Practical Steps to Assess and Measure Environmental Risk
What steps should a public issuer take to assess and measure its environmental compliance risk?
Some companies approach environmental compliance in an overly simplified manner: do what the law requires and nothing more. While this is not a bad starting place, it is not a complete answer and it does little to help public companies assess their risks for disclosure purposes.
In the same way that public companies adopted risk assessment methods for the assessment of control risks when making their certifications of internal control adequacy for Section 404 of the Sarbanes-Oxley Act, public companies should also adopt risk assessment methods for environmental risks. (While the assessment method may be the same as that adopted for Section 404 purposes, it does not necessarily have to be the same.)
An assessment method will identify the universe of compliance risks and, for each risk, assess its immediacy, its potential impact, and methods for controlling that risk. A rigorous control protocol will also track the design and implementation of controls for material risks and include a testing or audit regime to test both the design and the efficacy of those controls.
The COSO methodology adopted by most public companies for Sarbanes-Oxley Section 404 controls provides a convenient approach for developing environmental risk assessments and controls. In addition, an alternative environmental management system such as ISO 14001:2004 (International Standards Organization) may also apply.
ISO 14001:2004
The ISO 14001:2004 system was referenced in Executive Order 13423, which directed federal agencies to adopt systems for improving environmental compliance, reducing the consumption of natural resources and reducing air, water and waste emissions and improving overall environmental stewardship. As applied to federal agencies through subsequent government announcements, it requires federal agencies to implement plans to:
• Educate employees on environmental and sustainability issues;
• Implement procurement practices to reduce energy usage and improve sustainability;
• Reduce water consumption;
• Shift power consumption from fossil-intensive methods to green or renewable methods of power production;
• Reduce environmental impacts by shifting to more efficient buildings, production systems and transportation systems; and
• Reduce the environmental impact of the disposal of electronic devices by improving disposal methods and encouraging the use of electronic devices with minimal environmental impact upon disposal.
Through its rigorous method of identifying, assessing, controlling and managing risk, the ISO: 14001:2004 method (or equivalent) has been adopted by federal agencies for their compliance with Executive Order 13423. Likewise, public issuers might also adopt that same method.
An environmental assessment and management system under ISO 14001:2004 embraces the concept of Plan, Do Check and Act (PDCA), a system made popular by Dr. W. Edwards Deming, considered by many to be the father of modern quality control. Once Objectives, Roles, Resources, and Procedures are put in place, a GAP analysis is performed to identify areas of non-conformity or non-compliance. An Implementation phase is initiated, followed by monitoring and review to identify areas of opportunity for improvement. The system also calls for the establishment of a continuous improvement process.
ISO 14001 – Good for the Banking Industry?
ISO 14001:2004 is not industry specific and therefore lends itself for use by a myriad of industries and organizations, including banking. In 1999, UBS was the first international bank to obtain ISO 14001 certification for its worldwide environmental management system. Even local banks have seen the value in ISO 14001. Alpine Banks of Colorado has earned and re-certified in the ISO 14001 standard since 2006, and has won many awards for its sustainability initiatives, including the Green Leaf Award from Bank News. The time frame for the entire process, from start through certification can vary dramatically based upon a variety of factors including organization size, number and locations of branch operations, type of industry, management buy-in, and staff training. Organizations which currently have an established management system, such as ISO 9001:2008, already have an existing framework and understanding to more easily and quickly implement an ISO 14001:2004.
Typically, an organization should be ready to allocate at least 5 months and sometimes up to one year to reach certification status. Organizations have several options for implementation. The traditional method is to utilize the services of professional consultant/trainers. Additionally, with the growth of ISO 14001:2004, there are now a number of software programs which have been primarily developed to assist organizations in streamlining their record keeping and reporting responsibilities. Worldwide, as of 2007, over 154,000 certificates have been issued to organizations in 148 countries.
Measuring Greenhouse Gas Emissions
As GHGe (Green House Gas Emissions) have become the accepted unit of measurement for reporting and regulatory purposes, ISO has incorporated these measurement and reporting tools within the ISO 14001 family. ISO 14064 parts 1, 2 and 3 are international greenhouse gas (GHG) accounting and verification standards which provide a set of clear and verifiable requirements to support organizations and proponents of GHG emission reduction projects. ISO 14065 complements ISO 14064 by specifying requirements to accredit or recognize organizational bodies that undertake GHG validation or verification using ISO 14064 or other relevant standards or specifications.
It would follow therefore, that properly initiated, an environmental management system would include all conceivable steps in assessing, measuring and mitigating risk. Reverting our focus back to the various disclosure requirements which were enumerated in part 2 of this series, now armed with real data, measurements and impact reduction objectives, an issuer could conceivably translate that to a more positive disclosure report.
Private Companies
While this series has focused on the SEC Guidance and its effect on public companies, there have been some regulatory actions proposed and adopted that could affect private companies. The EPA recently issued reporting requirements for 10,000 facilities in the U.S. At present, those reporting requirements are mostly applicable to mining, minerals production, wastewater treatment and carbon dioxide sequestration facilities, but the EPA has suggested that it intends to broaden the scope of its GHGe reporting requirements over time. The most recently adopted provisions, announced in late June 2010, will begin taking effect in 2011.
On the legislative front, the proposed Kerry-Lieberman Bill (American Power Act) sets up a framework for cap and trade: the buying and selling of carbon credits. Other bills have also proposed cap and trade arrangements. While there can be no guarantee legislation of this type will be adopted in the U.S., the European adoption of cap and trade following the Kyoto Climate Change Protocol, indicates that the cap and trade framework is one that will be on the horizon for some time to come if it is not adopted in 2010.
Regardless of whether environmental reporting is legally mandatory, companies that wish to take a leadership role in environmental stewardship can do so through their approach to reporting. By assessing, measuring, and controlling environmental impacts, and reporting on the results of those efforts, companies are able to lead in this effort by their own example.
About the authors:
Keith Winn is vice president of marketing and chief operating officer of GreenProfit Solutions Inc., a Ft. Lauderdale based sustainability consulting, certification and contracting firm. You may contact him at 800-358-2901 or kwinn@greenprofitsolutions.com.
Jonathan B. Wilson is a corporate and securities attorney at the Atlanta law firm of Taylor English Duma LLP. Mr. Wilson is also the founding chair of the Renewable Energy Committee of the American Bar Association’s Public Utility Section. You may contact him at 678-336-7185 or jwilson@taylorenglish.com.