Pollution costs add up for businesses

In 2011, one kilogram of a toxic substance known as Chromium 6 leaked into the air north of Newcastle from Orica’s Kooragang Island chemical plant, infuriating and scaring local residents. The chemical and explosives company was subsequently fined $768,000 for that and other environmental breaches, but the fine pales into insignificance compared with its other costs. The company later estimated that the final bill from the resulting temporary closure of the plant could exceed $50 million and said it would have to work hard to rebuild trust with the local community. It’s an illustration that the costs of environmental breaches have become much higher in recent years. “Once you’re talking about an environmental risk or issue, that’s going to impact the bottom line and it’s going to affect shareholder value and there’s a whole lot of knock on effects,” says Elizabeth Wild, a partner specialising in environmental law at Henry Davis York. There are two main categories of environmental risks faced by corporates and organisations. The first is a pollution incident, one-off spills or discharges that come from operational sites, such as manufacturers. Although fines have increased, these are not a major risk if the company is prosecuted by environmental authorities. “It’s the management time spent defending these prosecutions or responding to an investigation, even if that investigation doesn’t lead to a prosecution – the lost management time, the legal fees,” says Wild. Another issue is that contracts for government work often contain a clause stating that if the company is convicted of any offence the contract can be terminated, and an environmental conviction can trigger this clause. Reputational damage can also be severe, such as the oil spill by BP in the Gulf of Mexico. The second environmental risk is historic contamination, where a company buys a site which has a history of contamination activities. The most expensive sites to remediate are those where contamination is in the soil and seeps into the ground water and once that ground water moves, the contaminants are carried offsite. It’s not always clear who is liable for a clean-up. In NSW, as in many other states, liability is now retrospective – that is the original polluter has to pay for the remediation. This applies even if the polluter followed all of the laws and regulations at the time they contaminated the land. However, the company responsible for the original pollution might no longer exist or might not have enough money for a clean-up, in which case environmental regulators will require the current owner to pay. This liability can in turn switch to the banks if they hold a mortgage over the property and the current owner cannot afford the remediation. In Sydney, a lot of former industrial sites are now being used for residential development and if contaminants are spilling from an industrial plot into a residential plot that can be “hugely expensive to clean up”, says Wild. Juliet Duffy, a director at environmental consultancy Regional EnviroScience, says multinationals and the mining companies tend to be on top of their environmental responsibilities, but the construction industry is lagging. “A lot of companies are only just starting to understand what their environmental responsibilities are,” she says. “It’s a lot to get your head around as a small business owner or a medium business owner, it’s a whole minefield of legislation on top of what they have to deal with in HR and occupational health and safety and finance.” Sarah Pendred, an environmental insurance specialist at insurance broker Milne Alexander, says there is a common misconception that general business insurance policies cover environmental risks. Specialist environmental insurance is needed to cover the fines and clean-up costs associated with a pollution or contamination incident. “The bulk of the costs you’re going to get are from that clean up action and that’s not really covered under any other policy and if it is, it’s very limited and structured around what would actually be covered,” says Pendred. “Environmental policies also cover the gradual or unforeseen risks such as slow leaks, whereas some other policies might only cover you for a sudden incident that you can clearly identify what happened and when it happened.” One of the advantages of insurance under a specific environmental insurance policy is it would more likely cover the losses. These losses can rise from clean up orders and cost recovery notices issued by the environmental regulators caused by pollution conditions at or emanating from a covered location or contracting activities. Not all policies cover fines as a standard and those which do exclude cover for fines where there is deliberate non-compliance. “If you have a client that’s poorly managing their operations and they’re not complying with environmental legislation to start with and then they have an incident, it’s likely they’ll get a fine for non-compliance and it’s sketchy whether they’re going to get cover for that,” she says

The Financial Review, 16 August 2016 ; http://www.afr.com/ ;