Environmental Risk Management

Paul Pritchard

• Publisher: Routledge
• Year: 2014
• Print ISBN: 9781853835988
• eBook ISBN: 9781136544323
• Topic: Business
• Subtopic: Management
• Index: Business

This timely publication considers recent developments in environmental risk management as they relate to commercial organizations, including risk transfer through insurance. It starts by looking at characterization of risks based on the hazard-pathway-receptor principles, emphasizing the importance of site specific factors.

Environmental risks are increasingly considered as a part of strategic control assessment. Checklists and case studies are presented to assist in review and assessment of environmental risks. Further guidance is offered for decision making under uncertainty, showing the potential of tools such as Monte Carlo analysis and fuzzy logic, and leading to a review of risk assessment and management frameworks.

Environmental Risk Management is an accessible and valuable reference to those from a range of backgrounds - including occupational hygiene, safety, quality personnel and operational managers - who are dealing with environmental issues within their organization.

CHAPTER 1

INTRODUCTION

This publication started from the desire to provide an update to Managing Environmental Risks and Liabilities. In the five years since it appeared there has been a range of significant developments in the field of environmental risk assessment and management. There have been major changes in the risk-based regimes for dealing with contaminated land in both the Netherlands and the UK and environmental risk management standards have appeared from the US. At least three significant trends are apparent. The greater use of risk-based methodologies in regulation has been complemented by the application of risk management ideas in integrative initiatives within organisations. Finally, there has been increasing pressure for communication and transparency, reflecting societal desires for reassurance on the use of appropriate risk controls in organisations.

The evolving interest in environmental risk assessment has seen the discipline increasingly extended from the academic sphere to become important in government strategy as well as in commercial organisations. This is largely due to its potential for facilitating decision making in a number of areas that present particular difficulties. For example, there may be inadequate data, or what data is available is subject to considerable or unknown uncertainty. Cynics might also argue that it adds a veneer of scientific credibility to aid politically motivated decisions.

Another advantage associated with an environmental risk-based approach in a commercial context is that it closely follows established business thinking. In this way it can be ensured that environmental issues are given equal prominence to, and more easily integrated with, other business functions. For example, organisations are already likely to have a risk management function to identify business risks, allocate resources and pursue risk reduction. Contingency planning would also be important in both environmental and general business terms. In addition, it can reflect uncertainties associated with the assessment and significance of environmental impacts in a consistent and meaningful way.

Risk and Legislation

The fundamental importance of legislation as the baseline for environmental risk management cannot be overstated. However this publication supports the idea that there is considerable merit in moving, beyond a compliance focused approach. Future developments in the legal regime are also likely to require more detailed investigation of issues such as the current extent of land contamination, that are amenable to a risk-based approach. For example, in the implementation of the EC Directive on Integrated Pollution Prevention and Control (IPPC) it is likely that the UK government will require the operators of IPPC processes to report initially on the state of their site. Prior to closure of the site a clean up routine could then be employed to either the IPPC regime or the new contaminated land regime (eg for pre-existing non-IPPC contamination) or a combination of the two (DETR, 1998). In other areas such as climate change, which might profoundly influence future organisational decisions, there is currently little in the way of legal requirements (eg in energy efficiency or choice of fuels) although this is likely to change with the forthcoming IPPC regime. Even with relatively few current ‘legal drivers’, important issues such as this are likely to form part of the risk agenda.

Risk management programmes are therefore likely to go beyond the requirements of legislation and may even pressure regulators into the provision of further guidance and standards in environmental areas. For example, any assessment of property transfer risks that did not include a recognition of the potential of underground storage tanks to cause significant environmental damage would be seen as incomplete, even though it is an area that is currently not the subject of strong environmental regulation in many countries. In the case of contaminated land, pressure has come in the UK from risk managers on to legislators to provide clear guidance on the standards that go beyond existing guidelines (eg for clean-up purposes).

Risk and Regulators

On the regulatory front the strategic utility of a risk-based approach has been recognised within the Environment Agency by the establishment of a National Centre for Risk Analysis and Options Appraisal. This multidisciplinary body is involved in the development of risk-assessment techniques, forecasting the future state of the environment for scenario analysis and providing guidance on costs and benefits to the Agency.

Risk assessments may also be applied as an operational tool. In determining whether to serve a works notice for ongoing or likely pollution under the Anti-Pollution Works Regulations (1999), the Environment Agency will carry out a risk assessment considering the nature and quantity of the material, the likelihood of it entering the waters in question and the quality of the water body. Models such as the Operator and Pollution Risk Appraisal (OPRA) have been developed that can help to focus inspection effort.

In explaining why risk assessment is important for regulators ‘… in a society where a primary role seen by the electorate for government is to protect against risks ranging from collapsing buildings, sinking ferries, environmental disasters and even the minutest threat to health’ the Parliamentary Office of Science and Technology (POST, 1996) indicated that risk assessment is an attempt to bring consistency to a complex range of pressures to achieve:

• equity	–	all having similar rights of protection
• value for money	–	allocating finite resources according to their relative importance

Significantly, there has been the increasing involvement of the general public in risk-based environmental issues from questions about the real risks posed by BSE through to recent concerns about endocrine disruptors and genetically modified food. A simple affirmative response to the question – is it safe? – has proved elusive in the face of risk and uncertainty about outcomes. Complementing this greater desire for information and openness has been an increase in the willingness to challenge the views and opinions of experts.

A recent review of various environmental risk management practices at a national/regulatory level has highlighted these issues (Power and McCarty, 1998). This showed a move towards greater emphasis on balancing multiple social goals in an attempt to achieve consensus. In turn this has meant a lesser emphasis on quantitative risk estimates and is leading towards more inclusive processes where those affected by risks become involved in the decision making process. Moreover, it is becoming recognised that the availability of quantitative risk estimates does not necessarily signpost the best risk management option, particularly where there is considerable uncertainty about outcomes.

The Confederation of British Industry (CBI) has recently produced a discussion document on improving environmental regulation (CBI, 1998) based on a survey of members. It stated that risk assessment is a key tool in achieving sustainable development as it requires business and regulators to assess tolerable risk against the cost of reducing it. It recommended a closer alignment of health and safety and environment regulation with a recommended move towards the “goal-setting, risk-based approach” of health and safety law.

The CBI discussion paper highlighted the potential for risk assessment to stimulate debate. An editorial in the journal (ENDS, 1998a) titled ‘A blast from the past by the CBI’ suggested that the CBI was embarking on an anti-regulation phase and that the Health and Safety Executive (HSE) was not the appropriate model for environmental regulation. This view was based on their opinion that the HSE was inward looking and that open, participatory forms of decision making would be needed in future environmental decision making.

Integration of Management

There has been a marked trend towards the integration of environmental controls within organisations. Primarily this has been with related disciplines such as health and safety and quality (here reflecting the systems-based nature of standards developed). The CBI survey referenced above noted the desire for greater integration at an operational level, while cautioning that the strategic aims of health and safety and environment could differ and even contradict.

These developments must clearly be relevant in any discussion on environmental risks, however, it is apparent that developments in the broader commercial sphere have become more relevant. Corporate functions such as treasury, internal audit, property and risk management have been moving towards a broader range of responsibilities including environmental concerns. Risk-based approaches have generally been adopted, which are in many cases entirely compatible with their purely environmental counterparts.

The expanding role of risk managers (historically cast in the role of insurance buyers) has been described by Barker (1997). They are moving from insurance related issues such as property and business interruption to a broader view of corporate risk assessment and control, with corporate executives needing to think of risk management in terms of ongoing activities and controls as well as financial performance. She notes that ‘Risk managers will increasingly work with their Environmental Managers and consultants in a co-ordinated way, reaping real rewards in ensuring not only real reductions of emissions, spillages and pollution incidents but also identifying energy saving and waste reduction opportunities’.

Risk profiling processes are now being introduced to identify key current and future risks to the organisation that could include environmental concerns. This process starts from the viewpoint that as a baseline, legal compliance must be assured but then moves further to anticipate forthcoming legislation, accident risks, reputational risks etc. In this context environmental issues have been seen to offer opportunities for, among others, the cost-efficient use of resources and enhanced stakeholder value (including investors and the general public image).

This coincides with the view from treasurers who indicated that an approach to risk control where line management focuses on operational risks, the board monitoring strategic items, the treasurer focusing on financial risk and the risk manager considering insurable risks would potentially fail the needs of businesses in the twenty-first century (Harris-Jones, 1998). A number of generalised business risk models have been developed to enable organisations to address the strategic and cross-functional nature of this issue.

Communication

The communication issue was highlighted in a US context (Tusa, 1994) where a consistent definition of environmental risk management was seen as crucial to achieving consensus on environmental issues. Areas of historical inconsistency were given as:

• differing health risk assessment methodologies being used by regulators – meaning that regulations might utilise standards based on either available technology or risk reduction, with or without regard to cost (meaning the cost of risk reduction varies greatly);

• conservative assumptions made in risk estimation (particularly in Superfund) resulting in expensive remedies with limited risk reduction;

• media failure to communicate environmental risks in perspective; and

• poor understanding by senior executives of environmental issues, and the focus of some organisations on regulatory compliance rather than reducing environmental operating costs, reducing impacts and liabilities and seeking commercial advantages.

Moreover it is not just within organisations that communication is important, traditional external mechanisms such as mandatory company reporting are relevant. For example, in the UK the President of the Institute of Chartered Accounts of England and Wales has recently indicated (FT, 1998) that annual company reports are failing to identify what risks are faced by a company, more explicitly, those dealing with the environment, society or ethics.

Any person concerned with environmental risks must therefore be cognisant of these developments in communication and integration along with their likely implications. Mutual understanding will be vital to avoid errors. One issue that will be key to broader integration is consistency in language. The term ‘environment’ is particularly vulnerable to misunderstanding. It can be viewed differently in the ecological/pollution context that is the primary focus here. However it has also become a popular term in business circles in its ‘broader surroundings’ meaning across a highlighted spectrum of applications. Waring and Glendon (1998) also note the lack of an agreement on the scope of risks and a common technical language as barriers to integration. Furthermore specialists in different risk-related disciplines are likely to value their separateness for fear that integration will lead to a loss of priority for their area.

Environmental risk terms may have explicit meanings unlike their ‘everyday’ use, for example some people view environmental risks as those aspects of the environment, such as storms or floods, that impact on their business rather than vice versa. The nature of the risks being discussed must be made explicit, along with details of risk receptors and the quantification techniques (if any) employed.

It is also important to differentiate between organisational and ecosystem risks. While there is clearly an overlap between the two, they are different in both their nature and the way in which they are measured.

The former is often assigned a monetary value or has a bearing on the overall public image or reputation of the organisation. Ecosystem risks by way of comparison would include potential damage to a watercourse or other natural resource or human health risks associated with an emission or discharge. This publication focuses principally on the former and the associated management tools that may be applied. This will of course facilitate the overriding objective of minimising ecosystem risks.

A UK government guide to risk assessment for environmental protection (DOE, 1995) gives the following risk-related definitions.

Hazard	A property or situation that in particular circumstances could lead to harm.
Risk	A combination of the probability, or frequency, of occurrence of a defined hazard and the magnitude of the consequences of the occurrence.
Risk assessment	Risk estimation and risk evaluation, where risk estimation is concerned with the outcome or consequences of an intention taking account of the probability of occurrence, the risk evaluation is concerned with determining the significance of the estimated risks for those affected.
Risk management	The process of implementing decisions about accepting or altering risks.

These complement earlier Royal Society Study Group Report recommendations (Royal Society, 1992).

Environmental hazard is an event or continuing process, which, if realised will lead to circumstances having the potential to degrade, directly or indirectly, the quality of the environment in the short or longer term.

Environmental risk is a measure of potential threats to the environment and combines the probability that events will cause or lead to degradation of the environment and the severity of that degradation. Liabilities such as financial obligations may come from the realisation of environmental risks.

These definitions provide a framework, however, problems arise because environmental risk assessment can be used as a term to describe techniques which, although superficially similar, measure very different things and give different results. Furthermore, the phrase ‘we have done a risk assessment to support our action’ should not be seen as a conclusion, but rather a logical framework facilitating questions (if necessary) on the validity of data, assumptions made and conclusions drawn.

Criticisms that have been levelled at risk-based approaches include the fact that they explicitly recognise that risks exist but that subsequently no resources might be allocated for their amelioration (the ‘no action’ scenario), or indeed, that the level of uncertainties involved in risk estimation is so great that the whole exercise cannot be justified. A response to these criticisms could be that it is not the aim o...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Table of Contents
• List of Tables and Figures
• Acknowledgements
• Executive Summary
• About the Author
• 1 Introduction
• 2 The Nature of Environmental Risks
• 3 Property Related Environmental Risks
• 4 Financial Risk Transfer
• 5 Risk Management Integration
• 6 Decision Making with Uncertainty
• 7 Risk Assessment and Management Frameworks
• Acronyms and Abbreviations
• References
• Appendix A – Environmental Issues in Corporate Transactions