Electrical culture

Tony Dimond, senior vice president within the Risk Management Practice at Marsh, explains how to manage recycling risks of the 'throw-away' consumer age

In the past, how many UK manufacturers and importers of electrical and electronic equipment considered the environmental legacy of their products when obsolete or simply no longer wanted by their consumers? Who helped to catalyse and add fuel to our throwaway consumer culture of the past few decades?

When faced with the startling facts relating to the electrical equipment consumers throw away each year, the tendency is to look for reasons why, and perhaps seek out someone to blame. Should manufacturers have considered the consequences of the discard and replace culture they have encouraged? And why has the make do and mend culture disappeared over the past 40 years?

The answers no longer lay in the textbooks of social anthropologists, but in a series of legislative directives from the European Union. What has resulted is a crafting of some tough legislation that ensures producers (typically the manufacturers and/or importers) are obligated to take responsibility for their products when they are discarded into the waste stream and to incorporate recycling in the product design phase.

To those that have yet to fully appreciate the business implications of this eco-friendly regulation, please take note of the Waste Electrical and Electronic Equipment (WEEE) and the Restriction of the use of certain Hazardous Substances (ROHS) directives- because both will have a significant impact on the future viability of your business models.

Should we worry? As consumers, perhaps. Some of the questions we hear take the form of: Can our waste management systems cope with the additional recycling obligations, where is the infrastructure for it? Are we destined for new forms of discarded product mountains in our landscape? Who is responsible? How is the extra annual recycling cost of an estimated £450 million to be paid?
As a business, should you be concerned about the impact of these directives? The answer, without doubt, is yes.

The enlightened few

Yet even now, we are seeing only a handful of businesses with enough foresight to invest heavily in understanding the implications of WEEE, although that number is beginning to grow. Why is this? One school of thought is the issue is regarded as non-business critical, the other is simply based on the extent of confusion that has existed over the implications of WEEE and the other eco-driven regulations.

To date, our discussions bear out the view that it has arisen out of the uncertainty surrounding legislative implementation. This has been the main driver for many businesses to close their eyes and ears to the plethora of anecdotal advice and commentary on WEEE and simply wait to see if any degree of certainty can miraculously appear as the implementation deadlines draw ever closer.

But time is now running out. If ever there was a need to sort the issue out it is now, or at least to have a plan in place to transition smoothly towards new work processes and operating structures. The only other option is simply to face the potential enforcement consequences of fines, product withdrawal or even imprisonment of directors and cessation of businesses. Clearly it is a reputation issue at its most fundamental level to all who advocate their businesses as socially responsible.

To those that only see the downside of such legislation and have lobbied governments on this, some appear to suffer from a bad case of business myopia or put more simply, are no better than the proverbial selfish child. It is not all downside – there are financial benefits, some significant, from market opportunities to the more traditional form of business efficiency gains.

Some firms are well advanced in their thinking on this. Advantages are being identified in the area of the eco-friendly products redesigned to last longer and being more conducive to recycling, to the opportunities of cost containment (such as raw material, production costs, energy usage) to de-manufacturing activities and reverse supply chain strategies all interconnected to manage this evolving issue.

Managing risk

Dealing with the legislation and the associated risks requires businesses to consider two sets of solutions – organisational and financial. Organisational issues are needed from an operational and compliance perspective; and financial, by managing the risks and potential rewards to position and protect the business in a liability regime that promotes both collective and individual producer responsibilities. Our attention to this subject arose out of the WEEE Directive’s desire to address the real potential for ‘orphan risk’ that hampered progress of the forerunner legislation, the End of Life Vehicle Directive. In doing so, the concept of recycling insurance initially brought into the world under the ELV regulations was christened through the WEEE Directive.

The uncertainty surrounding the liability regime caused much angst on how the insurance market would be catalysed into offering a mature product mix at the flick of a switch that would be a valuable protection to a business’s broader WEEE strategy. But as the directive points out, financing for the costs of recycling can take a number of different forms – would insurance be the best?

Constructing a policy

Unfortunately, few businesses have assessed the question outside very narrow financial cost criteria. Consequently, the answer so far has been disappointing, albeit a little understandable given the uncertainty that has dogged the regulations thus far.

How can a business expect to sell its recycling risk when it doesn’t know what that risk is anyway? It’s the nature of this risk that makes the subject worthy of further
investigation, specifically when insurance solutions can take on both finance and administrative services, predominantly those which we understand businesses fear to retain within their own specific strategies.

In our view it is back to basics and the fundamentals of constructing an insurance policy and programme by asking three questions from the outset:

  • What are the threats to a business from WEEE regulation?
  • How big are the potential losses to that business? And
  • What can be done about these risks?
  • The nature and breadth of the potential threats that a business now faces from WEEE is as broad as any other we have come across in any other business issue over the past decade. The range stretches from the simple issue of what the risk impact of getting the recycling cost wrong may be, to the more complex issues of reversing the supply chain, managing a competitors’ funding obligations, changing consumer behaviour patterns as well as materials and technology risks. Given this, it is surprising many businesses have yet to embrace the need for a thorough analysis to which a robust financing strategy enhances the current business model.

    Counting the cost

    Estimating current and, more importantly, future liabilities, relies on a coherent stochastic modelling framework to help understand the financial dynamics of a business’s different WEEE products.

    We would expect results to provide business with sufficiently robust information to make informed judgements on at least four areas of its financial risk management structure, namely:

  • What financial dangers is the business to avoid at all costs?
  • What are the investments and costs that a business needs to retain and manage?
  • Where might the business mitigate its risks for cost escalation, or maximise opportunities either through contract or organisational controls?
  • What risks can the business transfer or sell economically to another party?
  • Conventional wisdom typically explains the rationale for selecting a financial solution between risk financing, risk transfer and risk retention on not very sophisticated techniques as rules of thumb, available market pricing, management feel, pain thresholds, loss probabilities or peer benchmarks.

    But where does a business go for a financial solution to avoid the burden of both an inherited WEEE liability and for the future? Is there value in working with advisors in this area, where market sensitive data needs to be shared?

    Unless you are a risk management specialist in European legislation, supply chain economics, recycling technologies, actuarial and accounting techniques, waste/asset management capabilities including the tracking of such assets, audit and perhaps above all else a robust WEEE business strategy, independent advice and counsel should be a must have.

    Future gazing

    The legislation and all the associated risks are about to hit electrical and electronic businesses. There is a need to embrace the subject, grapple with the finances and the supply chain issues and begin to work within the new regime. Treat the issue as an opportunity. Step forward and answer some difficult questions about how you will address your responsibilities.

    Work with the subject matter experts. Explore the financial solutions that can be created. Managing WEEE risk is more than just compliance or operational changes.
    It is more than finding someone to buy your WEEE obligations. Inevitably, whatever solutions are developed, they will be devised using both the disciplines of art and science, but all will have to work within a viable business model going forward.

    We are and remain strong advocates to government and to industry that insurance has a significant role to play in the wider discipline of WEEE management. For businesses that are without a rigorous process to evaluate these risks to understand the potential impact and consequent need for financial protection, the ability to manage WEEE effectively is only achieved through chance. If your business is or has yet to turn ‘green’, please make sure your finances do not turn red simply because you were not prepared for WEEE.

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