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The table below shows the total environmental risk broken down by the risk
categories in this chapter.


Risk issue Net % risk to
market value

Environmental incident risk 1.3%
Historical environmental liabilities 0.8%
Air pollution “ from production 0.4%
Air pollution “ from transport 0.5%
Air pollution “ peripheral pollution 0.3%
Resource use “ materials 0.4%
Resource use “ energy 0.4%
Resource use “ natural resources inc. land 0.4%
Resource use “ waste generation 0.5%
Resource use “ water use 0.2%
Resource use “ waste water pollution 0.2%
Total 5.4%
Chapter 19 “ Aspects of environmental risk 463



A breakdown of the environmental risk by issue raises some interesting obser-
vations. The categories which contribute most risk to the capital are where
harm to individuals is most likely and liability can therefore be attributed “
environmental incidents and historical liabilities.
A recent report based on global scientific facts and projections from the
UN™s Ecosystem Assessment system and corporate interviews warns that com-
panies must transform business models and operations if they are to avoid
major economic losses caused by the current degradation of ecosystems and the
vital services they provide. (There is a link to the report at the end of this chap-
ter and on the attached CD-Rom entitled Ecosystem Challenges and Business
Implications, 2006 by the Earthwatch Institute (Europe), the World Conser-
vation Union (IUCN), the World Business Council for Sustainable Development
(WBCSD) and the World Resources Institute (WRI))


Environmental risk overview by sector
The following diagram maps out the sectors with the highest net risk from
environmental issues.
Environment Combined
14.0%


12.0%

MINING
10.0%
STEEL & OTHER METALS
Net (Residual) Risk




AEROSPACE & DEFENCE
8.0%
OIL & GAS
TRANSPORT
6.0%
ELECTRICITY
SECTORS
4.0%
FTSE 350 AVERAGE

2.0%


0.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%
Gross (Inherent) Risk

The impact on sectors like mining and oil and gas are clearly visible as they
are involved in large-scale extraction of natural resources on a very visible level
and in environmentally sensitive areas of the world. Other higher than average
risk sectors are those involved in high levels of energy use, the transport and
electricity sectors. They also have a higher level of entrenched liability.
However, there are some surprises and the steel sector provides a good case
study of how economic and environmental pressures are converging. The
inclusion of this sector as high risk may be a surprise, and the results are not
Part D “ Overview of the Environmental Aspects of Business Risk
464



indicative of an entire sector, as only a few were included in this research.
However, even considering this factor the sector™s primary inputs are environmen-
tal in nature, ore and energy, and are thus susceptible to environmental legisla-
tion, like carbon taxes. These resources are also susceptible to large fluctuations
in price. The recent price increases forced many producers to develop innovative
recycling programmes. Environmental efficiency is now part of the competitive
landscape in the sector, an economic necessity, as those who are not signing
agreements to take back their products will be at a disadvantage.
Another surprise is the aerospace and defence sector, which has below
average management of these types of issues. Is this because of a higher than
average level of secrecy in the organisations which inhibit transparency, or is it
that they are under the protective wing of the government and do not feel the
same commercial pressures that sellers of consumer goods do to raise standards
on these issues?
What is noticeable is that the sector devotes more risk management time to
the social and ethical dilemmas and public interrogation that they face.
A trade-off of risk management resources would seem to have occurred, with
the sector targeting their risk management priorities.

General environmental risk management techniques
These are covered in more depth in this and the preceding chapter. Protection
of the environment includes developing an environmental policy and processes
to ensure performance towards the following aims are achieved:
Setting an environmental policy and plan into place, indicating which staff
are responsible for various activities;
Setting standards for:
The controlling of dangerous pollutants and potential incidents;
Air emissions;
Holistic management of water resources, use and waste emissions;
Energy use, sources, security and efficient methods;
Promoting energy efficiency and combating climate change;
Raw material purchasing policies and efficient levels;
Noise, light, odour and other peripheral pollution levels;
Controlling the safe disposal, management and reduction of waste, includ-
ing hazardous waste safety measures;
Product design and production efficiency;
The ability for the products and wastes to be recycled;
The promotion of waste reduction among business processes and suppliers;
The protection of land resources and wildlife habitats; and
The encouragement of wildlife diversity and sustainability of land resources.

Analysis of environmental risk
Each environmental risk category will now be analysed in more detail, includ-
ing more specific case studies of how companies are addressing these issues.
Chapter 19 “ Aspects of environmental risk 465



Environmental incident risk
Analysis of environmental incident risk indicates that:
Environmental incident risk is 1.3% of market value of the top 500 EU and
US companies; and
This risk exposure is reduced from 1.8% of market value by good risk man-
agement techniques (the risk reduction/management factor).
Environmental incidents are defined as one-off acts of corporate negligence or
wrongdoing, where the negative impact on the environment is immediately
perceived. For example:
Significant spills of chemicals and oil, as well as incidents resulting in fines
for non-compliance and legislative infringements;
Chemical fires or vehicle crashes that result in chemicals being released into
the environment; and
Major impacts on biodiversity associated with activities and/or products and
services on land, freshwater and marine environments.
The graph below shows the environmental risk (net) from environmental inci-
dents by sector.

Environmental Activities/Incidents
3.5%

MINING
3.0%
AEROSPACE & DEFENCE
2.5%
Net (Residual) Risk




OIL & GAS

PHARMACEUTICALS &
2.0%
BIOTECH

TRANSPORT
1.5%

STEEL & OTHER METALS
1.0%
SECTORS

0.5% FTSE 350 AVERAGE

0.0%
0.0% 2.0% 4.0% 6.0% 8.0%
Gross (Inherent) Risk


Case studies
Such environmental incidents can have an impact on the following:
Human beings: death, disease, serious injury, genetic mutation, birth defects
or the impairment of reproductive functions. For example, according to the
Food Standards Agency (FSA) the concentration of aluminium and mercury
Part D “ Overview of the Environmental Aspects of Business Risk
466



in the UK™s diet is increasing (Food Survey Information Sheet 48/04 as
reported in the ENDS Report, April 2004, p. 12). An example is that officials
in Tehran now say that toxic fumes killed 120 people a day in the city during
October and November;
Other living organisms or ecological systems: irreversible or other substantial
adverse changes in the functioning of the ecological system; and
Property (i.e. crops, domestically grown produce for consumption, livestock,
game, other owned animals, etc.): substantial diminution in yield or loss of
value due to death, disease or other physical damage, or property (i.e. build-
ings), structural failure, substantial damage.

Oil and gas sector
The world™s largest oil platform owned by Petrobas sank off the coast of Brazil
in April 2001. The economic impact of this environmental disaster cost Lloyd™s
of London an estimated £600 million in claims. There was also substantial loss
of life and significant oil pollution. This incident is a clear indication that envir-
onmental, economic, health and safety and social events are interlinked.
Shell Transport & Trading/Royal Dutch were fined over US$50 million
(£30 million) by a Texas jury for knowingly selling a leaking pipeline that pol-
luted drinking water. Shell also had to pay more than US$6 million in clean-up
costs. It is also expected that they will have to pay the US$5 million legal fees
incurred by the company, which bought the leaking pipeline (Environmental
Law Bulletin, August 2003).
BP plc has had its Georgian pipeline halted by the Soviet Republic of Georgia,
whose Environment Minister said that the company had failed to provide contrac-
tually required environmental information (The Observer, 25 July 2004).

Company analysis of Exxon Mobil
After the 1989 Exxon Valdez oil spill, company representatives made a
promise to the affected communities of Prince William Sound that they
would receive full compensation. Some observers note that the damage to
the reputation of the world™s largest oil company is still ongoing as the resi-
dents say they are still awaiting payment, after 15 years (see www.ens-
newswire.com/ens/mar2004/2004-03-25-11.asp). As a result of this type of
management response and the objecting to the Kyoto protocol, there has
been a UK consumer boycott, which is still in progress. This has been esti-
mated to cost the company $600 million in lost sales in the UK in 2003
(Co-operative Bank/CIS estimated figures based on the Ethical Price Index
survey of customer behaviour patterns). The original cost of the Exxon
Valdez disaster was a US$2.8 billion clean-up bill, even though a double-
hulled oil tanker only costs approximately US$20 million in additional
expenditure to help avoid these types of incidents. It is now estimated that
the liability for such an incident has doubled in the last 15 years and that
a repeat of this incident would cost at least US$5.6 billion.
Chapter 19 “ Aspects of environmental risk 467



UK-based examples of risk
There are very many examples of environmental incidents throughout the
world: in this section some of the more vivid UK-based examples are cited:
Abbey National plc were one of the underwriters for the funding of the
Birmingham Northern Relief Road “ a controversial project criticised for its
expected adverse effects on the environment (i.e. traffic jams, house destruc-
tion, green belt land destruction) (Ethical Consumer Research Supplement
ec84, September 2003, quoted in Corporate Watch, Autumn 2000);
Bryant Homes have been involved in an incident of damage to biodiversity,
as they are accused of having ruined the habitat of one of the UK™s most
endangered butterflies, the Dingy Skipper. They used the sensitive site as a
dumping ground. In a rush to remedy the situation, the damage was magni-
fied as they planted inappropriate grass on the site (Birmingham Post, 25
February 2002, p. 5);
BT Group plc were found guilty of polluting the Thames with an oily, poten-
tially toxic residue and fined £12 500 in 2002 (ENDS Report, issue number
335: In Court, December 2002);
Diageo plc: according to the company™s Corporate Citizenship Report 2003,
four of the company™s sites reported pollution incidents, all of which were oil
spills. One resulted in a fine of £5000. The other three incidents resulted in
actions to prevent reoccurrence;
HSBC Holdings plc: Friends of the Earth reported that HSBC were one of the
institutional UK investors in APP, an Indonesian paper firm, accused by
Friends of the Earth of destroying 287 000 hectares of rainforest and clearing
land belonging to indigenous peoples (Earth Matters, June 2001). HSBC have
been noted as one of the main international banks in lending to the power sec-
tor. Power projects are criticised for their environmental impacts, forced dis-
placement of people, and for a generally high level of bribery and corruption.

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