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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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           «i
          jfyij
                             "- - ;     -A    ;  : •   ; •' •    ; ; '
                                    .  .

                       ?dfflitof 3/vfcorrtpany. diK'    r •'•  ;-'r*'-''
                                  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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      •             -                  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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