Environmental liability risks are an important concern for Europe’s industrial base
Environmental liability risks are an important concern for Europe’s industrial base. For this survey, Strategic RISK interviewed 40 risk managers in European business organisations. Most worked in large industrial or quasi-industrial companies. Even among the four respondent companies mainly involved in finance, media, retailing or business services, however, three had direct practical exposure to environmental risk through their business operations – while the fourth had concerns about potential for indirect exposure under the EU’s evolving environmental liability regime.
Of these 40 interviewees, 35 per cent rated their potential environmental exposures ‘high’ or ‘very high’, 35 per cent ‘average’ and 30 per cent ‘low’ or ‘very low’. Many interviewees seemed to believe that although the environmental risk from their operations was theoretically high, tight risk management processes drove the actual residual risk to a lower level. Judging by the results of this survey, however, a significant new environmental liability loss can be expected to affect about one in ten major European companies each year.
Legacy issues are just as much of a problem. A full 60 per cent of interviewees said their companies had known environmental liabilities arising from past operations. Forty-five per cent said they had known liabilities through the previous operations of acquisitions or subsidiaries. Those companies that seem to have avoided liabilities through their own operations also appear to be avoiding exposures through subsidiaries or acquisitions.
One respondent in three was willing to state complete confidence that his company had identified all potential environmental liabilities under current regulation. Many of those opting for ‘reasonable’ confidence, however, expressed a high level of confidence in their potential liability investigations that fell only just short of ‘complete’. The survey showed, not surprisingly, that the higher the company’s perceived risk, the less likely the interviewee was to be fully confident in its identification of potential environmental liabilities under current regulation.
Of our 40 interviewees, 15 said that they were aware of changes affecting them that could arise from the new EU Environmental Liability Directive. Most of these 15 worked in companies they rated ‘average’ to ‘very high’ in environmental liability risk. Most European companies seem ready to take the Environmental Liability Directive in their stride, though some risk managers expressed concern about proposals to hold companies liable for the loss of or ‘significant’ damage to natural habitats.
So how well are companies managing their potential environmental liabilities? Only one respondent said that his company did not have a formal, written environmental management strategy. Sixty per cent said that their companies had ‘detailed and well-rehearsed’ processes for dealing with sudden pollution accidents. The majority carried out regular training exercises to rehearse procedures – and some had had occasional additional ‘rehearsals’ in the form of responses to live incidents.
For most companies, responses to sudden, accidental pollution were an integral part of their wider crisis management or incident management planning. Many respondents spoke of having IT systems in place to support the internal reporting and management of incidents. Interviews also revealed many different approaches to processes for dealing with sudden, accidental pollution incidents.
Of our 40 respondents, 32 were able to discuss their insurance arrangements. All of these made some provision for transferring environmental liability risk. Only 35 per cent had specific environmental liability policies, however. The remainder relied on such limited coverage as existed in their standard product liability or public liability policies.
Many respondents complained that transferring their gradual environmental liability risks to the commercial insurance market was either impossible or prohibitively expensive. But several said they kept the situation under annual review – indicating an interest in offloading such risks as soon as the chance arises.
Varying national regulatory regimes affect how companies view and manage their insurance. In Germany, companies are legally required to separate their environmental liability and general insurance: specific, standalone environmental management cover is mandatory.
Many companies are putting a real effort into communicating their environmental management policies to the public, interest groups and – not least – investors. Where environmental matters are concerned, reputation management seems to have a strong commercial rationale. One third of respondents said that their companies now produced a free-standing environmental impact management report and several French respondents, plus one each in Denmark and Ireland, said that this was now mandatory for them. Twenty-one per cent said they included a section on environmental impact management within a wider-ranging Corporate Social Responsibility (CSR) report, while the largest group – 38 per cent – said they included information on their environmental impact management within their general annual report. Only three interviewees said their companies published no environmental impact management information at all.
Most posted their environmental management reports on their website. Quite a few – French firms in particular – had website sections, or even entire dedicated websites, addressing environmental and sustainability issues, often as part of wider Corporate Social Responsibility initiatives.
Companies are using many other, often quite innovative methods to communicate their environmental management strategies and establish reputations as good corporate citizens. Some had dedicated public relations officers at key plants, ran visitor centres for the public, conducted exhibition tours of local towns or published community newsletters. Others supported charitable foundations, got actively involved with community environmental improvement projects or engaged with interest groups through regular liaison meetings and discussion forums.
To what extent were companies relying on external environmental consultants? Forty-one per cent of interviewees said their company used external environmental consultants in M&A due diligence, while 23 per cent said they had them in regular use at all sites. Fifteen per cent said they had them in regular use at critical sites. Only eight per cent said their company never used them.
Today, the march of ‘globalisation’ is shifting much of Europe’s industrial activity to lower-cost operating bases in the East. Several manufacturing companies we spoke to were running down their European production and opening new plants in China or India, where industrial pollution regimes are, of course, lax by today’s western standards. But in time, that will change. Several interviewees we spoke with insisted that their companies would be applying European standards of environmental management wherever they operated. That approach will help avoid reputational damage today and heavy decontamination bills tomorrow.