Environmental Risks Roundtable

Pierre Sonigo, Group and Environmental Risk Manager, Alcan, Chaired the discussion

Hans Brandt, Corporate Risk and Insurance Manager, Veolia Transport

Adrian Clements, Senior Insurance Risk Manager, Arcelor Insurance Consultants, Arcelor-Mittal Group

Peter Joy, Head of Research, Newsquest Specialist Media

Tomasz Miazek, Risk Insurance Manager, Telekomunikacja Polska

Didier Mellaerts, Risk Manager, Umicore NV

Karl Russek, Senior Vice President, ACE European Group

Arle J van der Steen, Corporate HSE-RA Manager, Azko Nobel

PIERRE SONIGO: I would like to congratulate StrategicRISK and ACE for conducting their environmental risks study. It is the first time we have obtained some facts and figures regarding environmental liability and how it is perceived in corporations. I would like to come back to some of the findings of this study later but first I would like to pose a ‘warm up’ question to the group. The environment is obviously a very large issue. A lot of people are putting many things into the environment. I would be interested to know what you consider to be the major environmental risk for your companies. Is it is going to be past, present or future liabilities? Is environmental risk a risk to your company? So who would like to start?

HANS BRANDT: Our group is involved in providing services associated with water, energy and waste management, as well as transportation of people, so of course it is important for us to have a good approach to the environment. But I think it has been and remains an important issue for all people in society so it is going to be a more natural part of all our work in the future, reflected in our corporate policies as well as insurances. In the research report, someone said that safety of people is the most important thing and next comes safety of the environment. I think there is a lot of truth in that. If there are 100 people killed in a train crash that will be reported on the front pages of the newspapers. If you have a pollution incident or something serious like that, it may also be reported although not in the same way. So the environment is important to all of us.

PIERRE SONIGO: It is also an opportunity for your company because it involves your business.

HANS BRANDT: Well yes it is a big business. If you look at the map to see where we are located, you can see for instance that the water side of our operations goes east down to Asia and that helps the people to get clean water. That is one example. So it is important.

DIDIER MELLAERTS: I have perhaps an odd opinion about environmental problems for the future compared to the past. Our group in the past was very much involved with heavy metals for more than 100 years. This means that the environmental problems are coming from the past mostly and in connection with remediation of two sites, one in Belgium and the other in France. And a substantial amount of money is involved. But in respect of future environmental liabilities in Europe, I think we can manage these, not just because of the availability of insurance but also because of the legislation. We are now organised internally to manage the environment, we have specialist external consultants and we have insurance policies although mainly for pollution from sudden and accidental events. I think that our organisations can manage this through the permits that we’re required to have. The extreme regulations that are imposed make it difficult but we can manage for the future. My view is really an optimistic one. I have been involved in insurance for a lot of years and also involved in the legal aspects of the environmental issues and I see a positive trend. When you see what is now imposed in respect of permits for installation, for control, for continuity plans or crisis management plans, really I am not so afraid for the future, with one exception. The requirement to protect biodiversity in the new EU Environmental Directive will be a big challenge because nobody knows what the risks are and you cannot calculate what is involved. The best proof of this is that the insurance companies are not offering some coverage.

PIERRE SONIGO: Thank you, we will come back to the insurance coverage maybe a little bit later. Is there any more comment on why the environment is perceived as a risk in your company?

ADRIAN CLEMENTS: In my company I believe there are two areas we have to look at. Most of our facilities have ISO14000/14,001 certification, we are probably 97% compliant. However, that is the photograph of risk today. How risk changes in the future, how the governmental legislations will change, that I see as being the future risk. You don’t know where it is going to go and therefore, even though you are compliant today, you don’t know what will happen in the future. I have had personal experiences of that when, during clean-up of a certain incident, the law has changed and you have to clean up again. In fact there is one incident that I remember where we cleaned up twice because it took so long to clean up the first event that the law had changed, and then while we were trying to clean up for the second time, the law changed again and we had to clean up again to reach the new level. So we paid three times for the same incident.

The other risk I see is the past. As many of you know Arcelor is a steel company. Most of the steel industry was in the past government owned and still is in some countries a major part of the government assets. We don’t know what those governments were doing in the past 100 or 150 years ago. In fact in some of our plants we don’t have any drawings at all of where the power supplies come from, or where the drainage go - we actually have to have men walk along drainage tunnels to find out where they go - because some of the plants are so old. To clean up some of those plants would be difficult. For example, I don’t think we would ever be able to honestly sell a piece of land that has had a blast furnace on it and say it was clean, the contamination is just there. But the owner was the government. So if you start to make a lot of these legal requirements retroactive, you end up at the door of the government which is creating this new legislation.

Most of our sites are enormous. For example, in Brazil we have 133,000 hectares of eucalyptus forest for coke production. And some of our plants are on the migratory paths for birds. We have nature reserves on some of them. We don’t know what flora and fauna are being killed in Brazil, for example, right now, not because of us but because of other environmental issues in the country, but if it is happening on our property maybe we will be held liable. The same would apply to China. It’s a really big future problem - are you to blame if you don’t know? Ignorance is not an excuse.

TOMASZ MIAZEK: I represent a company that I think is at the low end of the environmental risk spectrum. This is a large Polish telecommunications company that was formerly state-owned. We deal with some environmental issues like heavy metals and asbestos in buildings - we have lots of buildings all over the country. We just use specialist disposal companies to deal with any hazardous materials and we feel safe at this stage.

PIERRE SONIGO: So it is a risk but not a big one?

TOMASZ MIAZEK: We haven’t suffered any major pollution incidents so far. There was quite a big issue with the wooden poles used which were impregnated with some toxic materials but because it is split into such little portions we don’t recognise it as a very high risk. However, if we change any of the wooden poles – there are thousands of them - we take care to dispose of them in a special way.

PIERRE SONIGO: Does that fall into the characteristic of a risk for the insurer as it seems very broad?

KARL RUSSEK: In a word, yes, environmental risk is a very broad topic. You can view it in the narrow view as an outgrowth of the casualty cover for the fortuitous accident and loss going into the future but the majority of the issues we deal with have to do with legacy issues or specifically with legacy or operational issues with political risk. In many ways, what we underwrite is not necessarily how well managed your sites are, because the majority of your sites will be ISO 14,000/14,001 certified - there is no question that the state of the art in the industry currently is much better than it used to be. The questions we look at when we are underwriting in a particular jurisdiction are what are the current regulations?, how are they likely to change? and what is the political climate? In order for you to perceive a risk and look at insurance as a way of managing that risk, your stakeholders, that is your local communities and your shareholders, need to see that as a risk as well. They need to make you aware of that risk. So that is really what we look at, not at whether a site is contaminated or not, because more often than not it is contaminated if it is a legacy site, but what is the likelihood that you are going to have to do something about it or that your stakeholders will force you to do something about it?

Hans Brandt: I have a question for you, Karl. I understand you are from the US but you are now based in London. What are the main differences in this area between the US and Europe?

KARL RUSSEK: In viewing the development of regulation in both areas, there is so much more legacy and so much more history - and a more complex history - to deal with in Europe than in the US, and the regulatory focus has been much more on compliance, much more on operational control and the prevention of future pollution. Whereas in the US you have Superfund, which was well intended but is a disaster from a public policy standpoint. To try to impose that purely retroactive scheme in Europe simply wouldn’t work particularly because it runs back to public ownership in many cases. Our experience in the UK currently is that this is one of the main hindering factors, it is what is keeping local governments from enforcing their own regulations because more often than not they are the ones who would end up having to pay for the clean-up. But at the same time these are issues that society as a whole and the political sphere have to get their head around because the public is demanding some means of addressing the issues and this is where we see the drive. In the US, we see the drive from the regulations and from the lawyers whereas we are seeing the drive in Europe to tackle the legacy issues more from a purely financial and business standpoint.

Europe is a densely developed continent compared to the US so in many cases the real estate has much more inherent value and therefore there is much more of a pure business drive to be able to do something with that real estate and develop it for a higher use. That is where we see many of these questions coming up, what can we do with these contaminated sites? Can you sell a former blast furnace site as clean? Likely not, but can it be made into a motor yard or something like that perhaps?

ADRIAN CLEMENTS: We just sold a plant worth around $160m for just $2m because we wanted to sell it and it was contaminated. Someone has a wonderful piece of land but it is contaminated. We know it, they know it.

KARL RUSSEK: If everybody enters the transaction with their eyes open, then the tools are available to manage that risk and it can make very good business sense.

ADRIAN CLEMENTS: But you can lose out as a company. If you look at your assets, you have to consider what their actual value is if you can’t sell any of your sites. Companies can be insuring their assets for a huge amount, reflecting the cost to replace them, but if they cannot sell them for anything like this amount, they have a problem. And that problem is with the shareholders because they are buying shares in a company which at the end of the day, theoretically taking the worst case scenario, has assets that are not worth the money because the company can’t do anything with them. They have to remain steel plants or whatever because the company is the only one that wants to use them.

That could be a problem if a company wants to sell or is perhaps obliged to sell some sites because of a merger. It could actually be eroding its capital assets. I don’t know if that is the aim of the new laws but it is certainly a consequence.

PIERRE SONIGO: So a new dimension to the environmental risk is merger and acquisition.

We have discussed the definition of what is an environmental risk, and we have touched on many different subjects connected with that. Clearly, the risk of compliance is a major issue for corporations now. If the regulations are always changing, it is difficult, and there is a difference between the past legacy risks and those risks likely to arise in the future which we feel apparently is much more controlled now than in the past.

We have also talked about environmental liability risk as a third party risk but more and more we are seeing it becoming a first party risk. It is more damage to their own property rather than damage to others which is the concern for companies now, and that changes slightly the perception and scope of our activities.

If we agree that the environment is a major risk for corporations, do we think that it is well handled within the corporation? And how is its management organised? This was another issue that was touched on in the research report. Is a risk manager really involved in the management of environmental risk, and if so, how? Is he in charge of environmental health and safety or is he just working with other people? What is his role in respect of this, is it changing and evolving, are there any trends emerging?

DIDIER MELLAERTS: I saw that one of the responses in the report was that most risk managers are not really responsible for the environment, at least that is the impression I got. Personally, I think environmental risk is very specific, very technical. It is not so much insurance, because the number of insurers that provide cover in this market is very small, most of the cover is limited to sudden and accidental events. In our company, managing the environment is a specific activity, with a special department created to deal with environmental and also health and safety aspects. I cannot speak for all companies but the impression I get from other risk managers is that their companies are the same.

HANS BRANDT: Within my group we have environmental control, it is part of our business, so I am probably not any more involved directly than anyone else here. But I think I would be the one who was contacted if something went really wrong and when there was a claim. Of course, I do look at the prevention side and also - most important – the environmental issues when we buy companies. Then it is part of my job but otherwise not.

ADRIAN CLEMENTS: I would say it depends on the size of the company. If you have a relatively small company say 500 or 1,000 workers, then it is the job of the risk manager because of his education, experience and knowledge to handle that type of risk. In a very large organisation, there is no way that the risk manager can know of everything that goes on out there, so it is the responsibility of the plant manager. He is responsible for everything that happens in that plant, not just environmental issues, and the risk manager will help him from a corporate level by providing support, resources, whatever he needs, and setting up the network so he can talk to his colleagues. Each plant will have its own environmental manager and they have to know their own local laws - there is no way that the risk manager could know every country’s laws. So each manager knows what they have to do, they know what the company’s benchmark is.

In my own case, we also have external auditors who visit each plant both for the certification process and also for knowledge and information. But we have a very clear policy, it is the responsibility of the plant manager to handle environmental issues. It is important to ensure that the company’s own benchmark is adequate. You can’t have double standards, for example a different environmental standard in China than you have in Germany. Your benchmark must be high enough to reflect the most exacting regime. Everyone must be aware of that and then it is the plant manager’s job to comply.

TOMASZ MIAZEK: I have the impression that generally in Poland low risk companies treat environmental risk as a compliance issue, not as a risk to cover by insurance, because the possibilities of transferring the risk by insurance are very poor. So we have a manager responsible for environmental issues and we have control from the local authorities; local environmental authorities are requiring us to take certain actions. It is not really our initiative, most of the activities are imposed by the local authorities It isn’t really something that a risk manager can do much with. Also I don’t think the potential loss has been really recognised. The view has been: what will be the loss?; exchanging the soil can’t cost that much. This may change with the new directive because of the biodiversity requirement. As Didier said, we don’t know how much that may cost.

ARIE J VAN DER STEEN: From my own organisation’s perspective, we are a big company, we run about 300 plants worldwide, we are in the healthcare, coatings and chemicals industries, and I do not fully agree with you. There can be different aspects and there can also be big damage to the environment and even to local communities where we operate. So we have to be aware that the risks and liabilities are well covered. Coming back to Pierre’s question, we have a complete department dealing with risk management. Regarding environmental risk, the biggest risk we have is based on liabilities associated with contamination of land and soil and ground water. Basically the responsibility to analyse this and to solve it is at the corporate level. Risk management can help, insurance people can help us, but basically establishing the liabilities is done at the corporate level rather than locally.

ADRIAN CLEMENTS: But your sites have to comply with local laws.

ARIE J VAN DER STEEN: They have to comply but you often find that the people at the local level go for local solutions and that is not always the best solution.

ADRIAN CLEMENTS: That is why we have the corporate benchmark. First they have to comply with local legislation - which is the minimum requirement - and then they have to comply with the corporate benchmark because we don’t want to have double standards worldwide. It is the coordination which is done at corporate level. A really big incident could go over country borders so it is important to be very careful. That is why some of those risks are handled at an enterprise risk level. We have enterprise risk management. We are aware you could theoretically get a domino effect arising from a lot of these sector level or business unit level risks and so we go beyond even the corporate risk management level and end up at the enterprise risk management level. It is their job to say, it is very unlikely but if two or three incidents do occur or if the law changes, what will be the consequences and what will be the potential cost.

I once worked for a company that made dangerous chemicals and we gave them to a waste company to dispose of. Then Greenpeace took some photographs of these drums of chemicals in the Congo and it was our reputation that was affected. So now every drum from this particular company is accompanied to ensure that it’s disposed of properly. My own organisation takes a similar approach to PCB transformers. We need to be sure that when they’re disposed of, they’re not sitting in a field somewhere, contaminating the ground. So we ensure that each one has been incinerated. We need certification and feedback to say this transformer has been incinerated, it has gone. If you don’t have that kind of system, something will come back and bite you in a few years and then it will cost you much more – not only reputation.

DIDIER MELLAERTS: When you have a lot of plants you have to spread the risk responsibility. Yes, the responsibility for the local operation is with the plant manager and his guys but there’s actually been a big problem from the past as the local operation’s job has been to operate for the future. Secondly, you need a lot of money, you need to make provisions for that at the corporate level. Practically, you will have the help of each plant manager and environmental manager in the plants but we have a special department which is coaching, coordinating and organising the remediation. It depends on the problem and if you can split it. And do not forget that when you have made provisions you also have auditors checking, your provisions must be right about the cost and so on. Just to come back to insurance, it is not the insurer who can help you here.

PIERRE SONIGO: I think it is difficult across the organisation to know where the responsibility lies. Major corporations now want to have an image and they have an environmental policy that they communicate. Based on this environmental policy they want to have action plans and to meet certain standards, etc. It is difficult to make this the sole responsibility of the plant manager who is responsible for complying with so many things. I don’t think he is entirely responsible. It is a shared responsibility. When I was risk manager of Pechiney before it combined with Alcan, I was not only risk manager but also the EHS manager. It was a conscious decision to combine the two and to really consider that environment, health and safety were major risks for the company and they had to be handled within the same group. So we had environmental specialists within the risk management department. Their role was to assist the subsidiaries in solving their environmental issues. I found this to be a very good way of organising things because then we could talk the same language of risk management applied to different types of risk. Unfortunately I don’t see this as a trend in companies. Rather, I see more that the EHS is being handled by specialists on one side and the risk management is being handled by other specialists on the other side. Very seldom do they talk to each other. For example, on insurance solutions, I am sure the risk manager can come up with some solution financially which can be interesting on clean-up costs, for example, on capping of clean-up costs for certain areas. But if people don’t talk to each other, they don’t share each other’s expertise to understand the issues and to come up with an adequate solution. As the report says, these areas tend to be separate in an organisation

DIDIER MELLAERTS: What I want to add to that is a big definition of risk management. In a certain sense the EHS manager is also a risk manager. We must abandon the idea that the risk manager is the guy upstairs who runs everything. A plant manager is also a risk manager, he has to manage his risk, and this should be part of the culture of the companies.

ADRIAN CLEMENTS: There are some positive sides to environmental issues for the company. As I mentioned, we have nature reserves in some of our plants. In one of our plants in Brazil we have very rare butterflies and crocodiles; we have the resources to do this. We actually helped the town to create a zoo in our plant. This is a very positive initiative. It helps us to attract good employees, to attract highly educated people. There are some cities in Europe where if you have a doctorate you don’t work in our industry - who wants to get their hands dirty in a steel plant? I think that is one of the biggest risks now facing some industrial sectors - actually hiring people. If you take it from a global perspective, I agree with you 100%. You have experts in many areas. Maintenance is managing risk, insurance is managing and transferring risk. There are many definitions of risk management and that is the problem. There are too many definitions. The ultimate goal, one of my visions, is to make sure that the board has the person on it who is a risk manager, who is actually managing the risks of the company. One of the questions we will probably discuss is mergers and acquisitions. A lot of these guys just look at them from the purely financial view and they are not taking a step back and saying, let’s look at this from a different perspective. There are positive sides and there are negative sides. One of the problems that the risk manager has is that he always shows himself from the negative side - what can go wrong? He is a pessimist!

But on the other hand, if you want to attract new employees, and human resources is a risk, the demographic curve is a risk, having a good reputation, showing that you care about the environment, and helping local companies improve their image, are very important. In the case of one of our plants, it was built in the area because there was nothing else there and now a city has grown around that plant. If we close the plant, we close the city. It is the centre of the community and if you close it the community dies. This part of the risk has to be looked at. You can’t pollute, you can’t create a bad image, it’s not something you can insure. You are investing your own money. You are investing in the future.

HANS BRANDT: So if you look at the title risk manager, the risk part is both a threat and a possibility?

ADRIAN CLEMENTS: Entrepreneurs take the most risk.

HANS BRANDT: As risk managers, I think we have to build up our own reputation and sell ourselves as problem solvers, bringing positive results to the board. In an organisation like mine that is buying a lot of companies, there will be a small team, a lawyer, some financial people, and they will be handling all the main work around that transaction. In that situation, I look to provide some positive benefits, perhaps by decreasing premium costs. I also look at areas such as old environmental liabilities and what the companies concerned did in the past. But it seems that it’s natural to have the financial and legal guys involved but it’s not natural to include the risk manager. Maybe we should devote a little time to promoting ourselves and our reputation.

PIERRE SONIGO: Regarding your comment, Adrian, about the plant in the middle of a city with the whole community depending on it, that’s a corporate social responsibility issue. Everybody is talking about corporate social responsibility now as part of a sustainable development image. Is the risk manager supposed to play a role in this corporate sustainable development? I have heard and seen presentations saying that sustainable development is also about managing risks, long term risks, social risks. Are you involved - or do you think you should get more involved - in those areas? What is your feeling about that? It touches on environmental issues.

ADRIAN CLEMENTS: Within our system for sustainable development we have eight points - one of them is environment and one of them is safety. I interpret that as risk management.

KARL RUSSEK: On the question of risk management as part of CSR, a company can spend years trying to build a positive reputation. That can disappear overnight with a badly managed incident, whether it is a sudden and accidental type incident or something that comes to light from a legacy issue that the company is seen as insensitive on. People can turn all your CSR efforts and all your public relations efforts upside down and make them look hollow.

PIERRE SONIGO: I think it will become a subject in the future. Companies are spending so much money on sustainable development that one day they will realise that it is all risk management of future risk, whether it is environmental, economical or social risk that they need to manage. I believe a risk manager will have a role to play in that area.

We have been talking about the risk and the organisation. The research report also mentioned the risk management tactics which are being used to manage environmental risks. Perhaps we could move on to the risk assessment and risk treatment of those risks and finish with risk financing and insurance. I was surprised to see in the report that 60% thought that they know their environmental liability but only 33% are confident that they have full information on their environmental liability. Do you think those risks are properly assessed in your company?

Peter Joy: It is very contradictory isn’t it?

PIERRE SONIGO: It is contradictory, so do you believe that your company, whether it is the EHs manager or whether it is yourself, has a good grasp on what the environmental liability is? Do you know all your exposures? Do you know the landfills that you have been using in the past? My answer would have had to be no, because I was very surprised as the risk manager and the EHS manager of Pechiney to suddenly discover that we had a mine somewhere in the US that we didn’t know about, and we received a letter from the EPA to say that we had to clean up that site. When we started to try to build up a data base of all our operations, even in France, there were a lot of areas that we didn’t know where we had put waste. Some people even questioned whether we should do this because they considered that if we didn’t know we would not be responsible.

ADRIAN CLEMENTS: Ignorance is not an excuse but some people try to use that.

DIDIER MELLAERTS: We have worked for many years on assessing our exposures, but nobody can predict the future. You have to investigate, wait for new legislation and so on. But I think I can answer yes as regards the past because we decided to make provisions and to spend a great deal of money on remediation. No-one can know everything – we must be modest! But I feel confident about the major problems of the past because of the internal organisation, our work with external consultants and also the legislation imposed in France.