How Companies Can Manage Environmental Reputational Risk
by Stuart Hammer and Christopher Aung
Debevoise & Plimpton LLP
Environmental issues, from headline-grabbing environmental catastrophes to protracted conflicts with governmental authorities, can impair a company’s reputation. Such reputational issues can threaten a company’s relationship with regulators, customers, employees, interest groups and the general public. Because it can take many years to repair a damaged environmental reputation, it is critical for any company to manage its environmental reputational risk.
Most companies will never face environmental setbacks warranting coverage on the evening news. However, environmental issues that appear in a local newspaper, website, blog or other medium can significantly harm a company’s environmental reputation.
Environmental reputational risks are not limited to companies in chemically-intensive industries. Renewable energy companies, for example, often face backlash from community residents over proposed projects. Retailers and technology companies, which have relatively benign environmental concerns, have come under fire because of the impact that their supply chains and data centers have on the environment. Even well-intentioned companies can find themselves confronting environmental reputational issues. Malfunctioning pollution-control equipment, for example, could result in unfavorable press coverage even for a manufacturer with a long track record of environmental compliance.
Today, the ease of access to environmental databases, such as the United States Environmental Protection Agency’s Enforcement and Compliance History Online (ECHO) database, means that a company is only a click away from potential claims from public interest groups, local citizens and others. The bottom line is that any company with an environmental impact – from the development of an office building to the development of a copper mine – is susceptible to a damaged environmental reputation.
Maintaining an organization’s environmental reputation can be a considerable challenge. The following are steps a company can take to help protect its environmental reputation:
• Compliance. The most important step a company can take to maintain its environmental reputation is an obvious one: comply with applicable environmental laws. Over the long term, simply following the law will decrease the likelihood of future regulatory actions, claims by private parties and unflattering media coverage. Sometimes, even the most minor or inadvertent offenses can result in unwarranted notoriety for a company. While most companies will not intentionally violate an environmental law, many companies can take additional steps to help ensure compliance (see below).
• Culture. Companies should have formal environmental policies that stress the importance of environmental compliance. Employees who perceive their company as sincerely committed to environmental issues are more likely to take the extra step necessary to maintain compliance with environmental laws. In addition, systems should be established so that non-compliance issues, including unauthorized releases of hazardous substances, are reported up the chain of command to senior management. Senior management should be talking to employees to stress the importance of environmental reputation. Performance in the environmental arena should be evaluated, and there should be limited tolerance for poor performance. In addition, commissioning periodic compliance audits by third-party consultants is an effective mechanism for helping to identify non-compliance issues and other potential pitfalls. The audits can also establish a framework for resolving open issues and for preventing repeat infractions.
• Business and Real Estate Transactions. When companies evaluate potential acquisitions, the deal team should assess potential environmental risks. Due diligence of potential targets should be conducted to identify environmental risks, including potential risks related to contamination, non-compliance and environmental claims. Risks identified during due diligence should be addressed through appropriate contractual mechanisms. Following the closing of a transaction, consideration should be given as to whether any identified issues should be voluntarily self-reported to regulatory authorities; regulators may decide not to penalize the company because of its voluntary disclosure of the issues. Acquisitions of real estate are particularly fraught with risks, especially contamination risks. Purchasers of real estate should consider commissioning Phase I environmental site assessments conducted by third-party engineers to help identify contamination issues.
• Stakeholders and Interested Parties. Companies should consider environmental issues from the vantage point of those impacted by such issues. Employees who believe they are being exposed to environmental harms may not be productive. Such employees may also report such issues to regulatory authorities, labor organizations or the press. Corporate parents and shareholders may view significant environmental issues as a failure of management. Local residents may file suit if they perceive their health to be in jeopardy or their property values to be diminished because of an environmental harm. Citizens may also notify community organizations and local media of any perceived environmental harm. Finally, customers may not want to purchase products and services from an organization with a damaged environmental reputation.
The above guidelines, which are not exhaustive, provide companies with a framework for managing their environmental risk. The guidelines, however, are only a starting point. At a time when environmental reputation is of increasing importance, companies should be aggressive in responding to changes in the business and regulatory environment that impact reputational risk.
Stuart Hammer is a Counsel and Christopher Aung is an associate in the Corporate Practice Group of Debevoise & Plimpton LLP. Max Friedman, an associate at Debevoise & Plimpton LLP, assisted in the preparation of this article.