Avoiding the Icebergs

Organizations of all kinds are increasingly required to achieve and demonstrate environmental compliance by controlling the impact of their activities, products and services on the environment. Governments have an interest in ensuring compliance with environmental legislation and can use their powers of enforcement to achieve results.

Insurers, also, have an interest in knowing whether their clients meet the minimum compliance obligations. Like risk managers, insurers would encourage clients to take steps to improve their environmental performance and mitigate losses.

How is this being accomplished? More often than not, companies are hiring environmental health and safety (EHS) managers to help a company comply with health and safety regulations. They hope that by doing so, they can kill two birds with one stone — i.e. compliance with both environmental and health and safety laws and environmental laws. An argument can be made, however, that compliance with environmental laws is enough of a task to merit attention in its own right.

All organizations, regardless of size or activity, are exposed to environmental risks. At the same time, it is not always the case that organizations are placing environmental issues at the top of their priority list. There are likely a number of reasons for this; the most likely reason, however, is a general lack of enforcement by government.

On closer investigation, a typical industrial or commercial operation deals with its environmental obligations by employing an Environmental, Health & Safety (EH&S) manager or coordinator. Health and safety is another government-regulated activity in which the compliance requirements are strongly enforced and inspected routinely; the consequences of a poorly-run health and safety program can result in serious harm to employees and business reputation. Very serious and compelling concerns can drive top management to divert resources away from meeting environmental requirements: given a limited time and budget, for example, a lone EH&S manager may focus more time and energy on health and safety issues, responding to environmental issues only when they reach a crisis.

Unfortunately, this doesn’t negate the company’s legal obligations to practice sound environmental management. A typical industrial plant is subject to an ever-changing sea of laws, regulations and bylaws imposed by all levels of government. In fact an industrial plant operation may be regulated by more than 20 different kinds of regulations involving, to name only a few, environmental emergencies, spills reporting, water quality, waste disposal and air emissions. And yet, when it comes to enforcing legislation, governments typically expend far more resources on health and safety compliance than environmental compliance. For instance, the Ontario government in 2004 conducted approximately 2,500 targeted inspections for enforcement of health and safety legislation, compared to about 500 for the environment. Given increasing public concern and awareness about environmental issues such as greenhouse gases, local air quality and drinking water, however, environmental issues are moving back onto the front-burner.

Companies unprepared for this shifting emphasis towards environmental compliance may need to re-evaluate their risk management strategies. A recent Ontario Ministry of the Environment inspection sweep encompassed 35 petrochemical facilities in southwestern Ontario; almost 100% of facilities inspected were found to be in non-compliance with one or more legislative and regulatory requirements. Common deficiencies included a lack of spill planning and lack of approval for wastewater collection, sewage treatment or air emissions. In 2006, another inspection sweep of 260 industrial, commercial and institutional operations in Ontario resulted in an overall non-compliance rate of 92.7% (most issues related to waste diversion and disposal).

Non-compliance occurrences require the organization to take immediate steps to correct the deficiencies. But faced with the threat of significant fines, a company’s time might be consumed by reacting rather than preparing for the future. Compliance is like the tip of the iceberg: identified deficiencies in the short term suggest a much larger environmental management concern is lying out-of-sight, just underneath the water.

What, then, is the best approach to deal with a situation of reactive environmental management and increasingly stringent regulation and enforcement? What steps can an organization take to reduce environmental exposures, and what role does insurance play?

UNDERSTAND RISKS

Environmental management should be considered a partnership between the insurer and the insured. Both should work together to identify and understand environmental risks. Insurance underwriters have successfully used the Environmental Impairment Liability (EIL) survey method to assess the frequency and severity of potential future losses that go beyond compliance. EILs help to identify appropriate controls to prevent or limit environmental loss. The EIL survey provides the opportunity to interview people in the company responsible for environmental compliance and to visit the organization. The EIL survey includes recommendations to prevent and/or reduce the likelihood from losses to occur. Inspectors who represent the insured need to be experienced: they need both a strong technical background in environmental management and a broad understanding of business realities.

MITIGATING RISK BY IMPROVING PERFORMANCE

Once risks are identified and understood, insurers have an excellent opportunity to assist the insured in developing a game plan to mitigate the risks. An ‘environmental management system’ (EMS) can assist an organization — and its lone EH&S coordinator — to meet the increasingly heavy burden of environmental compliance. In many instances, the introduction of an EMS can increase environmental performance, aid cost savings and reduce environmental liability.

By looking at all aspects of performance, opportunities for improvement may be found that might otherwise go unnoticed. Where an EIL survey has identified recommendations for improvement, the EMS provides the tools for the organization to conduct internal monitoring outside of the EIL survey.

An EMS need not be expensive. Depending on the size and type of organization, individual EMS programs can be developed and tailored to suit an organization’s needs. The EMS might be modelled after a number of well-recognized systems such as ISO 14000, or the Ontario Environmental Leaders program under the Canadian Chemical Producers Association.

Registration (with ISO 14000) is a considerable achievement, but in many cases it may not make good business sense to register a company. Registration requires costly audits and is not necessary for most organizations. Insurers may also want to develop incentives for companies that choose to implement an EMS.

By developing a partnership, plans to mitigate losses and encourage improvement can be realized. Where a business lacks internal resources, insurers could function as the agent of change through awareness training, support and consultation.

This is one of those win-win situations that can reduce premiums and decrease the overall environmental risk of the organization. Proactive planning with an environmental management system means fewer surprises. It helps prevent problems from going unnoticed and exposures from developing.