As recently as 15 years ago, the environmental impact of business decisions barely registered in the boardroom. The environment was regarded by most businesses as at best a fringe issue. Few North American executives would have cited environmentalism as a factor influencing their day-to-day decisions, and even fewer would have listed it as a core value of their companies.
Today, environmental concerns are front and centre in the boardroom, reflecting a radical change in priorities in society as a whole. In Canada the environment is the leading political issue in the minds of voters, and in the United States it is rapidly moving up the agenda as well. Corporations now recognize that the environment must be a central focus of every decision they make, and that environmental issues are here to stay.
Environmental Impact Entails Risk
The change in attitude towards the environment among businesses is, no doubt, motivated in part by the same ethical concerns that preoccupy individuals. Yet it is also driven by a hard, practical reality: for corporations, the environmental impact of their activities represents a serious – and in some cases massive – risk.
Environmental risk is viewed today in the same way as any other kind of risk. Recognizing this has led to changes in the way business now operates.
Today, most publicly traded companies that have an impact on the environment have a formal or informal system of identifying that impact, reporting it to the public and shareholders, and ensuring that it does not exceed levels set out by environmental regulations. Yet their attention to the environment goes beyond merely complying with the letter of the law. They also incorporate environmental considerations into their strategic planning. In many industries, environmental impact is a key part of the decision of whether or not to proceed with a project at all.
The risks companies face when launching such projects fall into two categories: concrete and reputational. The former includes such elements as the cost of cleaning up an environmental mess, the cost of delaying or shutting down a project for an extended period while it is made environmentally compliant, or the possibility of directors or senior management facing a fine or jail term.
Reputational risk, while less easy to predict or manage, can be at least equally damaging. A small misstep or violation may be quickly corrected, but the resulting damage to a company’s public image may be out of all proportion to the actual direct financial cost involved. Major environmental incidents can have a significant impact on share price.
Environmental and watchdog groups have seen their power magnified enormously by new communications technologies, which allow them to publicize their interpretation of a company’s actions to a potentially enormous audience, and subject it to intense scrutiny from major shareholders and the general public.
General Counsel and Environmental Policy
Managing these kinds of risks is a task that falls to numerous parties: corporate boards, top executives and operational managers in the field all have a role to play in minimizing risk by mitigating a company’s impact on the environment. Of particular interest is the role of the general counsel, who contributes in three major ways.
The first is by understanding and interpreting the regulatory framework within which a company operates. Environmental legislation is changing very quickly, and this can only be expected to continue as awareness of real and potential environmental issues increases. Not surprisingly, many companies are now hiring in-house environmental lawyers to keep abreast of changes, since this is an area that increasingly requires greater effort and specialized expertise.
The second contribution is through drawing on past experience. Environmental law issues can be extraordinarily complicated, involving such diverse elements as aboriginal land claims, public consultations and community involvement, in addition to highly complex scientific, technical and engineering questions. While a solid knowledge of current law is indispensable to counsel in addressing these issues, it cannot substitute for practical, hands-on experience of the sometimes Byzantine regulatory process. Not only does this count when dealing with stakeholders, it also contributes to the correct and timely execution of such mundane matters as completing and filing applications – a vital consideration when delays in project approval can cost millions. Thus the more experience a lawyer has in dealing with the process, the more adept they will be in safeguarding their company’s interests.
The third area in which counsel can manage risk is by integrating environmental concerns into strategic planning. In a rapidly changing regulatory environment it is not enough for counsel to simply know the regulatory framework: he or she should attempt to anticipate it as well. Taking action before a regulatory scheme is implemented can save a company a great deal of money, as well as buy goodwill from the community for its “good neighbour” policy. Yet a company can also suffer from acting too early, since it might not win credit for actions taken before new regulations are passed and be required to meet higher standards than might otherwise be the case. And finally, a company also must recognize that acting within the letter of the law while still creating a significant impact on the environment can be dangerous, since it can attract adverse regulatory action. It is sometimes the wrong approach to simply do what is legally required. In many cases, the key for companies to maintain their reputation and long-term operations is to mitigate environmental impacts before government forces them to do so.
Mandate From Society
It is important to remember that companies ultimately derive their licence to operate from society as a whole. With concern about the environment growing steadily among the general public, companies would be well advised to consider being at the leading edge of environmental awareness in order to retain the goodwill of the communities that host them. Environmental regulation is likely to become more complex and demanding, corporate behaviour will be more closely scrutinized and the consequences of environmental mismanagement will grow accordingly. Managing “green risk” is a duty companies have not simply to society, but to themselves as well.