big UK banks.
Shareholder investor groups are becoming more active in their requests
for action from companies on an increasing range of issues. In the US and the
UK there are groups like the Carbon Disclosure Group who control over $1 tril-
lion in assets and are pushing for large companies to report on, and manage,
their CO2 emissions. In the US there are AIDS and race equality action
groups. In the UK corporate governance activist investors are increasing their
demands on larger companies, which are filtering down through their supply
chains.
Insurers (who are also shareholder activists) are increasing premiums for
policies which include health and environmental liabilities. They are also
altering policies so that some items are not covered (flooding, asbestos and the
like) as these issues surface as substantial material risks to their margins.
Governmental organisations: national and local institutions have an
impact upon the development, and enforcement, of the regulatory framework. A
variety of government departments and agencies are responsible for the estab-
lishment of standards seeking to reduce the level of harmful substances entering
the environment and harming the public; imposing penalties; persecuting
offenders; issuing enforcement notices; and taxing, subsidising and planning
restrictions. The present government™s approach to many environmental issues
Chapter 18 “ Environmental risk management 449



are to use market mechanisms as a corrective force. This has led to a range of
environmental taxation and subsidies, which include:
Aggregates tax;
Climate change levies, and renewable energy grants;
Company car and business vehicles taxation, especially used for private use;
Landfill taxation; and
Utility bill increases (sanctioned by government regulators) to pay for environ-
mental remediation. For example, water companies will be allowed to raise
customer charges to invest in improving their environmental performance.
As a result of numerous European directives, the UK government is increasing
the level of regulation and enforcement. The Environment Agency has reiter-
ated the importance of appropriate penalties to deter avoidable pollution and
steer companies and businesses towards optimum environmental management.
Spokesperson Kathryn Corcoran said:
Companies often look for the cheapest way out. To deter environmental damage it must
be clear that the price of environment pollution is a lot higher than the price of environ-
ment protection. (April 2001)

In effect the government will move towards the ˜Polluter Pays Principle™ as they
seek the dual benefits of increased government revenue and protection of the
environment.


The ˜Polluter Pays Principle™
This has been incorporated in the UK™s Environment Act 1995 and ini-
tially in the Environmental Protection Act 1990. Within Europe the prin-
ciple has been embedded within decision-making processes but was
formalised with the Treaty of Amsterdam 1997. There is a growing ten-
dency to incorporate the principle into legislation along with market
mechanisms. This is evident from developments in the carbon taxation
and waste disposal fields. The principle in its rawest form is that organ-
isations that pollute will only be encouraged to desist by being charged a
percentage of their profits/turnover as opposed to a minimum fine.
Therefore, the larger the company the larger the fine, and this will become
more apparent as regulatory enforcement agencies revert to fining organ-
isations based on their ability to pay.


There will be increased environmental responsibility for the largest companies
in the UK. The Company Law Review last stated that company directors:
must recognise, where relevant, the importance of relations with employees, suppliers,
customers and others, the need to maintain a reputation for high standards of business
conduct and impact of their actions on the community and environment.

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