ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
A. James Barnes
Chair
TerryAgriss
Julie Belaga
John Boland
George Butcher
Donald Carre//
Michael Curtcy
Rachel Deming
fete Domcnlci
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Scott llasklns
Jennifer Hernandez
Keith Hinds
Steve Mahfood
Langdon Marsh
Greg Mason
Llndeue Patton
Cher/c Rice
Helen Salt!
Andrew Sawyers
Jim Smith
Greg Swartz
Steven Thompson
Sonla Toledo
Jim Tozzl
Justin Wilson
John Wise
Stan Melburg
Designated
Federal Official
APR 29 2008
Mr. Brian F. Mannix
Associate Administrator for
Policy, Economics and Innovation
U.S. Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Mr. Mannix:
The Environmental Financial Advisory Board (EFAB) is pleased to
enclose its observations and recommendations regarding Environmental
Management Systems and the Use of Corporate Environmental Information by
the Financial Community. The Board's work was led by its Environmental
Management Systems Project Workgroup, chaired by Ms. Rachel Deming, a
partner with Scarola Ellis LLP of New York City. In finishing this important
project, the Board would be sorely remiss if we failed to recognize the excellent
work and cooperation of two individuals from your Office, Mr. Chuck Kent and
Ms. Shana Harbour.
EPA has long recognized the potential that environmental management
systems (EMSs) have for improving environmental performance and compliance.
In the past few years, EPA's Financial Incentives for EMSs Steering Group, led
by your Office, has done important work in examining the extent to which the
financial sector values the development and implementation of corporate EMSs.
As an adjunct to the Steering Group's work, your Office asked EFAB to explore
some questions regarding EMSs and financial issues. When EFAB started
looking into these questions, it became clear that the initial request needed to be
examined in a broader context. The EFAB workgroup worked closely with your
staff to refine the questions to take into account market realities. The enclosed
report is the product of Board meetings, conference calls, member discussions and
a workshop involving experts from the equity, debt and insurance financial sub-
sectors. A detailed summary of the workshop is also enclosed for your reference.
The Board believes that the work of the Steering Group is very timely in
light of the increasing awareness of the role the environment plays is all segments
of the economy and strongly supports the continuation of the Agency's work with
Providing Advice on "How To Pay" for Environmental Protection
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the financial sector and companies to develop and promote a better understanding
of the relationship between EMSs, environmental performance and financial
value. EFAB believes that among the many areas that EPA could work, attention
should be given to developing mutually useful environmental metrics that can be
used as indicators by financial analysts, identifying all relevant environmental
information collection systems, and improving the measurement of certain
environmental impacts, starting with carbon footprints and the developing markets
relating to use of greenhouse gases.
We hope that you will find Board's more detailed observations and
recommendations constructive and useful. The members of EFAB appreciate the
opportunity to advise and assist the Agency on important environmental finance
issues. If you would like to discuss the report in more detail, we would be happy
to meet with you and/or members of your Office as you deem appropriate. EFAB
is very interested in helping to facilitate better evaluation of environmental
performance for the financial markets and remains willing to help the Agency in
any way requested consistent with its charter.
Sincerely,
A. James Barnes A. Stanley Meiburg
Chair Designated Federal Official
Enclosures
cc: Stephen L. Johnson, Administrator
Marcus C. Peacock, Deputy Administrator
Lyons Gray, Chief Financial Officer
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Environmental
Financial Advisory Board
EFAB
A. James Barnes
Chair
A. Stanley Meiburg
Designated Federal
Official
Members
Hon. Pete Domenici
Terry Agriss
Julie Belaga
John Boland
George Butcher
Donald Correll
Michael Curley
Rachel Deming
Kelly Downard
Mary Francoeur
James Gebhardt
Steve Grossman
Scott Raskins
Jennifer Hernandez
Keith Hinds
Stephen Mahfood
Langdon Marsh
Greg Mason
Lindene Patton
Cherie Rice
Helen Sahi
Andrew Sawyers
Greg Swartz
James Smith
Steve Thompson
Sonia Toledo
Jim Tozzi
Justin Wilson
John Wise
Environmental Management Systems
and the Use of
Corporate Environmental Information
by the Financial Community
Tliis report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the views and opinions expressed in the
report do not necessarily represent those of the Agency or any other
agencies in the Federal Government,
April 2008
Printed on Recycled Paper
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
EFAB EMS Project Final Report
Environmental Management Systems and the Use of Corporate Environmental
Information by the Financial Community
Original Request: Financial Market Incentives for Organizations to Reduce Risk and
Improve Environmental Performance Using Tools like Environmental
Management Systems (EMSs)
Original Requester: Office of Policy, Economics and Innovation
Original Questions:
1. Do EMSs yield information on financial risk that is relevant and meaningful to investment
and underwriting decisions? If yes, how?
2. What are the financial services industry's beliefs, practices, and conventions regarding EMS?
3. What additional organizations have an interest in EMS?
Addressee: Brian Mannix, Associate Administrator for Policy, Economics and
Innovation
United States Environmental Protection Agency
cc: Honorable Stephen L. Johnson, Administrator
United States Environmental Protection Agency
Marcus C. Peacock, Deputy Administrator
United States Environmental Protection Agency
Lyons Gray, Chief Financial Officer
United States Environmental Protection Agency
Subject: EFAB Findings and Recommendations on the Use of Corporate
Environmental Information Management Systems in Investment
Evaluations and Decisions Made by the Financial Services
Communities in the Equity, Commercial Banking, and Insurance
Sectors
Background
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
The United States Environmental Protection Agency (EPA) has recognized the potential for
environmental management systems (EMSs) to achieve compliance and to establish standardized
systems for monitoring and enhancing environmental performance. EPA's policy is to encourage
companies to implement EMSs. In connection with this policy, EPA created a program called
Performance Track which is focused on the implementation of EMSs by operating facilities. EPA
also decided to examine ways in which the financial markets could provide incentives for companies
to implement EMSs.
A Steering Group was established by EPA to look at financial market incentives, which is led
by the Office of Policy, Economics and Innovation (OPEI). This Steering Group conducted
extensive research and prepared a Phase 1 report on its findings, entitled "Financial Market
Incentives for Environmental Management Systems"
http://www.epa.gov/ems/docs/resources/FinalFinancialIncentivesforEMS%203-07.pdf
While this research was in progress, OPEI staff attended the August 2005 meeting of the
Environmental Financial Advisory Board (EFAB) and requested the Board's assistance in identifying
the financial advantages of EMSs. OPEI also asked the Board to provide recommendations to EPA
on ways in which the market value of EMSs could be promoted. EFAB formed an EMS Workgroup
(the Workgroup) to assist EPA.
Initially, the Workgroup had to assess whether the charge from EPA was feasible. Very few
of the EFAB members knew what an EMS was, and those that did knew there were wide variations
in EMSs. EPA itself did not establish specific requirements for EMSs, since it wanted to allow
companies the maximum flexibility to implement a management system that worked for each
company.
At the EFAB meeting in March 2006, the Workgroup considered options for addressing
OPEFs requests. The Workgroup members recognized that an EMS as a standard suffered from
definitional problems. First, in establishing a qualified EMS, each facility is given the latitude to
establish its own goals. The main benefit of the EMS is to establish a mechanism to systematically
evaluate those goals and assess the company's performance in attaining those goals. From a market
standpoint, there is no specific endpoint that can be measured across companies or business
segments. EMSs are used by the financial sector largely as an indicator of good management.
Second, EMSs do not usually exist as a stand-alone system. A company that has an EMS will also
have management systems for several other operational areas such as health and safety and product
stewardship.
The Workgroup decided to look at three financial market sectors separately, equity, debt and
insurance, and developed a couple of concepts to test in each sector: (1) what is the importance of
measurable results; and (2) whether branding a form of EMS would assist the market sector in
valuing environmental performance. In connection with the latter charge, a representative of EPA's
Energy Star program talked to the Workgroup about the development of that program and the time it
took for recognition by consumers in the marketplace.
At the August 2006 Board meeting, the Workgroup discussed some results of contacts with
representatives of the equity and insurance markets, as well as contacts within companies, and the
on-going review of the available literature. The Workgroup also heard a presentation by a
representative of the American Chemistry Council (ACC) on the discussions she had with certain
sustainability indices in the equity market. ACC's Responsible Care® Program includes an EMS
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
requirement that is consistent with EPA's EMS criteria for Performance Track. The ACC
representative stated that an EMS is one of the factors that sustainability indices look at when
evaluating the criteria for including companies on the index. ACC was working with the
FTSE4Good Index, on the London Stock Exchange, to get recognition for its Responsible Care®
Program and felt it was having some success.
The Workgroup decided to explore the possibility of setting up a workshop to get more
formal feedback from the financial market sectors. As part of that effort, some potential questions
were developed for a workshop and presented to the Workgroup at the March 2007 meeting. The
Workgroup refined those questions and developed a format for a workshop consisting of three
panels, one for each of the market segments: equity, debt and insurance.
In connection with preparation for the workshop, the chair of the Workgroup attended an
EPA-sponsored dialogue among financial and corporate representatives. Some important
conclusions from that dialogue are:
(1) the focus of the financial markets is on short-term performance while they
perceive environmental performance to require a long-term focus, unless it is a sudden
negative event;
(2) environmental metrics currently collected by EPA are not readily useful because the
data are facility-based and the information is backward looking;
(3) other environmental reporting frameworks like the Global Reporting Initiative (GRI)
are not as useful as they might be to mainstream investors; and
(4) this arena is changing due to climate concerns.
An excellent summary of the June 2007 workshop is attached for reference. Some of the key
points made during the workshop include:
(1) Standardized and consistent reporting has value to a number of stakeholders;
(2) independent verification of the information reported is important;
(3) several participants mentioned the need for stronger EPA enforcement;
(4) the measurement and reporting on carbon footprints is already happening and is the
kind of metric that the financial sector has found useful; and
(5) EPA should not speak for the market, but it could help to make data more transparent and
understandable.
Further work on developing sensible metrics that can be used to measure a few leading indicators
will take more work. Continued dialogues among regulators, the regulated community and market
sector representatives would be helpful to identify metrics that add value.
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
Some Observations
1. The equity market is looking for endpoints, while an EMS is focused on process. The
insurance market segment is interested in both endpoints and process. The banking sector is
generally a follower as a market sector.
2. Financial analysts are often asked to make decisions on the financial value of a company with
a significant environmental footprint in a short time span. Therefore, standardized metrics
and transparent reporting are more helpful to financial analysts than information that requires
value judgments.
3. Information currently being collected by EPA overall is not as helpful as it could be to
financial analysts to assess business value. The information collected by EPA primarily
relates to its role as a regulator rather than an assessor of environmental performance. In
addition, EPA collects data by facility and investors need information on companies.
Similarly, information from environmental reporting organizations like GRI has not been
especially helpful to the mainstream financial community.
4. The one environmental issue that is getting traction in the financial markets is the emission of
greenhouse gases and the measurement of carbon footprints.
Recommendations
1. EPA should take a leadership role in working with the financial sector and companies to
better understand the relationship between EMSs, environmental performance and financial
value. This will assist the financial industry to better understand the benefits of using
environmental criteria in valuing individual firms and/or in determining actual risks that can
be reflected in the appropriate cost of financing such firms.
2. EPA should work with companies and the three financial market segments already identified
in developing environmental metrics or categories of data that would be of value to the
financial markets, for both operational and legacy environmental concerns. This would give
the financial markets better information for making more knowledgeable decisions on
environmental risks and performance. The adoption of metrics can drive implementation of
management systems in order to collect the information necessary for reporting the requested
information. The reporting of such metrics could be on a voluntary basis; it does not need to
be mandatory. The greater the interest of the financial sector in the metrics, the more likely
that companies will implement systems to collect the information to report the metrics. The
development of key environmental metrics could provide enhanced methods of
differentiating corporate environmental performance, which to date have been evaluated
primarily on a qualitative basis.
3. If EPA decides to pursue this path, then it should make sure that the Steering Group identifies
all the relevant information collection systems within the agency, including information that
may reside in the regions, so that any new system considers all the information available
within the agency.
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
4. The agency should consider contacting environmental regulators and organizations in
Europe, Japan and Australia, which are geographical regions that have been identified as
more advanced in collecting environmental performance information that is of interest to the
financial markets. Examples of such information include energy use, water use and carbon
footprints.
5. EPA should coordinate on the development and use of environmental metrics with other
agencies, such as the Securities and Exchange Commission (SEC) and the Occupational
Safety and Health Administration (OSHA), and State environmental regulators.
8
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
U. S. Environmental Protection Agency
Environmental Financial Advisory Board
Meeting Summary
The Use of Corporafe Environmental
Information in Financial Decisions
June 12, 2007 - Arlington, Virginia
Prepared by:
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
International Decision Strategies, Inc.
911 Duke St.
Alexandria, Va.
10
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Environmental Financial Advisory Board Meeting June 12. 200. Arlington. Va.
Table of Contents
We/come and Introductions
Review of Questions Asked to Panels
Corporate Environmental Information and the Financial Community
—EPA Overview 2
Speaker: Commercial Banking/Lending 4
Panel 1: Credit Analysis and Equity Investment 7
Panel 2: Insurance 13
EFAB Workgroup/EPA Office of Policy, Economics and Innovation
Follow-up Discussion 18
Public Comment 22
Closing Comments and Next Steps 22
Participants 24
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Environmental Financial Advisory Board Meeting June 12. 2007. Arlington. Va.
United States Environmental Protection Agency
Environmental Financial Advisory Board
Meeting Summary
The Use of Corporate Environmental
Information in Financial Decisions
June 12, 2007 - Arlington, Virginia
Welcome and Introductions
• Stan Meiburg, EFAB Designated Federal Official
Stan Meiburg opened the meeting and described the Environmental Financial Advisory Board
(EFAB) and its purpose. Founded in 1989, EFAB is concerned with how to pay for environmental
protection. Its initial work focused on state revolving funds to finance water and wastewater
infrastructure, and has evolved since. Today's workshop started with an EPA request regarding
Environmental Management Systems (EMS)—how can we make EMS more attractive to firms
through financial incentives? Expanding this question, how do financial professionals use or not
use environmental information to make decisions? He added that the EFAB is fortunate to have a
distinguished panel at today's meeting.
He then introduced EFAB members in attendance. Rachel Deming has been a big help in
bringing better understanding of financial assurance issues. Jim Gebhardt is a relatively new (two
months) member, who is a Chief Financial Officer (CFO) and can help address matters related to
socially responsible investment (SRI). Lindene Patton also is a relatively new member and can
speak to insurance issues, while Helen Sahi can address the environmental banking perspective
because she is a former President of the Environmental Bankers Association. The chair also
thanked members of the EFAB Staff, Vanessa Bowie and Tim McProuty, for setting up the meeting.
Review of Questions Asked to Panels
• Rachel Deming, EFAB Member; Partner, Scarola Ellis LLP
Rachel Deming introduced the topics and questions for the meeting. She began by describing her
own involvement with the EFAB, which started at a meeting in San Francisco at which she heard a
presentation given by Shana Harbour of EPA; Ms. Deming then volunteered to chair an EFAB
subcommittee focusing on EMS. Prior to her current employment, she worked at CIBA, a major
European-based chemical company. While there, she became well grounded in the Responsible
Care® program and developed a background in management systems.
In preparation for this meeting, she said she worked with EPA to refine the EFAB's charge, and
break it into pieces to be better understood. She suggested that financial people do not frame
their questions in the same way as EPA, and that getting all participants to fully understand one
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another has been a challenge. She thanked fellow EFAB members Lindene Patton and Helen
Sahi for help in recruiting participants for today's meeting.
On a more personal note, Ms. Deming said she had retired from CIBA earlier this year, and
found herself needing to better understand her retirement assets; this coincided with hearing a
presentation by Bruce Kahn (a panelist), which piqued her interest in the connections between
investing and the environment. It is not her impression that people rarely ask about SRI funds or
environmental issues, nor do others in the financial services industry generally promote or talk
about environment or environmentally screened companies.
She then described the questions that EPA would like to have addressed by meeting panelists, and
indicated that they had been refined several times. The questions are organized by topic and are
as follows:
• To what degree do you consider environmental performance or environmental
management information when assessing the financial strength of a company? Of a
sector?
• If there is no (or minimal) consideration made for environmental performance/
management in fundamental analysis, why not? Is it a perceived lack of relevance? Is
environmental performance considered not material in relation to corporate
fundamentals? Or, are the data to accurately measure the impact of environmental
performance not reliable or not readily accessible to analysts?
• Are there environmental impacts/elements that you would like to see measured?
• Would branding something as Responsible Care one or more forms of EMS help?
• What role can EPA play to promote greater understanding, increased information
exchange and generation, and use of environmental performance data that are more
relevant, consistent, timely, and meaningful to capital market participants?
Corporate Environmental Information and the Financial Community—EPA Overview
• Charles W. Kent, Director, Office of Business and Community Innovations, Office of
Policy, Economics and Innovation (OPEI)
Stanley Meiburg introduced Charles Kent, and noted that Mr. Kent had provided nearly 30 years
of service to EPA in a variety of roles.
Mr. Kent opened his remarks by thanking Mr. Meiburg, and stated that he worked with him
closely over the years and that the EFAB is fortunate to have his involvement. Mr. Kent
continued by saying EPA is trying to learn about the financial sector and the relevance of this
sector to decisions regarding environmental performance. EPA wishes to test the theory that
better information would lead to better decisions, and serve as an incentive for better behavior
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and performance. He stated that EPA's job is to find new ways to provide incentives to stimulate
this improved behavior. He expressed appreciation for panelists' willingness to help EPA staff
learn about the work of the financial markets, and to better ask questions of financial market
participants.
He then provided some background on EPA's Steering Group and its work. The Group was
formed and performed extensive research before going to the EFAB for further ideas and
guidance. EPA seeks EFAB input on the extent to which EMSs provide useful information, but
acknowledges that EMSs are not widely understood.
Mr. Kent described some of the key findings of the Group's early stage research, which include:
• There is a positive association between environmental performance and financial
performance
• Intangible assets are an increasingly important determinant of company financial
performance
• Equity markets do react to environmental events, both positive and negative
• Investors are only moderately aware of environmental issues, at best, but their interest is
growing, and
• Investors have an interest in EMS as concept, but not as a specific tool; at best the
presence or absence of an EMS serves as a proxy for effective environmental
management and, more commonly, as a surrogate for good management generally.
Mr. Kent also described several significant trends that developed as the Group was conducting
the initial phase of its work:
• Interest in environmental issues and performance is perceived by many to be increasing
both in investment firms and in the companies in which they invest
• Disclosure requirements for public corporations have been strengthened significantly
during the past two years—as a result, corporations have begun to disclose more
information on environmental issues
• Institutional shareholders are increasingly asking for management action to define
environmental/sustainability policies, actions, measurement, and reporting
• Due to concerns about climate change, major insurance companies are bringing renewed
attention to environmental and sustainability issues
• A number of companies—including some of the largest companies in the world, like GE,
are visibly seeking to turn environmental issues to their business advantage, and
• These trends will likely shape the interests and behaviors of financial sector participants
relative to EMS and environmental issues in the coming years.
The Group has prepared and issued a report describing these findings, which has been delivered
to all EFAB members. He also indicated that EPA had received some press coverage for its
work, and had been invited to a Wall Street dialog with representatives of several financial firms.
Mr. Kent then described a dialog held in April with another group of financial market
participants and corporate representatives. Findings from this dialog include:
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• There is a fundamental disconnect between the short term orientation of the financial
markets and the long term value created by most environmental investments
• Currently used environmental metrics are not useful to investors
• Major environmental reporting frameworks (e.g., Global Reporting Initiative—GRI) are
not germane to investor concerns, and
• The "game" is, however, changing due to climate concerns.
He closed by thanking all participants.
Mr. Meiburg then recognized EFAB expert witness Sarah Diefendorf, who represents one of
EPA's Environmental Finance Centers. He then asked panelists to each limit their remarks to
about ten minutes and then opened the session to dialog.
Commercial Banking/Lending
• Helen Sahi, Past President, Environmental Bankers Association
Helen Sahi began her remarks by stating that the EFAB and EPA meeting organizers were unable
to find a traditional banker to participate in today's meeting. She emphasized that today's large
banks are now financial institutions offering a variety of services (equity, insurance), and not just
"banks." She indicated that she and other EFAB members were able to find traditional risk
managers, but no one was willing to come, for several reasons. One is that bankers felt that they
did not sufficiently understand EMS to feel comfortable discussing the issue in an open forum.
Also, because loan officers often hold relationships with customers for many years, environmental
issues may be examined but generally may not be viewed as very important in relation to other
issues.
Continuing, she said larger banks now use their own internal environmental experts to evaluate
environmental issues. These experts are not risk managers or underwriters. Most of these
positions came into being following release of the FDIC bulletin in 1992 stating that banks need
to have an environmental policy appropriate to their size, and a person responsible for
environmental issues. The bulletin did not, however, include any definitions. Over time, the
internal environmental experts at a number of the larger banks founded the Environmental
Bankers Association to provide a forum to discuss issues of common interest. Ms. Sahi said she
has been involved since the early days of this organization. It remains small, with only about 60-
80 banks as members. The larger institutions (30 or so) may have a small dedicated staff, but
most other banks rely on consultants to address environmental issues.
Given the principle business and risk exposure of banks, the focus was and continues to be on
real estate transactions, with little attention paid to EMS. Most large institutions hire outside
scientists and other experts to handle (i.e., clean up and sell) foreclosed real estate. Work on
other environmental issues, when it occurs, is driven by the business lines. Many institutions
with customers in the chemical sector tend to examine company financial statements (i.e., Form
10(k)), and develop a deep understanding of their customers, their product offerings, and the
information they are providing to their customers (e.g., Responsible Care, EMS). She believes
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few banks have looked at larger issues, and those that do often use outside legal counsel to
investigate.
That said, major institutions are now saying that the environment is a major issue and are making
substantial commitments in this area (e.g., $20 billion by Bank of America). Many, however,
have not specified or may not know in what manner these funds will ultimately be spent. One
emerging area is a growing interest in Leadership in Energy and Environmental Design (LEED)
certification of buildings. This point of focus seems natural given the heavy real estate
orientation of most banks. One promising idea is to try to measure productivity changes from
green building, though this thinking is in its formative stages.
On the issue of reporting, many financial institutions use or follow the Global Reporting
Initiative, and report on their own internal processes (e.g., paper, water, energy consumption).
Some are starting to think about EMSs, for reasons of scale if nothing else. Ms. Sahi illustrated
her point by stating that Bank of America, uses the equivalent of two sheets of every ream of
paper sold in the U.S., and occupies more office space than is available in the City of Chicago.
She closed by saying that Bank of America is focusing on the costs of mail, internal operations,
and other opportunities for improvement. She believes that the banks are getting there, but will
need more time and working experience to fully understand EMS. She also feels that banks need
to complete their internal (environmental) efforts before looking at other organizations (e.g.,
prospective customers).
Ms. Patton asked whether bank lending has any parallels with insurance underwriting, and why
banks are so focused on real estate. More specifically, what are the remaining concerns if things
go bad, and what can make them go bad?
Ms. Sahi responded that real estate is often the security for the loan or the lender's last resort.
What this means at a practical level is that if a customer has one piece of property, the bank will
focus on legacy contamination using a site assessment. If, however, the borrower has a portfolio
of properties, performing environmental site assessments (ESAs) may not be feasible; this might
instead be a good point of application for an EMS. In lieu of performing site assessments on a
sizeable portfolio, a bank might examine who is responsible for environmental issues, or
establish escrows or buy insurance to mitigate risk. The key question is, "What steps or tactics
can be used to produce an informed, forward-looking assessment?"
Wilhelm Wang, a member of the public who certifies EMSs, asked about EPA support of small
and medium-sized enterprises (SMEs), stating the presumption that EPA is promoting a systems
approach when working with these businesses. He asked whether there were any signs of
operating risks being evaluated with an EMS.
Ms. Sahi responded that the burden is on the customer to show the value of a management
practice, whether it is EMS or something else. She added that legacy (contamination) issues
could be managed with an EMS, and that banks might change loan rates or terms based on its
perceived strength.
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Panelist, Paul Scian, asked whether in evaluating a single property versus a portfolio there is a
"tipping point" e.g., 12 properties, at which one would look for systems instead of performing
ESAs at all sites.
Ms. Sahi responded this varies by bank; some will do ESAs at 40-60 properties while others will
go earlier to an EMS to save time and capture a deal. Timeliness is very important because bank
lending is very competitive.
Ms. Patton noted that in the banking industry, environmental experts came into the business from
the outside in the 1980s. She asked whether people are looking at operational versus legacy
issues, and if so, what is the split between these perspectives?
Ms. Sahi responded that operational issues usually are handled internally, while consultants are
retained to handle legacy issues.
Mr. Meiburg asked whether banks offer lower rates for good environmental performers.
Ms. Sahi responded there are no established metrics to prove lower lending risk for such
companies, and that EPA could help provide these metrics.
Mr. Kent asked whether environmental performance is viewed as material; he noted that some
say it's of tertiary importance.
Another panelist, Peter Meyer, asked whether environmental performance affects the terms and
conditions attached to a loan.
Ms. Sahi responded that revised terms and conditions are being looked at, but are not used
currently. She added that activity in this area is being driven by announcements concerning
greening and a corresponding need to "walk the talk." She believes the current view of
materiality will change, and that the need for maintaining a reputation as a sound environmental
performer is growing in importance. New scrutiny being applied to lenders; stakeholders are
now focusing on who is receiving loans from whom. Bank marketing departments are now
measuring and reacting to positive and negative media coverage in this regard.
Ms. Patton concurred that in her industry, marketers also are trying to quantify these issues. And
a number of people are now quantifying the value of green offerings for consumer products,
though not much is being done concerning commercial products or services. She added that
historically, materiality always focused on the security issue, so unless an EMS can substitute for
collateral (security) it would not be considered material. Unless you can reduce costs (security),
EMS and other environmental improvements are not likely to be considered material.
Ms. Sahi, acknowledging these comments, said things are changing by the week. People are
looking more at the company level and at behavior as well as more traditional, tangible
endpoints. There seems to be a belief that doing so will enhance a bank's marketing capabilities.
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Another EFAB member, Jim Gebhardt, said that in a collateral-based (e.g., real estate) context,
financial value is the key question, and in that situation, EMS has a very marginal impact. He
added that EMS has some traction, but will not save you if your balance sheet does not hold up.
There is a continuum of relevance here, and EMS is most valuable in an equity context.
Panel 1: Credit Analysis and Equity Investment
• Kyle Loughlin, Managing Director, Corporate and Government Services, Standard &
Poors
• Bruce Kahn, Investment Management Consultant, Smith Barney
• Sonia Wildash, Senior Research Analyst, EIRIS - Ethical Investment Research Services
• Michelle Smith, Director, Environmental Health and Safety Development, Rohm and Haas
Company
Mr. Meiburg initiated this session by stating that EMS may mean different things to different
people, and that in this session we would likely hear a range of views.
The first panelist, Bruce Kahn, began by describing his role in the equity markets. He manages
the SRI practice for a variety of investors. In his work, he looks at all investments while accounting
for environmental, social and governance (ESG) issues and conducts due diligence research on
these issues. In response to a topic raised in the earlier discussion, he assumes that these issues
are material. His firm does not perform exclusionary screening of prospective investments, but
instead practices "responsible" investment.
Mr. Kahn responded to EPA's question one, by saying yes, I do look at environmental issues when
evaluating companies, as I believe that these issues are material to equity pricing. Translating
EMS to balance sheet information is, however, a big challenge and a gap that has yet to be
spanned.
His analysis involves integrating separate (i.e., project-level) analyses done by individual analysts
using a variety of techniques (e.g., ratio analysis, discounted cash flows, profit impact relative to
cost of capital, option pricing), then rolling up all of the initiatives for the company. This is a
labor-intensive approach and is very expensive.
Regarding EPA's second question, Mr. Kahn said the problem is that one cannot capture all of
the relevant facts with which to evaluate environmental management quality or performance. The
data are not that available or reliable, and there is too much required granularity across multiple
business lines.
With respect to metrics, he examines greenhouse gas (GHG) emissions and risk as well as other
fundamentals, such as waste, water use, etc. These more traditional indicators are, however,
being eclipsed by global warming concerns.
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On question 3, Mr. Kahn said he thought branding might be helpful. At present, some of the
existing extra-financial researchers look at company EMSs, though usually as a binary (yes/no)
consideration. Having a brand associated with certification is important.
Finally, he believes EPA could play a useful role by fostering EMS standards and/or processes.
EPA already has an abundance of data, and there are huge amounts of data available in
journals, dissertations and other sources. The key question is how to get this information into the
capital markets. In terms of any new data requirements, he believes there would be value in
looking first at the ultimate endpoints, i.e., the condition of the environment, and then tracking
any substandard conditions back to company behavior and its association impacts. EPA also can
reach out to other agencies and collect, organize and analyze data held by these organizations.
The next panelist, Kyle Loughlin, began by describing his function, which is to evaluate waste
management companies from the standpoint of default risk; he manages a team often people,
and collectively, they determine the debt ratings of 130 companies in the United States.
To them, the key issues are default risk and the likelihood of loss given a default. They do use
environmental information, but its importance varies. They treat environmental and asset
retirement obligations in similar fashion to debt, and look at a range of indicators. Environment
is not a key factor, except in certain cases. To develop the pertinent facts, they rely on financial
statements and accompanying notes and other Securities and Exchange Commission (SEC)
filings.
Mr. Loughlin's firm conducts approximately 100 meetings with company management teams over
the course of a typical year. These often happen during "road show" events hosted by companies
seeking additional financing. In his experience, it is a very rare company that will talk about
environmental risks or systems in the absence of questions from analysts. Finally, in his view,
existing disclosures usually are sufficient regarding liabilities and their cash flow impacts. In cases
in which they may not be or impacts are potentially significant, he and his colleagues drill down
further, asking additional, more specific questions.
Mr. Loughlin then provided a few examples of how environment can affect the ratings assigned to
a company or otherwise intersect with financial markets:
• Some notes now provide ranges of and time frames for addressing contingent liabilities;
often an environmental adjustment is notable but not a major rating factor, though
sometimes it is.
• Adjustments may be made in financial models to account for environmental liabilities,
along with many other issues; this may result in adjustments to conventional financial
ratios.
• Default risk may be affected by environmental issues, in particular by required capital
outlays, bonding/letters of credit, and other financial obligations that affect liquidity as
well as by contingent or even perceptual risks.
• Similarly, phase-out of a product, particularly an important one, can affect a company's
cash flow and, therefore, its risk of default.
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Mr. Loughlin next described how his firm addresses the risk of loss for all companies that are
rated "speculative," or below investment grade. This is done by conducting a recovery analysis,
which involves simulating a path to default, then forecasting a revised cash-flow-at-default
estimate. Debt and non-debt claims are evaluated, along with a distribution of the projected
value of the firm. The end result is a recovery rating. Environmental claims and risks must be
included in these analyses, but they rarely are important, because the typical time frame of
analysis is less than five years.
Mr. Kahn asked whether the ratings evaluation considers only legal liability and compliance
issues.
Mr. Loughlin responded it did, not least because the entire analysis is conducted within about a
two-week time frame. This is because the road shows are performed to raise capital and to make
deals quickly. Accordingly, the focus is on default risk over the intermediate term.
The next panelist, Michelle Smith, represents a major multi-national chemical company. She is
responsible for the company's EHS (environment, health and safety) & Sustainability Report, which
includes a detailed description of its EMS, among many other items.
The company serves the electronics, paint and coatings, household, personal care and industrial
segments, and has little direct exposure to consumers. Ms. Smith believes her company's
products can yield environmental benefits, an issue they will be looking at more closely in the
future. Energy, health care and water are specific new areas for potential expansion.
The company is now looking at its supply chain, especially high risk areas such as waste
management.
Regarding environmental performance, she suggested language may be an important barrier to
effectively communicating what is in a sustainability report as well as the meaning of particular
results. In her experience, investors may not be familiar with environmental issues and their
relevance to business results, so better communication will be important to raising awareness.
With respect to EPA's question on branding, she believes that in the case of the American
Chemistry Council (ACC)'s Responsible Care program, branding has been valuable.
Ms. Smith suggested that EPA play a role in defining what the important leading and lagging
indicators should be, and put some sustained scientific horsepower behind filling this need.
The final panelist of this session, Sonia Wildash, explained that she is employed by a company
that performs sustainability ratings of companies, and that she had formerly worked as a
mainstream investor. She described the typical SRI understanding of environmental issues—there
is a relatively large upfront cost associated with making environmental improvements, but these
investments lead to savings, and essentially, a sustainability "sweet spot" through creating less
volatile companies that make better long-term investments.
In contrast, she characterized the mainstream investor perspective as: if a company is not
breaking the law, environmental issues are of no interest. More generally, she believes the
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market does not put a price on environmental benefits from existing and new corporate behavior,
but does punish disappointments.
Environmental information must be easy to find or it will not be used. In cases in which such
information is found, it usually has not been independently audited, so investors may be
suspicious of its reliability. Ms. Wildash noted there is no global standard for environmental
reports, which tend to be full of photos of children and fluffy text rather than data that are of
interest to investors. In her view, lack of time is a frequent excuse of corporate representatives for
not providing more extensive environmental information. Also, meetings with corporate
management tend to be short and are not focused on the environment.
Ms. Wildash believes ESG issues and their importance must be introduced in investor training
programs early on and not left to personal interest or random chance.
As far as useful indicators are concerned, she would like to have a single number or index with
which to compare companies.
She also spoke to the perceived lack of materiality of environmental issues by saying that they are
not viewed as important until it is too late to prevent a rare but profound occurrence; because
such incidents are rare, time is better spent focused on other issues. In her view, a catalyst is
needed to break the circular logic that inhibits consideration of environmental issues by investors.
A virtuous circle could be created if the market started to differentiate between companies on
environmental issues. As an example, the position of the sell-side appears to be changing in
Europe. Sell-side analysts are influential. In the U.S. they are notably unconcerned about
environmental issues.
Regarding branding, Ms. Wildash thought such efforts would not be especially helpful; only 1 5
percent of companies have one-third or more of their locations certified to the ISO 14001
standard in the U.S. as opposed to 50 percent in Japan. She believes it would be much more
fruitful to focus on getting more companies to comply with existing regulatory and other
standards, rather than further "raising the bar."
As to the question of what EPA can do, Ms. Wildash suggested developing a framework for public
reporting of environmental performance and, perhaps, making it compulsory. EPA also could
define key issues and metrics, and time frames for attainment. She also suggested there be a
legal requirement for audits of publicly reported environmental information. She also called for a
means to ensure board-level responsibility for environmental performance. As partial justification
for this, she noted that American companies have had more trouble staying in the sustainable
company indices than their European counterparts.
As examples of possible approaches to consider, she said the UK government has promoted
companies displaying leadership behavior. In Japan, the Ministry of Environment has facilitated
many stakeholder consultations, leading to a number of performance improvements. For
example, 40 percent of companies now have independent environmental reviews and 80 percent
disclose their internal environmental accounting standards. EPA could help U.S. companies
emulate these behaviors.
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Ms. Wildash closed her remarks by thanking EPA for inviting her and stating that panels like this
are valuable.
Ms. Patton said there seems to be consensus that there is a lack of good indicators relating
environmental performance to financial issues, and asked where one should start in producing
standards for use by the financial markets. As an example, how do you move from proprietary
models for greenhouse gas (GHG) emission risks to generally accepted rules?
Ms. Wildash said her firm uses several management and performance indicators when evaluating
GHG and other environmental dimensions of a company. They provide the environmental
analysis for the FTSE4GOOD index. She would like all of this information to be publicly
disclosed, e.g., on company web sites and/or in Form 10(k)'s.
Mr. Kahn also responded to the question by saying that the ESG world has no standard, so EPA
has an opportunity to establish some kind of new standard or approach. He concurred that all
existing players are competing with their own individual proprietary methods. He added that all
financial analysis is an art, so evaluating ESG issues is not fundamentally different than assessing
other aspects of company performance. He said EPA should help establish a credible, scientific
standard for environmental measurement and reporting.
Ms. Wildash noted there is need for an analog to Generally Accepted Accounting Principles
(GAAP) for mainstream financial information, as analysts and investors want to spend time
analyzing information rather than finding it. Ms. Smith added that metrics across businesses can
swing considerably, and their interpretation is part of the "art" of investment analysis. She urged
EPA to be careful in crafting any standards, especially if they are rigid or uniform.
Ms. Deming asked what we might learn from the experience of Europe and Japan in this area.
Ms. Wildash said the focus currently in evaluating EMS is its presence or absence in companies.
Rather than focusing on more nuanced evaluation of EMS quality, she advocated the promotion
of more certification of EMSs in the U.S. and getting information on this out to the financial
markets.
Ms. Patton said she thought self certification of EMSs is of questionable value. Ms. Smith
responded that, in her view, EMS is best applied in concert with other improvements, but has
added value to her firm in a variety of ways.
Mr. Loughlin returned to the issue of branding, saying it is not likely to be critical; instead,
consistency in reporting is much more important. He added that anything EPA could do to bring
consistency would be helpful, as there is little uniformity in the ways that environmental risks,
management processes, methods, ranges of estimates and time frames are addressed and
described by companies, even those with EMS.
Ms. Patton asked about the emphasis between legacy and forward-looking issues in terms of
getting new standards developed. She suggested legacy issues are very controversial in this
regard.
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Mr. Kahn said an EMS is not a trivial matter, as many companies use them as a management
tool. He also questioned whether branding might be used by some companies to "game" the
system. He thought EPA needs to get the SEC involved with this. Existing regulations require
disclosure, but the government is behind the curve in understanding that companies have
appropriated environmental services while creating significant externalities and social burdens.
He believes accounting for these environmental services (externalities) will be increasingly
important in the future. EMS, he believes, can help illuminate these issues.
Mr. Meiburg saw two possible opportunities. One is for the SEC to step up and play a more
active role in promoting more full disclosure; the other is to equip financial analysts with the
background information and questions needed to conduct meaningful company level analysis of
environmental issues.
Regarding metrics, Ms. Deming said the Responsible Care program is developing new metrics
that will address many stakeholder interests, including GHG. She asked whether these will be of
value to investors.
Mr. Meyer asked whether the desired environmental reporting does or will consider secondary
impacts (e.g., employee travel), or whether that would produce an "envelope" that is too large.
Ms. Sahi responded that in the case of her company, it would indeed consider secondary
impacts.
Mr. Gebhardt suggested that ecosystem services might be beyond the context or reach of EMS.
He believes that a whole new paradigm may be needed, the costs of which may be significant.
Mr. Kahn agreed, saying this conversation has gone further than the original focus of the
meeting. He would like to be able to measure impacts rather than natural conditions first, so that
he can determine the better steward of natural resources among different companies.
Ms. Diefendorf said her state government (California) seems to be very interested in greening
companies and in green chemistry and asked, to what degree should government force
environmental performance when the financial sector doesn't act?
Ms. Wildash responded that some of the large public pension funds (e.g., the California Public
Employees Retirement System (CalPERS) have been important in pushing this debate. She
believes their large size creates influence and noted that, in addition to CALPERS, the pension
funds of Connecticut, Vermont and New York also have been active.
Ms. Smith said consumers are the driver of innovation and whatever can influence them is the
shortest path.
EPA representative, Dale Ruhter, returned to the issue of the SEC and legacy costs, asking, to
what degree has the financial community gone to the SEC with the concerns voiced here?
Mr. Loughlin responded he knew of no specific examples of lobbying for action.
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Mr. Kahn said the group, Friends of the Earth, has lobbied the SEC and members of the
environmental media (e.g., CSR wire) have reported on these discussions. He also noted the U.S.
Supreme Court had very recently ruled that companies may be held responsible for climate
change risk.
Finally, Ms. Smith said she would be open to using other environmental metrics, but emphasized
that voluntary approaches are preferable to new mandates. She also noted that issues of
confidentiality may be important in certain cases, as these may limit which issues a particular
corporation can report on.
Panel 2: Insurance
• Susan M. Vetter, Vice President, Environmental Services Group,
AON Risk Services, Inc. of New York
• Laurie Rudolph, Senior Risk Engineering Consultant, Zurich NA
• Paul Scian, AIG Consultants
• Dr. Peter Meyer, Director, Center for Environmental Policy and Management, University
of Louisville
The first panelist, Susan Vetter, began her remarks by saying her firm helps clients with risk
management overall, an approach that includes not just insurance but other products and methods
that take into account a particular client's appetite for risk. She also related her own professional
experience, which began with another carrier, where she became involved in all types of
insurance. Her perspective on the environment reflects the industry's history, in which products
and services initially had a casualty focus, which then evolved to a financial-risk management
perspective. This perspective is reflected in current environmental insurance products, which
remain a "discretionary buy" for many companies.
She then described the major types of environmental insurance that currently are available:
• Site specific, e.g., pollution legal liability
• Environmental services
• Cost cap
Underwriters evaluate risks under each, based on warranted information (applications signed by
a director). Issues of interest to underwriters include reportable releases, Phase II environmental
site assessment results, and the like. In an acquisition (due diligence) context, information on
permits, consent decrees, "no further action" letters, closed UST reports and waste management
vendors all would be of interest. In addition, real estate liability underwriters now often require
spill plans and other evidence of a proactive approach to controlling site-related risks. Moreover,
typical insurance products automatically exclude known conditions, so having public
information on site characteristics is very important. In fact, the most useful information to an
underwriter relates to site conditions.
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While not required, EMSs would be embraced by underwriters, as they provide a source of
information on environmental conditions as well as some assurance that environmental risks are
being controlled. In other words, EMSs can help carriers make informed business decisions.
Underwriters would value an easily accessible way to access information on a site or operations;
in this regard, an EMS could be of interest. The effect would be an increasing level of comfort
by an underwriter with a particular site or company; greater underwriter comfort level leads to
better insurance policy rates and terms.
Ms. Vetter also stated that a partnership results once risk issues are fully identified, i.e., the
insured and insurer tend to work together on an ongoing basis to resolve and control the
identified risks. Because an EMS can serve to store and manage risk-related information and
increase an underwriter's level of comfort that relevant issues have been identified and
controlled, it could help to produce financial benefits for a company.
Despite its potential value, EMS still has yet to fully demonstrate that it provides quantifiable
risk reductions. When companies can show the long-term cost effectiveness of their EMS, they
will then be offered the best terms and conditions.
Ms. Vetter concluded by saying she would like to see an EMS requirement, and observed that
many companies are integrating other issues, such as health and safety, into their environmental
programs. She believes that insurance underwriters will increasingly want to work with such
forward-looking companies in the future.
The second panelist, Paul Scian, began his remarks by stating that he served as a consultant, or
in-house service provider to his employer, a major insurance carrier. His firm's work is mainly
transaction driven; in that context, the key question is, what could go wrong?
Mr. Scian's area of special expertise is the costs of complex environmental site remediation. In
his work, his role is to pose "impolite" questions of a prospective insured, to bring to the surface
important risk-related issues. While he does not decide to offer or not offer coverage,
unconvincing answers to his questions may result in notes to the file, which in some cases might
put future claims at risk. This would occur if the insured did not fully disclose pre-existing site
conditions, for example.
Mr. Scian stated that in a sound insurance underwriting transaction, all parties should win.
He then turned his attention to the four questions posed by EPA.
In response to the first, Mr. Scian said he evaluates environmental information every day. In
talking with prospective insured parties, he conducts telephone dialogs and completes a checklist
while doing so. The absence of a complete or convincing answer to a question raises "red flags,"
causing him to probe more deeply into the issue.
He emphasized no insurer wants to inadvertently underwrite a known condition and so he
questions company representatives closely. On the other hand, assessment and underwriting are
usually conducted very quickly—a two-week window at most. This can result in a "war of
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paper," in which it can be a struggle to find and adequately review what may be a large
assortment of site-related documentation that addresses conditions over a period of years.
Mr. Scian said risks can be segmented (e.g., legacy known vs. unknown, on-going), and can be
covered in various ways by insurance policies. Because underwriters make business decisions,
coverage may be offered even if risks are identified, though higher risks result in higher
premiums, more stringent conditions, and/or more limited scope of coverage. Because all of
these variables are in flux for any given underwriting situation, he and his peers are accustomed
to dealing with ambiguity.
With regard to the relationship of environment to corporate fundamentals, Mr. Scian asked, what
is material? This judgment is somewhat situational and arbitrary. For example, he said, a $5
million liability may be material in one situation and inconsequential in another. In practice,
insurers strike a balance among many factors.
He also commented on emerging financial accounting and reporting requirements, stating that
the Financial Accounting and Standards Board (FASB) doesn't necessarily require disclosure of
potential contamination if investigations are ongoing. Sarbanes-Oxley may change this
behavior, however. He believes that, as a result, there will be lots of "new" sites and related
liabilities announced in the future. He also felt that more data is preferable to less, but suggested
that it is important to know when to make the decision with the available data rather than
continue to seek new information.
Mr. Scian also offered an opinion on the question of branding, with respect to ISO 14001 EMSs
as well as other variants on the EMS concept. He believes that EPA should focus on getting
more attainment of well-functioning EMSs, rather than setting the bar higher.
Mr. Scian also said EPA could play a valuable role in developing/promoting some common
quantitative metrics (e.g., energy/unit) that could be used across a wide variety of companies and
industries. Teasing out some of the data currently subsumed in the balance sheet and income
statement would enable better industry-wide comparisons.
The third panelist, Laurie Rudolph, described her main responsibility as risk assessment. She
also emphasized that pollution insurance and related products are not mandatory. There is
substantial negotiation in establishing coverage and rates and considerable variability in the
terms, conditions and scope of individual policies.
She said she has not observed any direct relationship between the presence of an EMS and lower
insurance costs. In her view, interest in environmental issues and EMS varies by insurer and
depends upon individual appetite for risk.
She did suggest that in the context of her work—trying to assess what could go wrong—the
aspects analysis of an EMS could be very useful. She further thought that it would be helpful if
EPA could in some way assist with the quantification of risk and exposures for benchmarking
and cross-company comparisons. From an insurer's perspective, EMS is most useful for its
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ability to control or minimize risks and demonstrate and document that effective controls are in
place.
In Ms. Rudolph's view, EMSs are often written well, but the key is quality of implementation.
Insurers would look to a well-implemented EMS to formulate and track action on risk reduction
recommendations and might modify coverages, terms and rates accordingly.
With respect to EPA's question about branding, Ms. Rudolph does not believe that it would be
likely to be appealing. In her view, ISO 14001 certification of an EMS is not meaningful,
because registration has been market (customer) driven, rather than stimulated by a desire to
truly improve performance (e.g., risk reduction). Accordingly, it is not clear that registered
EMSs are any better than non-registered management systems. She does believe that having
some form of management system will make companies more desirable to insurance
underwriters.
The fourth panelist, Peter Meyer, began his remarks by reviewing some features of
environmental insurance policies and contrasted them with other types of insurance products.
He stressed that environmental insurance policies are "surplus" or "admitted" rather than
"admitted" insurance lines. This means that they are not standardized, and may (and do) vary
considerably from state to state. Coverage may or may not be available in a given location, as
there is no pool of insurers to guarantee access to coverage as there typically is for admitted
insurance lines (e.g., homeowners, auto insurance).
Also, insurers are not regulated at the federal level, though they may (or may not) be regulated in
individual states. He suggested the discretionary nature of environmental policies may inhibit
more extensive environmental disclosure, particularly by poorly performing companies.
He also suggested the risk appetite for underwriting may vary over time within the same
company. Indeed, such changes may occur from month to month as the characteristics of the
firm's portfolio evolve, as well as in response to more general market conditions.
Another important factor, in Mr. Meyer's view, is that the "industry" offering environmental
insurance products is narrow enough to pose problems when thinking about standardization.
Also, as these products are "surplus" or non-standardized lines, meaning each policy is
individually tailored and negotiated, there can be an important lack of clarity regarding the utility
of EMS to identify and control risks and, by extension, influence insurance policy rates and
terms. That said, he believes having an EMS may lead to some negotiating room for an insured.
For example, a company may receive fewer exclusions from policy coverage.
With regard to influencing insurance coverage for ongoing operations, Mr. Meyer said EPA
should be careful about mandating EMS requirements. He believes it is important to avoid
creating redundant information. On the other hand, getting more information reported should
lead to self-correcting behavior and improved environmental performance.
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Looking toward the future, Mr. Meyer concluded that if an EMS standard to satisfy everyone
could be developed and adopted, it might help in someday getting environmental insurance
products standardized and admitted as insurance lines. Indeed, if the relationship between EMS
and the process of risk transfer that is provided by insurance were to be fully defined, he
suggested in the long term, EMS might even take the place of insurance in some cases.
In response to this statement, Ms. Patton said that while not required now or (probably) in the
future, companies would likely continue to need environmental insurance, and offered an
analogy to automobile insurance. She also asked how EMSs or their components affect
underwriters of "core" insurance coverages (e.g., property, workers comp).
Ms. Rudolph responded that workers' compensation, property coverage and general liability
coverages may be affected by a good management system. These systems may reduce the risk of
serious illness or injury in an insured company's operations and make them more attractive to the
insurer.
Ms. Vetter said having a plan is better than not having one, even if it is not implemented
perfectly. She added that many factors do intermingle in designing coverages, e.g., employee
driving records. In that respect, the management system can help to delineate, or clarify, the
relationships between the company and the employee, as well as between the company and
insurer. In some respects, a company demonstrates that it is investing in its own future by going
through this process. In assisting a company in developing plans, underwriters often ask for
information on general liability losses; these show the effects of prior investments as well as
company cultural aspects.
Ms. Deming then asked the panelists whether the applications used by different carriers pose the
same questions.
Ms. Vetter responded they did. Because the information solicited by the form is warranted, it
tends to be the same, though carriers all have their own application form that must be completed.
In terms of differences between environmental coverages and more general business insurance
(e.g., CGL), applications for both will require a description of operations, revenues, employee
counts and the like, but as discussed previously, forms for environmental coverages also require
information on (and from) ESAs and other relevant site data.
Ms. Rudolph added that for coverages addressing ongoing operations, underwriters also will
want to know what the company has done to mitigate risks. It is important to understand,
however, that all underwriters have their own particular concerns, and that policy underwriting
remains both art and science in practice.
Ms. Deming then asked whether there were typically gaps in the information reported to the
underwriter.
Mr. Scian said gaps always exist at a particular site.
Ms. Patten asked about legacy exposure and EMS.
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Ms. Rudolph said, in her view EMS is focused on the present and future. To address legacy
issues, she generally relies on ESAs and other site-specific documentation. She added, there are
good mechanisms available to manage site assessment data.
Mr. Scian observed that EMSs have been in place for many years in some companies, and the
"history" of such systems can be important, in that reviewing the company's experience can
reveal important insights into its attitudes, behaviors and responses to new information. Ms.
Rudolph added, EMS history shows something about the culture of the host organization.
Mr. Meyer indicated that "legacy" includes current off-site disposal of wastes, so if an EMS
tracks waste disposal sites, it may provide a bridge to legacy issues.
Ms. Diefendorf said, in California there is a third-party certification program that recognizes
companies that achieve compliance and beyond, i.e., a "green company" certification. She added
that, in her view, some certified companies might invite review of their past history, but only if it
is solid. She then asked the panelists whether such a certification might serve as basis for an
insurance rate reduction.
Ms. Vetter responded it would. She said credits are available to underwriters that might be used
to account for this, and insurers are most interested in companies that can show evidence of
effective risk management.
EFAB Workgroup/EPA Office of Policy, Economics and Innovation
Follow-up Discussion
Mr. Meiburg shared a few observations and posed some questions to begin this session.
He outlined some of the differences among sectors and between the operational and legacy
perspectives when considering environmental risks. He also was struck by the degree of
commonality between EPA and financial sector with respect to the information that is of interest
in an environmental system, performance and risk context. He asked how these commonalities
could be harnessed for the mutual benefit of all.
He then asked about a prominent EPA database that is intended to provide the types of
information that should be of interest to meeting participants, the Enforcement and Compliance
History Online (ECHO) database. He asked whether anyone uses it.
He closed by saying that EFAB has focused on insurance as a financial assurance mechanism.
He has heard, however, many complaints from state regulators regarding insurance industry
behavior, and asked, somewhat facetiously, whether insurance companies ever pay on claims
made on policies used for financial assurance purposes.
To add some perspective to the discussion, Mr. Kent reviewed some of what had been heard in
the previous dialog. He said that Paul Portney (formerly with Resources for the Future and now
with the University of Arizona) had said that most environmental information is incorporated
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already into market decisions, i.e., no further action is needed. Many others, however, still
believe that new information is out there and being used for a variety of purposes. What is to be
made of it?
He added, some also believe it is not EPA's business to define what is important (or not)
regarding environmental performance. Instead, the market place should dictate what should be
measured, communicated and considered by financial analysts.
He went on to say that EPA's OPEI is looking at EPA's information management functions, and
observed that they could be improved. He asked the group, what does the Agency need to do
differently? Is the information of interest really there?
He stated that much behavior change is based upon rules changing, which is now occurring in
ways that are somewhat unclear. He believes some of the observed behavior change is occurring
not based on data, but on new social expectations for improved environmental performance, or
even sustainability, i.e., on intangibles. In such a context, environmental leadership may produce
a first mover advantage.
Another EPA representative, Shana Harbour, recounted some of the discussions that EPA
conducted with financial representatives over data. It is unclear at this point whether the data are
there but are not used in the right way(s), or are not there and are hard to get at. While there is a
lot of "buzz" around integration of environment into financial markets, it is not yet really
happening in mainstream markets.
She asked the group how we can develop forward-looking metrics, where EPA's leverage points
might be, how EPA can act as a catalyst, and what are appropriate roles for EPA and other
parties.
Mr. Scian drew an analogy to the early days of the EPA underground storage tank program. This
program started very simple, but became very complex over time. He added EPA should be
careful about what it asks companies to do, and go with simple, basic metrics and build over
time.
Ms. Smith suggested tying metrics to a goal, and asked, what are our national priorities (e.g.,
water quality, carbon footprint)? One should not have metrics for metrics' sake. She pointed out
the emerging stakeholder expectation that environmental/sustainability performance reports
should be global may pose some issues for EPA; as many will want global data that may not
correspond to EPA's needs.
She added that, ideally, the marketplace would ensure that environmental issues are integrated
into mainstream business practice and offered the analogy of the TQM/quality management
movement as an example.
She noted that issues may evolve in the same direction on environment, with companies
achieving accelerated progress on environmental impacts, quality, cost and other key
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determinants of value. She asked whether environmental performance is actually improving
over time, and whether more environmental insurance is being purchased.
Ms. Vetter said that more companies are buying environmental insurance products, or at least
looking at related issues, as well as improving their management of legacy issues. Leaders in the
more sophisticated companies also are getting more comfortable with the management of these
issues. Interestingly, chains of effect are kicking in, e.g., environmental insurance may be
required to obtain a bank loan. In this type of market environment, clients will want to
contribute to addressing risks and finding solutions.
Mr. Scian said growth in the environmental insurance business is slowing but still there;
environmental coverages are now an accepted component of risk management. The recent high
level of merger and acquisition (M&A) activity is fueling demand at present.
Ms. Patton said the environmental insurance market does not appear to be slowing down. She
added that the industry covers many activities, from real estate to services, and each may be
affected by different things. For example, there may be issues on the state level. Each
competitor has a different profile.
Mr. Meyer said there is an important distinction between a claims-made versus current policy.
This is important because the disclosure of some information can lead to a refusal to renew a
policy. On a claims-made policy, the claim must precede the expiration of the policy to be
honored by the insurer even when the insurer refuses to renew the policy. This means a bigger
risk for the insured, which often has less power in the relationship than the insurer.
With respect to suitable environmental metrics (e.g., for water, energy use), he said all
companies have data on expenses, so there would be no additional data required to report
consumption of these endpoints. He also suggested it might be most appropriate to express such
resource consumption data as a ratio of consumption to output. He asked whether such questions
might be an appropriate focus for EPA.
He added that there are extensive data in state agencies regarding permit or other regulatory
violations, and suggested perhaps EPA could form a clearinghouse in which to house and
distribute these data.
Ms. Vetter asked whether the data of interest are really there. She believes a large portion is, but
one would need to consider how much time should be invested in sifting through it. EPA has
data, but it would be helpful if access could be made simpler. She added having good data is
more important than a lot of data, so imposing additional reporting requirements may not get us
to where we would like to be quickly. As an illustration from the insurance industry, she said
environmental insurance applications are now typically two pages in length rather than seven.
Mr. Meiburg asked Mr. Kahn whether his evaluation of a particular company is time limited.
Mr. Kahn responded that for a firm like Standard & Poors, the evaluation period is very time
limited, although in other firms and contexts it might not be similarly constrained.
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He spoke further to the short-term versus long-term orientation question. He noted that many
environmental issues have a long time span (a decade or more). To address this problem, the
analyst looks at company culture and the value creators that have been important during the past
18 months. He added that environmental investments are analogous to R&D investments, which
are widely viewed as important determinants of long-term value creation potential.
Ms. Deming recounted the experience of her former (chemical) company in measuring energy
and water consumption 18 years ago, and stated that doing so was very difficult. She said,
however, that ratings firms liked metrics that went beyond the traditional ones, so her company
realized some benefit in the longer term.
She noted that the American Chemistry Council, which represents many U.S. chemicals
producers, has added some of these types of metrics to its Responsible Care program. These
enhancements make the program more consistent globally as well as more satisfying to
stakeholders.
In the current context, she suggested the group should first figure out which endpoints and
metrics are helpful to the financial community before proceeding further, as there is a lot of
variation in what is used and in what ways.
Ms. Rudolph suggested one needs to be careful to consider local climates and conditions when
looking at metrics such as energy consumption. Geography (e.g., local climate) may be
important, so it is important to not oversimplify.
Mr. Gebhardt pointed out this is a mis-assessment of the information and results in mis-pricing.
Eventually, the marketplace will sort out the issue of what information is important; he expressed
the view that EMS may be helpful in that regard.
Ms. Diefendorf said small and medium-sized enterprises (SMEs) would need help if information
requirements became more extensive.
At this point, Mr. Meiburg posed two questions for participants to consider, and asked that each
panelist respond to the one of their choice: 1) What is most important thing EPA can do to
stimulate progress? and 2) What would you most like to ask one of the other panelists?
Mr. Kahn responded to the first question by stating that EPA should act as the enforcer of
existing regulations and policies, as well as be a conduit for receiving information from other
agencies, which should then be put into a concise, accessible database. Similarly, Mr. Scian said
EPA should take the lead in developing, quantifying and enforcing key metrics.
Ms. Sahi asked whether the panelists had received much feedback on GRI and other
environmental/sustainability performance reports. Mr. Scian asked Ms. Sahi what the most
useful environmental metric(s) is/are in executing a property transaction. She responded that
data found within ESAs and similar documents that speak to risks are the key metrics; her role is
to evaluate these risks and deliver her assessment to the lender, who prices the service
accordingly.
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Ms. Vetter indicated that she views EPA as an enforcer, adding that it can add value by making
performance visible, as no entity wants to be non-compliant in the public eye. She expressed
support for the idea that EPA should be a conduit for information.
Ms. Rudolph said people need to talk the same language, e.g., across sectors. Topics of interest
here include defining what an EMS is, and industry-specific liability issues. She added that
having some common goals across all sectors would be helpful.
A different perspective was provided by Ms. Smith, who encouraged EPA to "do what only you
can do." She noted that a shift toward more proactive behavior over time has occurred in U.S.
corporations. She suggested that EPA's activities might be able to help address potential major
environmental and resource challenges, such as shortages of water and energy shortages. Ms.
Smith added that industry is a customer for environmental performance information just as are
financial markets. She expressed the hope that EPA could help to make these markets and
underlying processes more efficient.
Ms. Wildash took a different tack endorsing (more) vigorous enforcement of existing
regulations, as well as an expanded role for EPA in identifying key environmental metrics for
investors, promoting standardization and inclusion of these metrics in company financial (e.g.,
10(k)) reports.
Mr. Meyer emphasized that EPA can and should make state-level public data more available and
accessible to people in other states and nationally.
Mr. Kahn inquired of the EFAB members and EPA representatives whether they have SRI funds
available in their 401(k) or other retirement accounts. Mr. Kent responded that legislation has
been introduced to allow SRI funds to be included in the federal government's thrift savings
plan; this effort is being supported by EPA.
Mr. Kahn continued by stating that $2.1 trillion or one of twelve U.S. investment dollars, are
being screened in some way, and pointed out that there has been enormous growth (2001-05) in
demand for climate risk data. More assets are being placed with explicit reference to
environmental and social issues, which to him suggests that perhaps this is a "buy" signal. This
could reflect a continuing maturation of SRI as a discipline, or perhaps is simply more people
"putting their money where their mouth is."
Mr. Gebhardt responded to these comments by saying that, to him, it seemed that, behavior
increasingly is being driven by financial considerations, not traditional SRI screening criteria.
Public Comment
Michael Joiner, of Georgia Gulf, offered his view that environmental metrics need to be
normalized, measured, and reported in real time, and as much as possible, leading rather than
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lagging indicators. He also expressed some frustration with the way in which EMS is defined and
used within EPA; he said EMS is defined in at least seven different ways on EPA web sites, and
called for a common operational definition. He would like to know where companies should
invest their resources, considering that they are major consumers of environmental performance
information just as are financial market participants.
Closing Comments and Next Steps
Ms. Deming stated that there will be a meeting of the EMS subgroup in San Francisco in August
as part of a broader EFAB meeting. At this time, the subgroup will discuss options for further
activity and action. She identified two common threads that emerged during today's discussion:
• Standardizing and normalizing information is important to a variety of stakeholders, and
• The process of reaching a widely accepted standard for measuring and reporting
environmental information will be iterative.
In the near term, she would like to see the questions and criteria that are of interest to all parties
compiled so that one can determine where there is overlap. She also wondered how much of the
current "disconnect" between providers and users of environmental performance information is
due to terminology or language differences. She also endorsed the idea that EPA can serve as a
clearinghouse for state-level information.
Ms. Patton said that focusing on common threads in simple, valuable ways is a key step and
favors maximizing the information value that can be aggregated into a few leading indicators or
surrogates. She said existing indicators have limitations and their relevance varies by sector.
Mr. Gebhardt expressed the view that the market is moving in competitive mode regarding EMS,
and returned to the question of the appropriate role for EPA. He believes EPA could help make
data more transparent, and could offer useful expertise in defining and making sense of metrics
that capture the essence of EMS, as well as testing candidate metrics in the marketplace. He
emphasized, however, that EPA should not speak for the market, but rather enable market
participants to make more informed decisions.
Ms. Sahi suggested possible efforts to educate and raise awareness more broadly. This might be
done, for example, by providing training for financial analysts. She also highlighted campaigns
being conducted in some states, e.g., New Hampshire's EMS is Not Just for Big Businesses effort,
and more general outreach in schools.
Mr. Meiburg responded by stating that EMSs can work and add value to many enterprises, even
small farms.
Mr. Kent expressed thanks to all participants, and described several new EPA information
products. These include new energy use data by sector (found at www.EPA.gov/sectors), and the
overall Sectors Program performance report. He indicated that both products provide
performance data over a ten year time period. He added that EPA also is working on a product
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that would express TRI data adjusted for risk. He closed by saying that feedback on these
products would be very helpful.
Mr. Meiburg expressed thanks to the panelists, noting the day's conversations were rich and will
require time in which to reflect.
He stated that during the day the issue of legacy versus ongoing operations continued a pattern
exhibited in previous dialogs, and seemed to be a useful distinction. He added that metrics,
databases and indicators are all within the scope of the Environmental Information Exchange
Network, which has a ten year life span and participation from all 50 states. He asked whether
this network might have potential for use in the current context.
He observed further that branding did not seem to be viewed as very important by panelists, and
that the suggested role(s) for EPA focusing on enforcement and related activities was interesting.
Mr. Kent noted EPA had not endorsed a specific EMS model or construct as yet, as the concept
has room to grow. EPA wants to promote EMS as a tool, but not any particular variant. That
said, he believes EMSs will help EPA and others to analyze sustainability questions, and further
consideration of much more than traditional "within fence-line" issues and endpoints.
Mr. Meiburg closed the meeting with the comment that when the EFAB tried six years ago to
gauge the level of interest in EMS as it related to water/wastewater treatment plant financing
within the financial markets, there was little or no interest. Recent events and today's discussion
show that change is in wind. The form that this change will take, however, has yet to be defined.
The meeting adjourned at 4:30 p.m.
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Environmental Financial Advisory Board Meeting June 12. 2007.
Arlington. Va.
Participants
EFAB Designated Federal Official
Stan Meiberg, National EPA Liaison to Centers for Disease Control and Prevention,
National Center for Environmental Health/Agency for Toxic Substances and Disease
Registry
EFAB Members
Rachel Deming, Partner, Scarola Ellis LLP
Jamed Gebhardt, Chief Financial Officer, New York State Environmental Facilities
Corporation
Lindene E. Patton, Senior Vice President and Counsel, Zurich North America
Helen Sahi, Past President, Environmental Bankers Association
Business & Industry
Susan Briggum, Vice President for Federal Public Affairs, Waste Management, Inc.
Chiara Frabucchi, Principal, Industrial Economics Incorporated
Bruce Kahn, Investment Management Consultant, Smith Barney, Citigroup
Kyle Loughlin, Managing Director, Corporate and Government Services, Standard &
Poors
Laurie Rudolph, Senior Risk Engineering Consultant, Zurich North America
Paul Scian, AIG Consultants
Susan M. Vetter, Vice President, Environmental Services Group, AON Risk Services,
Inc. of New York
Michael Joiner, Georgia Gulf Corporation
Robert Kerr, Managing Director, Pure Strategies, Inc.
Ray Potter, Casals & Associates
Michelle Smith, Director, Environmental Health and Safety Development, Rohm and Haas
Company
Peter Soyka, Soyka & Company, LLC
Tomaysa Sterling, American Chemistry Council
Wilhelm Wang, Lead EMS Auditor/Marketing Manager-Sustainability, BSI Management
Systems, BSI-Global
Sonia Wildash, Senior Research Analyst, Ethical Investment Research Services
Academia
Dr. Peter Meyer, Director, Center for Environmental Policy and Management, Louisville
University; EFAB Expert Consultant
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Sarah Diefendorf, Director, Environmental Finance Center, Dominican University of
California; EFAB Expert Consultant
Press
Colin Finan, Reporter, Inside EPA
U.S. Environmental Protection Agency
Nishkam Agarwal
Kathleen Bailey
Deb Berlin
Vanessa Bowie
Kevin Donovan
George Faison
Charles W. Kent
William Hansen
Shana Harbour
Richard Kashmanian
Sandra Keys
Dinah Koehler
Sarah Mazur
Timothy McProuty
Bhanna Patfl
Verena Radulovic
Dale Ruhter
Pamela Scott
Larry Zaragoza
U.S. Department of Energy
Myra Sinnott
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Workshop Agenda
UNITED STATES ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCIAL ADVISORY BOARD (EFAB)
WORKSHOP ON THE USE OF ENVIRONMENTAL INFORMATION IN FINANCIAL
DECISIONS
United States Environmental Protection Agency
One Potomac Yard
2777 S. Crystal Drive, 4th Floor Conference Center (S-4380)
Arlington, VA 22202-3553
AGENDA
June 12, 2007
TOPIC: The Agency and the Board seek to collect information and ideas with
respect to how professionals in the areas of credit ratings, equity investment, commercial
banking/lending, and insurance use or do not use a corporation's environmental
information in their analyses.
Questions to be Addressed
(1) To what degree do you consider environmental performance or environmental
management information when assessing the financial strength of a company or a
sector?
(2) If there is no (or minimal) consideration made for environmental performance or
management in fundamentals analysis, why not? Is it a perceived lack of
relevance? Is environmental performance considered not material proportionate to
corporate fundamentals? Or, are the data to accurately measure the impact of
environmental performance unreliable, or not readily accessible, to analysts?
(3) Are there environmental impacts/elements that you would like to have measured?
(4) Would branding (e.g. Responsible Care) one or more forms of EMSs help?
(5) What role can EPA play to promote greater understanding and increased
generation and use of environmental performance data that are more relevant,
consistent, timely, and meaningful to capital market participants
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8:30 am REGISTRATION
9:00 am Welcome and Introductions
Stan Meiburg, EFAB Designated Federal Official,
National EPA Liaison to CDC, NCEH/ATSDR
Rachel Deming, EFAB Member, Partner, Scarola Ellis LLP
9:15am Corporate Environmental Information and the Financial Community --
EPA Overview
Charles W. Kent, Director, Office of Business and Community Innovations,
Office of Policy, Economics and Innovation (OPEI)
9:30 am Panel 1: Credit Analysis and Equity Investment
Kyle Loughlin, Managing Director, Corporate and Government Services,
Standard & Poor's
Bruce Kahn, Investment Management Consultant, Smith Barney,
Citigroup Global Capital Markets Inc.
Sonia Wildash, Senior Research Analyst, EIRIS - Ethical Investment
Research Services
Michelle Smith, Director, Environmental Health and Safety Development,
Rohm and Haas Company
10:45 am BREAK
11:00 am Speaker: Commercial Banking/Lending
Helen Sahi, Past President
Environmental Bankers Association
12:00 - LUNCH
1:30 pm
1:30 pm Panel 2: Insurance
Susan M. Vetter, Vice President Environmental Services Group,
AON Risk Services, Inc. of New York
Laurie Rudolph, Senior Risk Engineering Consultant, Zurich NA
Paul Scian, AIG Consultants
Dr. Peter Meyer, Director, Center for Environmental Policy and
Management,
Louisville University
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2:45 pm BREAK
3:00pm EFAB Workgroup/EPA Office of Policy, Economics and Innovation
Follow-up Discussion
4:00 pm Public Comment
4:30 pm Meeting Close: Next Steps and Adjourn
Rachel Deming, EFAB Member, Partner, Scarola Ellis LLP
Stan Meiburg, EFAB Designated Federal Official
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\
WASHINGTON, D.C. 20460
OFFICE OF POLICY,
ECONOMICS, AND INNOVATION
Mr. A. James Barnes
Professor of Public and Environmental Affairs
Adjunct Professor of Law
Indiana University
1315E. 10th Street, Suite 418
Bloomington, Indiana 47405
Dear Mr. Barnes:
Thank you for providing the Environmental Protection Agency with the Environmental
Financial Advisory Board's (EFAB) report on "Environmental Management Systems (EMSs)
and the Use of Corporate Environmental Information by the Financial Community." The
Administrator, Stephen L. Johnson, has asked me to respond directly to you about the Agency
response to the report's findings and recommendations.
First, I want to thank the EFAB for taking on this complex and sometimes difficult
subject. The relationship between corporate environmental performance and its financial
performance is often an indirect relationship with many factors influencing corporate decision-
making and corporate performance. We knew this was a complex task and we appreciate the
EFAB exploring it with us. EFAB deliberations provided valuable information on the direct and
indirect links between corporate environmental performance and their financial performance.
We agree that there is increasing awareness of corporate environmental information and
performance in many segments of the economy.
We accept and are taking steps to implement the recommendations in the EFAB report.
The EFAB recommended that EPA take a leadership role in working with the financial sector
and companies to better understand the relationship of EMS's, environmental performance and
financial value. Consistent with this recommendation, EPA sponsored a dialogue with the
financial community, on Thursday, June 19, 2008, to explore how to improve access to EPA's
data bases. Over 75 people attended from the financial community. Many offered suggestions
that are actionable through the Office of Environmental Information's (OEI) database access
strategy which will be issued this Fall. During the Dialogue the financial community stressed
that improved access to environmental data will improve its usefulness to the financial sector as
well as to other stakeholder groups. My office will use the Agency-wide Financial Sector
Working Group to continue te exploration of these issues with OEI and Region 2.
Internet Address (URL) « http://www.epci.gov
Recycled/Recyclable • Printed with Vegetable Oil Based Inks on Recycled Paper (Minimum 50% Postconsurner content)
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In addition, our Performance Track and Sector Strategies programs will continue to explore and
develop environmental metrics with their corporate partners. Examples include the "Working
Paper on Quantifying Greenhouse Gases from Key Industrial Sectors in the U.S.", the report
"Energy Trends in Selected Manufacturing Sectors," the "2008 Annual Performance Track
Report," and the upcoming 2008 edition of the "Sector Performance Report." As noted during
the Dialogue, many members of the financial sector have expressed interest in our measurement
work.
We will share the EFAB report with other EPA offices and look forward to working with
the Environmental Finance Advisory Board in the future. Again, I want to thank the EFAB, and
particularly Rachel Deming and her sub-committee, for tackling this important issue.
Sincerely,
Brian F. Mannix
Associate Administrator
cc: Stephen L. Johnson, Administrator
Marcus Peacock, Deputy Administrator
Lyons Gray, Chief Financial Officer
Charles Ingebretson, Chief of Staff
Stanley Meiburg, EFAB National EPA Liaison
Chuck Kent, Director, Office of Cross-Media Programs
Bill Hanson, Associate Director, Office of Cross-Media Programs
Shana Harbour, Chair, Agency-Wide Workgroup on the Financial Sector
Rachel Deming, Chair, Subcommittee on the Use of Corporate Environmental
Information by the Financial Community
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