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11 Acknowledgments / . .,
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The views expressed in Pollution Prevention & Profitability: ^ Primer for Lenders do not necessarily
reflect*those of NEWMOA, NEWMOA's member states, or the U.S. Environmental Protection
Agency. Mention of any company or product name should not be considered an endorsement by
NEWMOA, NEWMOAs member states, or the U.S. EPA:
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n Pays program '
Contrary to popular'thinking, protecting the environment and
improving business profitability are compatible objectives. In fact',
.taking a proactive approach to environmental management
based on'preventing rather than controlling pollution enables
companies to lower costs, reduce liability risks, and improve
operating efficiency. ,
For lenders, the threat of exposure to a customer's environmental
liabilities is a deterrent to doing business. After numerous cases
o'f unforeseen involvement, banks have placed some industries
and types of projects ' off-limits," and carefully scrutinize bor-
rowers for compliance with environmental regulations. But this
focus on current risk and compliance may fail to take into
account what potentially valuable customers are doing to limit
future risks and problems.
, In the following pages, you will learn how pollution prevention can
enhance traditional loan evaluation criteria. Specifically, diis booklet
1 explains how a company's investment in pollution prevention
Provides an indicator of management competence
Generates both direct and indirect cost savings
Enhances profitability and competitiveness as well as
environmental quality.
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Traditional environ-
1 mental management-
approaches incur
costs without neces-
sarily eliminating
future liability risk.
How does pollution prevention differ from pollution
control? '
Throughout the 1970s and 1980s, pollution control was the pri-
mary means for achieving environmental protection. Control
strategies include the treatment and/or disposal of industrial
byproducts or waste and discharge to the air, waterror land. This
approach, however, has serious drawbacks including:
High costs for treatment equipment, waste disposal, and t
regulatory compliance, and
Increased liability risk for any company that uses, transports, or
disposes of hazardous materials and wastes.
In fact, for many U.S. firms (especially smaller companies), the
costs and risks of the pollution control approach have led to
impaired competitiveness and reduced creditworthiness and
therefore limited access to financing.
The Pollution Control Approach
Control
Treatment Disposal/
Discharge
Air
Water
Und
Today, a shift to strategies and practices designed to prevent,
instead of control, pollution is imperative in the face of
the soaring costs of regulatory compliance
the principle that the "polluter pays," and
the growing number of environmental tort lawsuits.
In contrast to control strategies, pollution prevention (also
known as waste minimization or source reduction) limits die
generation of waste during the process of producing goods or
services. As such, pollution prevention is similar to Total
Quality Management (TQM). Just as TQM emphasizes "building
in" quality during production rather than repairing defects at die
end of the line, pollution prevention strategies adjust the process
to reduce the generation of waste rather than treat waste as it
leaves the plant.
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Both TQM and pollution prevention improve efficiency and
quality by eliminating activities and inputs that cost money and
add; no intrinsic value. Pollution prevention practices can include
changes in the design, inputs, production, and delivery of a
product. In particular,
Raw material substitution: switching to less hazardous materials
Process modification: changing the production process to
improve efficiency and reduce the use of toxic substances
Equipment upgrade: installing more efficient equipment to
reduce raw material consumption and produce less waste
Product redesign: reducing certain raw materials in products or
packaging, or improving manufacturability.
In keeping with
the Total .Quality
Management para-
digm, pollution
prevention focuses
on process-based
prevention of waste
(defects) instead of
end-of-pipe treat-
ment (repair).
Pollution Prevention: Moving Up the Pipe
Material Substitution .
Treatment
Equipment or
Process Change
Improved O & M
POLLUTIONf
Any practice which reduces the amount of any hazardous substance, pollutant, or contaminant entering
the waste'stream, or otherwise released to the environment (including fugitive emissions) prior to recy-
cling, treatment, or disposal; and reduces the hazards to public health and the environment associated
with the release of such substances, pollutants, or contaminants. ' ' '
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Prevention-based . How do companies benefit from investing in
measures generate ' these changes?
Significant savings in Pollution prevention strategies can generate immediate, highly ,
both direct and indi- visible savings as well as longer-term, less tangible benefits.
, . According to a survey by the New Jersey Department of
rect COSTS. Environmental Protection, facilities that had prepared pollution
' plans projected savings of $7.40 for every $ 1.00 invested.
Among the direct gains from investing in pollution prevention
projects are cost savings for:
raw materials
\
production labor
compliance costs, and
waste disposal and transportation.
In addition, pollution prevention investments can provide indi-
rect cost sayings by reducing
special handling and storage requirements
hazardous materials training
* paperwork involved in monitoring, record keeping, permitting,
and disposing of toxic materials, and
insurance expenses related to storage of flammable or hazardous
materials.
\
What's more, pollution prevention program's offer some longer-
term, less tangible benefits that are difficult to quantify, such as
« reduced long-term liability risk associated with cradle-to-grave
responsibility for toxic material use and disposal
improved public image as. an environmentally responsible business
new potential to take advantage of "green market" trends
improved employee health and safety
enhanced relationships with local communities, and
reduced regulatory headaches.
The following company profiles, illustrate how actual businesses
have managed to achieve many of these benefits.
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Hubbardton Forge: immediate Environmental and Efficiency Returns
Hubbardton Forge is a manufacturer of wrought-iron lighting and fireplace accessories located in
Casdeton, Vermont. For years, Hubbardton painted its products widi a conventional solvent-based
lacquer spray. Problems with the quality of the finish, the difficulty and cost of applying the spray,
and chronic environmental and safety issues arising from the-use of solvent (a flammable, toxic ,
.substance) then led the company to consider alternative approaches. As a result,. Hubbardton invested
in an electrostatic powder coating system, a relatively new technology that uses static attraction to
draw powder (paint) onto an unfinished iron surface providing higher efficiency, better quality,
and lower environmental impact.
Hubbardton funded half the $80,000 project cost internally and borrowed the balance from 1st
Vermont Bank, where the company had been a customer for five years. Ahhough the company's
financial condition and business prospects were sufficient to justify the loan, the environmental bene-
fits of the powder coating project and the company's environmental management philosophy provid-
ed the bank with an added margin of comfort.
The loan officer understood the immediate gains as well as the longer-term, -more intangible bene-
fits of the'company's proactive approach to environmental management. Most important, he recog-
nized that, given the bank's exposure to Hubbardton's liability risks, it neededf to pay attention to .
the company's environmental management strategy. The lender believed that paying attention to a
firm's approach to environmental responsibilities is "important because it measures your feeling
about management and their capacity for taking a long-term perspective on the business."
After almost two years of operation, the new system has generated environmental quality and"
efficiency gains including:
Elimination of toxic emissions ,
98 percent reduction-in use of toxic material
Lower labor and materials costs for coating
Faster production speeds
Improved product quality
Based on operating data, Hubbardton estimates that the project has a payback period of 2.5
years and an internal rate of return (IRR) of 24 percent.
Year 3 Projected Savings ($ Thousands)
Solvent
Powder
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National Chromium Co., Inc.: Renewed Profitability Through
Pollution Prevention
National Chromium Co., Inc., located in Putnam, Connecticut, is another example of a company
that improved its performance while meeting its environmental responsibilities. This chrome-plating
company serves customers with a variety of surface-finishing needs, ranging from single, multi-ton
steel shafts to thousands of one-ounce parts for household appliances. The chromium used in the
plating operations is highly toxic and strictly regulated.
In 1988, National faced an uncertain future: its antiquated facility had severe ground contami-
nation and substantial chromium air emissions, and its wastewater treatment system did not sat-
isfy state regulators. Without major investment in new process equipment and pollution control
technologies, the business would not survive. To make matters worse, die condition of the site
and the status of legal actions filed by the state obstructed access to external financing.
With no viable options, other than closing down the plant, the owner of National Chromium was
able to forge a consent decree with the Connecticut Department of Environmental Protection based
on a credible plan to achieve compliance. In exchange for greater flexibility in cleaning up the site, the
owner agreed to a significant investment in new plant and equipment. By mid-1995, National
Chromium was nearing completion of its new 10,000 square-foot facility incorporating structural
design features, upgraded production equipment, and refined process techniques to minimize
raw materials usage and maximize internal recycling. These changes produced significant dollar
savings in:
plant heating costs
water usage
raw materials
The new operations eliminated the source of site contamination, reduced chromium air emis-
sions, 99.5 percent, and significantly improved the effectiveness of wastewater treatment.
Percent Cost on Constant Volume 1988-95
' 100
80
60
40
20
0
Heating Water
National Chromiums strategy of proactive environmental management played a key role in estab-
lishing the conditions (the consent decree) under which Citizens National Bank (CNB) was will-
ing to loan the company $600,000. It also influenced the bank's assessment of and confidence in
managements ability and competence. Despite the potential risks of making a loan collateralized
by property that was severely contaminated, CNB was nevertheless assured of National
Chromiums commitment to cleaner production under the terms of the agreement with the state.
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Other Success Stories
Along with Hubbardton Forge and National Chromium, many other firms and organizations have
achieved business success with highlywisible pollution prevention initiatives. Among them are:
3 M Company
Since its inception in 1975, 3M's employee-based Pollution Prevention Pays (3P) program has
prevented more than 650,000 tons of pollution worldwide and saved more than $750 million. For
example, 3M's electronic products plant in Columbia, Missouri makes flexible electronic circuits
from copper sheeting. In the past, 3M used various hazardous acids and other chemicals to clean the
sheets before they could be used in the production process. They replaced these chemicals with a
specially designed machine with rotating brushes that scrubbed the copper with pumice. In the first
year of operation, this new process saved $15,000 in raw materials and disposal costs, and continues
to eliminate 40,000 pounds of hazardous waste each year that would otherwise be generated.
Polaroid
Polaroid's Toxic Use and Waste Reduction (TUWR) program was launched in 1988 largely in
response to negative publicity. TUWR is now credited with a significant drop in toxic substances
use as well as gains in operational efficiency and improvements in manufacturing process and
product design. For example, Polaroid's film assembly plant in Waltham, Massachusetts devised and
implemented a new method for removing grease from metal parts. This new procedure has dramati-
cally reduced the plants use of a common industrial solvent, trichloroethane (TCE). By switching to
an aqueous solvent-based washing, the plant has reduced the facility's annual use of TCE by more
than 85 percent and saved thousands of dollars in solvent purchase and disposal costs.
Hyde Tool . ,
Hyde Tool, a family-owned business that manufactures hand tools, managed to restore its
competitive position by relentlessly focusing on pollution prevention supported by new cost
accounting practices. The company has cut its annual discharge of process wastewater from 29
million gallons to 1 million on the way to zero. Hyde Tool has also reduced its potential
future liability by diverting 1,000 tons of the solid waste generated from its tool-grinding
i operation from a landfill to use as an ingredient in the production of blacktop.
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Difficulty Jn securing
financing is widely
cited as an obstacle
to pollution preven-
tion pro'iects.
What are the primary obstacles to implementing
pollution prevention programs?
The adoption of pollution prevention has been hampered by the
persistence of the pollution control mindset embodied in exist'
ing regulatory and corporate policies and practices. In addition,
surveys and anecdotal evidence indicate diat access to financing
has been a barrier. In many cases, this is an internal company
issue. Unlike mandated pollution control, discretionary pollution
prevention projects must compete on overall financial grounds
with other demands for capital.
External financing can also be a constraint, especially for smaller
firms. The difficulties may:stem from lack of creditworthiness,
liability exposure, or insufficient knowledge about lending
requirements and procedures. In addition, project-specific issues
can create obstacles for example, equipment specialized for a
single site may have limited value as collateral.
In some cases, an improved understanding of pollution preven-
tion can have important implications for a financing decision. In
particular, banks should keep the following factors in mind when
evaluating applications: '
Management competence: Viewing pollution prevention as an
integral part of Total Quality Management, rather than an
environmental control strategy, can help distinguish forward-
thinking managers from reactive ones.
Cashflow. Many of the costs of environmental compliance are
lumped into overhead accounts and are generally ""hidden"
from project analysis. Recognizing how a pollution prevention
project can reduce these costs can support cash flow projections
that might otherwise seem too optimistic,
Long-term competitiveness: By taking a prevention-based
approach, a company is setting itself pn the path toward
improved competitiveness through reduced risk, improved
efficiency, and a focus on value-adding activities.
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As a lender, what can I do to encourage
pollution prevention?
As the case studies presented here demonstrate, enyironmental
protection and financial-success are compatible objectives.
Proactive environmental management can enhance efficiency and
competitive advantage. Understanding the basic principles and
benefits of a prevention approach can help you identify and
support those companies that will likely succeed in todays increas-
ingly competitive economy.
To augment die information provided in diis booklet, you may
want to examine the role of pollution prevention in industries
and companies with which your institution has lending relation-
ships. Of particular interest might be the specific savings in over-
head costs that pollution prevention initiatives have generated.
As a starting point, die next page provides a list of organizations
and publications to consult for additional information.
And you can help potential loan customers make smart invest-
ments in pollution prevention by, asking the right questions:
Does the firm appear knowledgeable about environmental
compliance requirements?
Does the customer have a proactive approach to managing
environmental risks and responsibilities?
Has the customer fully evaluated pollution prevention
opportunities? (Many states have technical assistance programs
that offer free help.)
Does a proposed project reduce environmental liabilities and
risks?
Does the customer understand all the potential savings a
pollution prevention project can generate particularly in
those environmental costs diat are included in overhead?
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10
Where can I get more information?
The two pollution prevention examples presented in this primer
summarize longer case studies that you can order from NEW-
MOA i>y calling the phone number listed below. The following
organizations will provide additional information about pollu-
tion prevention and identify other resources to consult in your,
region or for a specific industry. '
Pollution Prevention Information Clearinghouse (PPIC)
U.S. Environmental Protection Agency
401 M Street SW
'Washington, DC 20460
(202)260-1023
Enviro$en$e, EPA's full-spectrum environmental information
system. Via World-Wide Web: http://es.inel.gov. Via BBS,
with modem and communications software: (703) 908-2092.
National Roundtable of Pollution Prevention Programs
2000 P Street NW Suite 708
Washington, DC 20036
(202) 466-7272
(The National Roundtable can put companies in touch with
state and local agencies that provide free technical assistance on
pollution prevention.)
Northeast Waste Management Officials' Association (NEWMOA)
129 Portland Street
Boston, MA 02114
(617)367-8558
The following list presents a sample of the publications available
on the subject of pollution prevention and financial analysis of
pollution prevention projects. The organizations cited above can
also provide additional references.
A Primer for Financial Analysis of Pollution Prevention, American
Institute of Pollution Prevention, 1993, available through PPIC.
An Introduction to Environmental Accounting as a Business
Management Tool: Key Concepts and Terms, U.S. EPA, 1995,,
available through PPIC.
Improving Your Competitive Position: Strategic and Financial
Assessment of Pollution Prevention Projects, Training Manual,
NEWMOA, 1994, available through NEWMOA.
Green Ledgers: Case Studies in Corporate Environmental
Accounting, World Resources Institute, 1995.
Beyond Compliance: A New Industry View of the Environment, B.
Smart, World Resources Institute, 1992.
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Acknowledgments
NEWMOA is indebted to the U.S. Environmental Protection
Agency for its support for this project. The Northeast states provid-
ed additional in-kind support. ' _
For their advice and assistance in preparing this booklet, NEW-
MOA would like to thank the members of the Project Advisory
Committee: Andy Andrews, Citizens National Bank (CT); Mark
Arienti, Maine Metal Products Association; Liz Armstrong, Fleet
Bank (ME); Ron Blanchette, HADCO; David Boyer,Vermont
Small Business Development Center; Bob Brown, ConnTap; Jim
DeWitt, GZA;" Richard Girasole, Rhode Island Department of
Environmental Management; Deborah Hall, Business for Social
Responsibility; Emily Hess, WasteCAP; Kirk Heart, 1st
Vermont Bank; Peter Hollingsworth, Massachusetts Small
Business Development Center; James Kammert, Barnett Bank;
Mitchell Kennedy,-The Pollution Prevention Cooperative; Jared
Keyes, Brown Brothers, Harriman; Sally Mansur, U.S. EPA-New
England; Loch McCabe, Environmental Capital Network;
Andrew Miniuks, EPA-New England; Mike Murphy, Fleet Bank;
Stuart Myers, Mercantile Bank; Brian O'Connor, Fleet Bank;
Rick Reibstein, Massachusetts Office of Technical Assistance;
Donald Rielly, Massachusetts Small Business Development
Center; Deborah Savage, Tellus Institute; Helen Scalia, Coastal
Enterprises; Christine Siegrist, Bank of Boston; Dan Stulac,
Arthur Anderson; Liz Taddeo, Maryland Department of
Environmental Protection; Dick Torborg, Massachusetts Office
of Technical Assistance; and Mike Wilson.
t
NEWMOA is particularly grateful to the management and staff
of the Hubbardton Forge Company and National Chromium
Company, Inc. for their participation.
11
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About NEWMOA
- -, >».''*, I ' ' '
The Northeast Waste Management Officials'- Association is a
nonprofit interstate governmental association providing a forum
for increased communication and cooperation among the mem-
> > ' , ~' " '
her states, a vehicle for the development of unified positions on
various issues and programs, and a source of research and train-
ing on hazardous and solid waste management and pollution
prevention. NEWMOA's members are the program directors of
the hazardous and solid waste and pollution prevention pro-
i -
grams for the state environmental agencies of Connecticut,
Maine, Massachusetts, New Hampshire, New Jersey, New York,
Rhode Island and Vermont. .
12
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Writer: Samuel Perjkins , '. v '
NEWMOA Project Manager: Terri Goldberg * '
"EPA Project Manager: Edward Weiler
Design and Producrion: FINELINE Communications Group, Inc.
Printed on recycled paper.
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For more information on NEWMOA and its Pollution Prevention Pr6gram,,cohtacc
- s" ' . ^
Terri Goldberg '
Northeast Waste Management Officials' Association , ' - '
129 Portland Street, 6th Floor . '
Boston, MA 02114 . ' .
Tel: (617)367-8558 * ,."
Fax: (617)367-0449
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