Risky business

According to a survey conducted by the London School of Economics for law firm DLA, 96% of business people believe regulatory risks are growing, but almost a third of boards are unaware of – or do not know about – the activities in their companies which could lead to a regulatory intervention.

Company directors are simply not aware of the

environmental risks and liabilities their companies face, despite the increasingly harsh regulatory environment in which they operate. The days when contamination of land, aquifers, waterways and the air we breathe could be simply ignored are long over. Directors have the responsibility of ensuring that environmental risk is evaluated and planned for very carefully indeed.

When considering environmental risks – and possible liabilities – the aspects relating to property and the potential presence of contamination tend to spring to the forefront of most people’s minds. But David Hockin, director of environmental due diligence for consultancy firm Enviros says that the real environmental liabilities relate to operational issues rather than land issues.

And the key to managing those operational risks is knowledge. “It’s an pretty obvious truism – if you don’t know where your material environmental liabilities lie you certainly can’t manage them,” Hockin says. “Knowledge is the platform from which to go on to better environmental performance.”

Assessing risks beyond the obvious

The factors that expose a company to risk must be considered very carefully indeed, and Peter Waite, technical director of risk management at Entec UK, says it is important to be radical when considering just what might go wrong. “Companies need to be prepared for what they might not have foreseen – which is always the case in risk assessment.

“Some of the regulator examples are quite mind-bending,” he says, giving the example of the Control of Major Accident Hazards Regulations 1999 (COMAH), which force companies to take account of accident risks to the environment.

He cites an example from regulators of a hypothetical hydrocarbon facility with a dairy next door. An environmental risk assessment considering a possible risk of explosion would be required to consider the possibility of damage to milk storage tanks that could potentially pollute waterways. “You have to follow the chain of events right through,” Waite says.

“People’s knowledge is patchy,” he adds. Quite how patchy is a matter of concern, especially when current economic conditions are taken into account.

To make matters worse, the report also found that less than one in five directors describe themselves as “very confident” in their risk management processes. But Hockin believes there has been a great improvement. “Environmental risk is much better understood than it was, because corporates realise that they are accountable,” he says.

He puts this increase in awareness down to the success of environmental legislation, stakeholder pressure and a hardening insurance market. “The whole point of

environmental law has been to try and ensure that corporates become responsible – not just the legal entity but also the individual director sitting on the board making investment decisions,” he says. “If you actually ignore your environmental responsibilities you can get into serious trouble with the law.”

And while the level of fines for failure to comply with environmental legislation remains much lower than people like environment minister Michael Meacher and Environment Agency chief executive Barbara Young would like, Waite says: “Fine levels have been increasing – with six and seven figure penalties – but the actual cost of incidents is much higher. There is a big diversion of management resources into investigating incidents and the costs of legal defence. There can be a huge cost if there is a plant breakdown. There is loss of production and potentially of market share.”

A changing insurance market

Although a company may think that at least part of any incident costs would be covered by insurance, the safety net can be illusory. Waite says: “What costs are covered will be recovered by the insurer through increased premiums.”

Environmental insurance has changed considerably in recent years – longer-term policies have become available as the sector has matured, and cover has become more affordable. Michael Balmer of specialist broker Willis Environmental says: “The general insurance market has hardened considerably since September 11. We have been affected, but not to the same degree, with premium rises over the past year of 10-15%. Also, the ease with which we can put together long-term programmes – beyond 10 years – has been reduced.”

However, he says that the market is becoming more sophisticated, and that it is willing to innovate. “Companies have become used to the fact that their general insurance programmes offer only restricted pollution coverage so they have developed sophisticated management procedures. But for heavy industry, no matter how well you manage those risks there is always the chance of a loss. Insurance can play a role there, even if it is just catastrophe protection.”

Increased costs and a more sophisticated market places pressure on industry to pay more attention to potential areas of risk. “Ten years ago the insurance market was very soft – insurers could require actions to be taken, and companies could almost ignore the request,” Hockin says. “Nowadays, companies ignore that advice at their peril.”

Operating beyond minimum standards

Risk is not simply a matter of impacts on the physical environment – corporate reputations can be destroyed by an environmental scandal, especially as pressure groups are watching for any slips and the public has become much more concerned with the issue.

Hockin says: “If you are a listed company, you have to make sure that you have your act together with environmental and social issues.” Although they have not had quite the impact environmentalists had hoped, legislative moves like the amendment to the Pensions Act requiring funds to disclose whether they take ethical, environmental and social considerations into account when investing, have brought the reputation element of environmental risk to the fore.

Waite also points out that: “Fines are important from the point of view of reputation – the bigger the fine, the bigger the headline.” And with the rise of socially responsible business, Waite has seen companies beginning to go beyond a strictly necessary level of risk management. “A lot of the more enlightened businesses are making it company policy to operate in excess of minimum environmental standards because of the need to look for the unexpected,” he says.

The careful management of environmental risk has become an essential factor in the running of every business. Assessment of where liabilities lie; plans to minimise costs and damage to reputation; and contingency plans to deal with unexpected events must be considered very seriously by environmental managers and those at board level.

Waite’s advice to business is simple and direct: “Make sure you have assessed your risks systematically,” he says.