Cleaning up your act
Written by Helen Yates
The strength of a firm’s brand and reputation depends on its ability to protect its surroundings and respond quickly when industrial accidents occur. Helen Yates reports
Environmental risk frequently tops risk management surveys as one of the key concerns faced by corporates today. Research by ACE highlights environmental risk as the second highest ranking emerging risk concern for businesses across EMEA, after supply chain or infrastructure disruption. Of the 650 companies polled, 42 per cent said environmental risks are most likely to have a negative financial impact on their business in the next two years.
Tougher regulation and more vocal stakeholder concerns means companies are held accountable for their environmental impact today as never before. This month, a European Parliament decision to increase corporate transparency has the potential to identify previously hidden environmental risks, impact international climate change negotiations and harmonise increasing regulation by European Member States on corporate reporting of non-financial information.
The decision could affect approximately 6,000 European companies who will shortly be required to include a statement in their mainstream financial reports detailing their current and foreseeable impacts on the environment, focusing on renewable and non-renewable energy, greenhouse gas emissions, water use and pollution.
And nearly three quarters of firms surveyed by ACE said their shareholders are taking environmental risk more seriously. Among the reasons for this is the very clear link between environmental damage and brand and reputation.
Take Deepwater Horizon. Four years and US$42.2 billion on from the Macondo blowout and oil disaster in the Gulf of Mexico BP continues to struggle to rebuild its reputation. The energy giant recently took out full-page adverts in several US newspapers complaining it is being forced to pay hundreds of millions of dollars in fictitious damage claims.
“They’re trying to bring to light what is happening but remain engaged in their PR strategy in the Gulf and nationally,” says Robert Hartwig, president of the Insurance Information Institute. “The advertisements show what they have done to get the Gulf back on its feet.”
The growth in public awareness surrounding environmental issues means companies are today more likely to be taken to task for environmental damage or pollution than they were in the past. Thirty years on from the tragic Bhopal chemical disaster in India there is far less tolerance by regulators and the public for environmental degradation wrought by multinationals and poorly regulated industrial growth.
Those found guilty of failing to adequately protect people and surroundings can also expect to see a hit to their share price. In March, ACE announced it was adding crisis management to its European environmental risk proposition. The insurer is partnering with red24assist to give clients access to specialist resources when facing a serious environmental incident.
“We believe that managing environmental risk successfully is about more than issuing an insurance policy,” says Karl Russek, senior vice-president, environmental risk for ACE Overseas General. “In particular, the reputational aspect of a serious environmental incident in the age of the 24-hour news cycle and social media is more important than ever before for businesses and needs dedicated expertise.”
“By expanding our environmental risk proposition with crisis management services we can now offer... access to critical services that can help [clients] navigate the immediate aftermath of a serious environmental incident,” he adds.
The aim is to avoid the kind of PR gaffes that caused yet more damage to BP’s brand and reputation in the aftermath of Deepwater Horizon. One of these included former chief executive Tony Hayward telling reporters that “there’s no one who wants this over more than I do. I would like my life back.” He was also criticised after pictures of him on board his yacht on the oil-free waters of the Solent were published less than two months after the disaster.
“A lot of our clients are making the logical link between environmental risk and liability and their brand and reputation,” says Cliff Warman, environmental practice leader for the EMEA at Marsh. “The first thing they need is support to manage the communications of that loss to the regulators, to the government and the public. Embedding that type of service into a policy is going to be increasingly important.”
“Many EIL insurers are also offering a formalised 24-hour claims response service,” he continues. “It follows that the quicker you can mitigate and manage a claim from an environmental perspective the better it is for your brand and reputation. It’s very important that firms get good claims advice sooner rather than later.”
More powers, bigger fines
Risk managers and C-suite executives are not just concerned about the detrimental impact an environmental incident can have on their brand. Also keeping them awake is the potential cost of remediation. Under Europe’s Environmental Liability Directive (ELD), which was transposed in the UK as the Environmental Damage Regulations (EDR) in 2009, firms face civil sanctions for environmental offences and any clean-up costs under the “polluter pays” principle.
A central pillar of the EDR 2009 is the requirement for a comprehensive package of remediation measures to cover primary, complimentary and compensatory restoration, based on the principles of ecosystem services. Ecosystem services experts seek to quantify the full impact caused by the environmental damage, and this goes far beyond physical property damage and includes damage to water courses, protected species, natural habitats and sites of special scientific interest.
Under the ELD the potential quantum of claims has grown substantially, explains Warman. For the same loss that occurred historically you would be expected to pay between ten to 40 times more today than in the past. The expanded definition of environmental damage has also increased the exposure. “Nowhere in the ELD does it talk about pollution,” he says. “It talks about damage to the environment, the environment itself now having a value and there being a responsibility for operators to restore the quality of the environment to how it was before it was damaged.”
While the clean-up costs under the ELD are potentially huge, to date there have only been a few cases. In the UK, ahead of the EDR, Bartoline set a precedent. A fire at the adhesive manufacturer’s East Yorkshire premises in May 2003 caused damage to nearby rivers as a result of fire-fighters’ foam and chemicals.
The company’s claim was denied on the basis that it was not covered for clean-up costs. Its bill from the Environmental Agency amounted to £600,000.
A case brought by Mid-Devon Council put the EDR to the test in 2010. A fuel company had caused a spill of Kerosene when it transferred oil to a redundant tank. This caused nearby residents to suffer from nausea, headaches and sore throats. The council served a Remediation Notice specifying the remediation strategy, clean-up targets and completion date and was able to recover its costs under the EDR.
Another example of the EDR in practice is the remediation following United Utilities’ spill of crude sewage into the Three Pools waterway, Southport, killing over 6,000 fish and polluting five kilometres of river, in July 2009. United Utilities was prosecuted and a court fine of £14,000 imposed, but the incident was also designated as environmental damage and so remediation measures were also required.
The company paid £41,000 to restock the river with fish and in October 2011, the Environment Agency served a notice requiring compensatory remediation.
Europe’s worst environmental disaster to date occurred in Ajka, Hungary in 2010. When chemical waste produced by bauxite refining burst the banks of a reservoir, more than 700,000 million cubic metres of red sludge flooded surrounding towns, contaminating rivers and killing three people. Clean-up costs were over €25m and heavy fines were imposed on the operator MAL Hungarian Aluminium.
Plentiful EIL capacity
Such test cases have also raised awareness of environmental liability and the type of organisations taking out specialist EIL cover has broadened as a result. “Ten years ago we were writing EIL insurance for relatively high-risk activities,” says Warman. “Oil and gas and power and waste were bread and butter business for us. The types of companies we’re working for now are many and varied.”
“We have a number of policies in place for property investors,” he continues. “A lot of these properties are leased or rented out and they have little control over what the tenants do at each of these individual sites and there’s a contingent liability embedded in that business model. We are currently insuring things like light industrial warehouses and office blocks.”
“The trend at the moment is for many companies to look at EIL insurance as being low likelihood, high significance cover,” he adds. “So it’s unlikely to happen, but if it does happen it’s going to be expensive. If it does occur it could be a very big event, both in terms of quantum of remediation requirement and the brand and reputation issues that go with that.”
The good news is there has never been a better time to buy EIL cover with plentiful affordable capacity. “Cover available on EIL insurance now is mind boggling,” says Warman. “It’s completely comprehensive environmental cover whereas before every environmental policy used to have to be bespoke to the client and would have certain very selective heads of cover.
“Environmental insurance now is a very commercial place to be,” he continues.
“The data requirements are much lower and people understand what the risks are or could be. We’ve gone from having four or five markets to 13 or 14 at least, and there’s more coming by the month. There’s no lack of capacity that’s for sure.”
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