Proactive companies adopt external reports and enviro audits

Richard Cogen, partner, Nixon, Hargrave, Devans, & Doyle, L.L.P. in Albany, was available for questions on external reporting and environmental audits.

Question: What systems are in place for external reporting of environmental liabilities?

Richard Cogen: In the United States, the only mandatory systems are those required by the SEC [Securities and Exchange Commission] as part of a company's annual report. This requirement dates from early '80s or late '70s. Other systems are voluntary, such as the CERES (Coalition for Environmentally Responsible Economies) report. CERES principles took on momentum after the Exxon Valdez spill.

Q: How have these reporting systems evolved?

Cogen: The desire for external reporting systems, beyond those from regulatory requirements, stems from a number of factors. First, environmental responsibility has become a core value of the public, and the public includes investors and customers.

Second, institutional investors such as mutual funds and pension funds also recognize the importance of environmental responsibility to the public. This was one of the original driving forces behind the SEC rule that potential investors had a right to know about significant environmental liabilities because this could have an impact on a company's overall performance.

Third, companies themselves are aware of these issues and they don't want to be viewed as "environmental black hats."

Fourth, the environmental community views external environmental reporting as an important piece for progress in preserving the environment because they doubt the ability of government regulatory programs adequately do the job.

Fifth, government itself realizes that its resources are limited and may become more limited. Therefore, it endorses external reporting and public oversight.

Q: What about environmental regulations in other nations?

Cogen: Environmental regulations vary across the map. The multinational companies would like to see ISO 14000 quality standard become the norm. It permits participants to develop their own environmental-management systems, including the external reporting component. They can choose their own level of participation--company-wide, division-wide, or facility-wide.

Q: Do companies see compliance with these reporting systems as giving them a competitive edge?

Cogen: When ISO 9000 quality standards came out, companies-could see how adopting these quality systems could give them a competitive advantage. The connection among customers, marketplace, and ISO 14000 is not as direct as it is in ISO 9000. Because of that, fewer companies are immediately adopting ISO 14000. Companies that have important operations and customers in Europe are feeling more pressure to get ISO 14000-certified. As time goes on, the public and the market forces discussed earlier will lead more and more companies to see ISO 14000 certification as a necessity.

(Exhibit 2 lists the ISO 14000 categories; Exhibit 3 shows the benefits and risks of ISO 14000 participation. Both exhibits have been provided by Richard Cogen.)

Q: How has environmental auditing evolved?

Cogen: Environmental auditing began to develop in the early- to mid-'80s, driven by the Clean Water Act, Clean Air Act, and the Resource Conservation Recovery Act of the mid-'70s. The laws had teeth, and some big companies paid stiff penalties for noncompliance, Companies then began to develop systematic programs of self-inspection to detect and correct potential violations before they became liabilities. In the end, companies were required by the SEC to do environmental audits of all their operations.

Companies in larger industries (chemical, steel, utilities, manufacturers) worked together to develop environmental-compliance-auditing programs, and the field blossomed from there. In 1986, the EPA announced its first policy to encourage this auditing. More companies developed compliance auditing and made compliance an objective of their management systems.

Companies then began auditing their environmental-management systems. Interest in this developed in professional associations of the United States and internationally through the British Standards Institute, the Canadian Standards Institute, and the European Union. It is also part of ISO 14000. Management-system auditing, although not as widespread as environmental-compliance auditing, is the next generation of environmental audit.

Q: What does the future hold for external reporting and auditing systems?

Cogen: There will be more auditing of environmental-management systems, and the pressures on business for external reporting will not go away. In the United States especially, large businesses are considering adopting an environmental-management system as envisioned in ISO 14000. The possibility that their customers or suppliers will require ISO 14000 certification will have a bearing upon the decision.

A key question is how the regulators will treat these environmental management systems--whether or not companies that have certified environmental-management systems can be excused from other types of governmental oversight, such as lesser reporting requirements, fewer inspections, fewer permits, and relief from liability for violations. These issues are being debated now, particularly within the framework of the recently established Project XL for environmental excellence. In this program, the EPA has asked for applications from companies and states for a variety of pilot projects, some dealing with companies adopting, implementing, auditing, and reporting results on environmental-management systems in exchange for reduced regulatory oversight.

Right now there are no altered regulatory requirements for companies, but the pilot projects are very active. In EPA's 1995 revised environmental-auditing policy, there are some benefits available for companies that do their own environmental audits and report their own violations, but this is very limited. There are about 30 states that have adopted laws granting some immunity to a company that has an acceptable environmental-audit program and reports its own violations. More importantly, people are looking at ISO 14000 as a unifying principle that will lead to more significant regulatory reform than what I've just described.

Exhibit 1

Initiatives in the Movement Toward Standard Environmental Reporting

1. ICC/BCSD. The ICC (International Chamber of Commerce) introduced the BCSD (Business Charter for Sustainable Development) with 16 environmental-management principles. More than 1,000 companies have endorsed this charter.

2. CERES (Coalition for Environmentally Responsible Economies). This nonprofit group presented their "Valdez Principles" in 1989. Participating companies agree to monitor, report, and improve performance in 10 areas of environmental concern.

3 PERI (Public Environmental Reporting Initiative). This group has developed a set of guidelines for reporting environmental policies and practices. Participant companies choose their own method of responding to each of the 10 elements of the report.

4. IRRC (Investor Responsibility Research Center). This organization, established in 1972, "compiles and analyzes information on activities of corporations and institutional investors to influence such activities and related public policies," and publishes the Corporate Environmental Profiles Directory of companies in the Standard & Poor's 500.

5. Responsible Care Initiative. This was launched by the CMA (Chemical Manufacturers Association) "to improve the chemical industry's health, safety, and environmental performance record." The principles are implemented using six codes of management practices.

6. ISO 9000/14000. The ISO (International Organization for Standardization) 9000 is a "series of quality-assurance documents introduced in 1987 that attempts to create quality standards for products worldwide," Fifty-five countries are members. ISO has proposed international environmental-management standards (ISO 14000) to cover six environmental areas: management systems, auditing, performance evaluation, labeling, life-cycle assessment, and environmental aspects in product standards.

Exhibit 2

ISO 14000: Required Documents

ISO 14001. Environmental Management Systems--Specifications with Guidance for Use

ISO 14004. Environmental Management Systems--General Guidelines on Principles, Systems, and Supporting Techniques

ISO 14010. Guidelines for Environmental Auditing--General Principles on Environmental Auditing

ISO 14011/1. Guidelines for Environmental Auditing--Audit Procedures--Auditing of Environmental Management Systems

ISO 14012. Guidelines for Environmental Auditing--Qualification Criteria for Environmental Auditors

ISO 14013. Management of Environmental Audit Programs

ISO 14014. Initial Reviews

ISO 14015. Environmental Site Assessments

ISO 14020. Goals and Principles of All Environmental Labeling

ISO 14021. Environmental Labels and Declarations--Self-Declaration Environmental Claims--Terms and Definitions

ISO 14022. Environmental Labels and Declarations--Self Declaration Environmental Claims--Symbols

ISO 14023. Environmental Labels and Declarations--Self-Declaration Environmental Claims--Testing Verification

ISO 14024. Environmental Labels and Declarations--Environmental Labeling Type I--Guiding Principles and Procedures

ISO 1402X. Type III Labeling

ISO 14031. Evaluation of Environmental Performance

ISO 14040. Life-Cycle Assessment--Principles and Framework

ISO 14041. Life-Cycle Assessment--Life-Cycle Inventory Analysis

ISO 14042. Life-Cycle Assessment--Impact Assessment

ISO 14043. Life-Cycle Assessment--Interpretation

ISO 14050. Terms and Definitions--Guide on the Principles for ISO/TC 207/SC6 Terminology Work

ISO Guide 64. Guide for the Inclusion of Environmental Aspects in Product Standards

Taken from International Environmental Systems Update, volume 3, No. 6, CEEM Information Services, Fairfax, Va.

Exhibit 3

Pros and Cons of ISO 14000 Participation

Benefits

* Meeting market demand from vendors, suppliers, contractors, etc.

* Prerequisite for business in European Community

* EPA (U.S. Environmental Protection Agency) and DOJ (U.S. Department of Justice) incentive policies

-Environmental Leadership Program

-Audit Policy

-Design for Environment

-Sentencing Guidelines

-Procurement Qualification Criteria

* Demonstrate environmental commitment to shareholders, investors, lenders, consumers

* Reduce perceived need for command-control regulations globally

* Formal framework for organization existing tasks

-Efficiency/productivity

-Liability and risk prevention

-Improved regulatory compliance and relationships

-Energy conservation

-Reduced premiums

-Pollution prevention

-Facilitated permitting

Risks

* Third-party review of conformity documentation can be risky in U.S. jurisprudence system

* Misjudgment of market forces

* Costly to implement, costly to register

* Perceived low value added

* Lack of global mutual recognition of registrations/certifications

* Disproportionate impacts on small and mid-size enterprises (SMEs)

Business Learns to Cope With the Environment

External reporting systems and environmental audits are taking hold as companies assume a proactive role in coping with the environmental aspects of their operational systems. Even marketplace competitors are working together to save money in solving their mutual environmental problems. The EPA has begun to loosen its command-and control approach on industries by initiating pilot projects to reduce regulatory oversight of self-auditing and reporting participants.

Marc J. Epstein, in his recently published Measuring Corporate Environmental Performance, describes initiatives in the worldwide movement toward standardized environmental reporting.

Exhibit 1 presents a synopsis of each initiative.

Arlene Davidson of the Dakota Software Corporation in Pittsford, N.Y., offers introductory comments on environmental audits. "An environmental audits serves to inform management about whether or not operations are in compliance with regulations," she states. According to Davidson, environmental-compliance audits have been part of the remedial action for violators. This factor, along with highly publicized criminal prosecutions for corporate noncompliance, provided an incentive for corporations to think seriously about integrating regulatory-compliance audits into their daily operations.

Davidson states that some environmentally-conscious companies have audited regularly since the '60s and '70s. A Price Waterhouse survey conducted during the spring of 1996 shows that "three out of four companies surveyed--large industrial companies--had environmental auditing systems in place." Davidson also notes the exponential growth in Environmental Auditing Roundtable (EAR) membership.

Copyright Central New York Business Journal Sep 16, 1996
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