U.S. ENVIRONMENTAL PROTECTION AGENCY
ENVIRONMENTAL FINANCIAL ADVISORY BOARD
JUL 1 8 2003
Honorable Marianne L. Horinko
Acting Administrator
U.S. Environmental Protection Agency
Washington, DC 20460
Dear Administrator Horinko:
The Environmental Financial Advisory Board (EFAB) is pleased to provide you with its
findings and recommendations regarding Environmental Management Systems. The Board's
work was led by its Cost-Effective Environmental Management Workgroup, chaired by Michael
Deane. In particular, the Board would like to recognize the excellent work of Jim Home in the
Office of Water and Bonnie Barkett of the San Francisco regional office.
Over the past several years, the EPA has done remarkable work in encouraging regulated
entities to develop and implement formal environmental management systems (EMS). From the
development of its EMS position statement and implementation policy to its participation in
national and local conferences and its ever improving web site, EFAB commends the Agency's
efforts.
On November 8, 2001, EFAB co-sponsored, with Office of Water and Region 9, a
workshop on EMS designed to examine the possible financial implications of adopting an EMS.
The Board wanted to find out what the link is, if any exists, between EMS implementation and
improved financial performance. The workshop convened two panels of experts from the
financial services industry (public and private) to discuss their experiences with implementing an
EMS. The workshop explored whether or not the financial services industry considers EMS and
EMS certification as a factor in its decision-making; if so in what way(s) is this occurring and, if
not, what measures, incentives or other factors might encourage organizations to take EMS into
account? The workgroup developed a detailed summary of the workshop and a copy of this
summary is enclosed for your convenience.
The Board believes that when an EMS is properly implemented (including the ISO
14001 model), organizations have the potential to improve their corporate image, realize
financial savings through improved efficiency, achieve a competitive advantage, and improve
environmental performance. While there have been a few examples of positive responses from
the financial community, the EFAB workshop illustrated the need for continuing and expanded
dialogue to help educate financial representatives on the specific benefits to public and private
organizations of EMS implementation. To this end, EPA's Office of Water, as part of its Public
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Entity EMS Resource Center (PEER) Initiative, recently sponsored a two day workshop at the
Wharton School of Finance at the University of Pennsylvania. This workshop featured
presentations by several public entities that have developed EMSs and various representatives of
the financial community. This workshop made it clear that the level of understanding of EMS
benefits by the financial community is increasing. We understand that EPA hopes to help
increase this understanding through continued communication, and we applaud this effort.
There were other common themes found throughout the summary of information that was
gathered and we enclose those findings along with the Board's recommendations.
We hope that you will find the recommendations constructive and useful. The Board is
prepared to take any follow-up actions that are consistent with its charter. The members of
EFAB appreciate the continuing opportunity to advise and assist EPA on important priorities. If
you would like to discuss our findings and recommendations in more detail, we would be happy
to meet with you and/or other members of Agency management you deem appropriate.
Sino
A. Stanley Meiburg
Executive Director
Enclosures
cc: Stephen L. Johnson, Acting Deputy Administrator
Tracy Mehan, Assistant Administrator for Water
Linda M. Combs, Chief Financial Officer
Joseph L. Dillon, Comptroller
Jim Home, Office of Water
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Enclosure
Findings and Recommendations from the
Environmental Management Systems Workshop
Findings
1. Environmental performance is a good proxy for general management quality.
2. Environmental management is a big challenge for corporate management. The
environment and environmental performance have significant impacts on corporate
financial performance.
3. EMS implementation does not have a direct influence with bond rating agencies'
assessment of organizations.
4. Third party certification/verification is very important in establishing credibility with
regard to EMS implementation.
5. The Socially Responsible Investments area is more concerned about EMS. Although the
financial services industry is beginning to understand the benefits of EMS, -the main
barrier is the investment advisor's fiduciary responsibility to maximize investment
returns.
6. There is yet little systematic data regarding implementation of EMS and few objective
analyses of the performance of organizations that have implemented EMS.
7. It is difficult for the financial services industry to determine benchmarks that would
establish value for EMS implementation since such implementation is voluntary and very
sporadic among regulated entities.
8. There have been some instances in which the insurance industry has recognized the risk
management benefits of EMS implementation and therefore provided financial benefit to
the implementing entity. However, in general, there is no recognition of any direct
financial benefit from EMS implementation by public or private entities.
9. Comprehensive national data on EMS is lacking. Compiled information that does exist
focuses on operations and compliance rather than financial and business strategy.
Recommendations to EPA
1. EPA should partner with environmental trade and industry organizations to develop
materials and conduct workshops for development and implementation of EMS in the
water industry.
2. EPA should provide incentives to regulated entities that implement proven, cost-effective
EMS (e.g., point savings in SRF loans).
3. EPA should monitor existing pilot programs for results and try to identify direct financial
benefits.
4. EPA should prepare case studies of tangible examples of the value (financial benefits) of
EMSs and the relationship between EMS and finance.
5. EPA should support and promote third party evaluation and certification of EMS.
6. EPA should support development of a national database that provides sufficient data for
benchmarking the financial value of effective EMS.
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ENVIRONMENTAL FINANCIAL ADVISORY BOARD
COST-EFFECTIVE ENVIRONMENTAL MANAGEMENT WORKGROUP
EMS Public Meeting
Ariel Rios Building
Washington, DC
November 8,2001
TOPIC: What is the nature of the link, if any, between EMS implementation
and improved financial performance?
QUESTIONS TO BE ADDRESSED
1. What is the Financial Services Industry (FSI) doing, if anything, in considering
EMS/certification as a factor in decision-making?
2. If the industry is taking EMS/certification into account, in what ways is this
occurring?
3. If the FSI is not considering EMS/certification at all or only tangentially, why not
and what incentives or other factors would encourage them to take EMS into
account?
DETAILED SUMMARY NOTES
Introductory Remarks
Stan Meiburg, EFAB Executive Director
• gaveled the meeting to order
• good morning and welcome
• described roles and responsibilities of EFAB
• solicited written statements from panel members
Jim Home, EPA Office of Water
• has been working on the relationship between EMS and finance for years
• actively working with public agencies and with OECA and OAR
Agency is more active in this (EMS) area now and is working smarter
• believes EMSs are applicable beyond big industry to areas such as agriculture
• The purpose of today's meeting is to facilitate a discussion about EMSs, not set policy.
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Michael Deane, Chair, EFAB Cost-Effective Environmental Management Workgroup
• The role of the Board/Workgroup is to provide advice to the Agency on finance-related
issues.
• outlined past and ongoing activities of the workgroup in looking at both private and
public sector cost-effective initiatives
• placed today's discussion in the context that work
ErikJ. Meyers, Environmental Law Institute
• The environmental community does not have much interest in EMS and is not very aware
of it.
• EMSs are process-oriented. Environmental groups are interested in performance, not
process.
• The environmental community associates EMSs with voluntary initiatives — skeptical.
• "Think Tanks" are interested in EMSs as a public policy tool.
• There has been some environmental interest in EMSs from WRI, EDF, and the WWF
(international part).
• Multinational companies use EMSs as a tool for continuous improvement.
• He sees EMSs as an effective tool for improvement, but stresses the importance of
verification with regard to EMS implementation.
JackGreer, Moderator
Director, University of Maryland Environmental Finance Center
• Kudos and thanks to USEPA for hosting the meeting
• views EMSs intellectually in three parts — environment, management, systems
• breaks today's discussion into 3 main parts ~ public sector panel, private sector panel,
and roundtable discussion
EMS and the Private Sector
Frank Dixon, Innovest
• Traditional environmental issues are not relevant to management except where a big
problem exists.
• Environmental performance is a good proxy for management quality.
• Environmental management is a big challenge for corporate management.
• The environment has a big impact on corporate financial performance (both on the upside
and the downside.
Companies that have done better environmentally have outperformed the market.
Increased transparency via the Internet is opening company environmental records to
increased scrutiny.
• There is increased awareness among investors of the importance of environmental
management.
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• The Socially Responsible Investments area is more concerned about EMSs, but the
mainstream investment community considers it less.
• The FSI is beginning to change (improve), but the main barrier is the investment
advisor's fiduciary responsibility to put profit first.
• A major problem is that EMS data quality is not good.
Q (J. Home): What factors in EMS certification interest senior managers?
A: How it is implemented. Managers believe third-party certification/verification eliminates
worry about bias.
Q (R. Wells): Does the positive correlation between environment and financial performance
only apply to an up market?
A: No, it applies in a down market too.
Peter M. Lanahan, Con Edison
• Managers said they only get environmental questions when they have a problem.
• There is no direct relationship between EMSs and bond ratings at Con Edison.
• An EMS was forced on the company in reaction to a negative court decision.
• The EMS developed was tied to traditional due diligence work.
• Environmental health and safety work was a key part of the EMS.
• The company developed environmental procedures for all work options (extensive
guidelines).
A risk management program and a rigorous auditing program were important parts of the
EMS.
• To succeed in these programs and activities, you need to change the company culture.
• & The results of an EMS can be measured.
• Communications and management understanding are an ongoing challenge.
• You can avoid liability via an EMS.
Q (Jim Home): Have you been able to use EMSs to open up other things beyond compliance?
A: The company began with compliance and then moved/evolved to risk identification.
Q (R. Wells): Is there feedback between the EMS and the management system?
A: Yes. It does really help the management system.
Q (R. Wells): How was the public involved in the EMS?
A: They were not involved in developing the EMS, but were informed about it.
Q (J. Greer): How were future risks identified?
A: By having people involved who knew the operations and environmental works
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Amy R. Lasky, Fitch
• Ms. Lasky works on revenue bonds at Fitch.
• She was asked if EMS was a factor in the rating process. She answered that she did not
know, and then asked, what was an EMS?
• Ratings Agencies look at the credit quality of bond issuers on behalf of investors.
• Over the past twenty years, water and sewer bonds have one of the lowest default and
problem rates.
• This strong safe credit environment means that a single factor like an EMS is not likely
to have much impact on water and sewer bond ratings.
What she looks at in doing ratings:
1.) legal provisions of the bond
2.) service area
3.) economy ~ growth and development prospects
4.) financial operations/rates
5.) management (includes financial planning and environmental planning)
6.) capital needs
7.) Compliance with regulations/compliance problems
• The financial ability of bond issuer to meet long-term costs/needs is an important
consideration (involves capital planning).
• She sees management as the primary area for possible use/integration of EMS.
• EMSs are voluntary, a negative.
• EMSs are a very pro-active management commitment and to the extent they are cost-
effective would be credit positive.
• Management is the main area for the possible use of EMSs (in credit considerations).
Q (J. Greer): What if the EMS is not cost-effective in the short-term, but is in the longer term?
A: It depends, but we do have to weigh the financial ability of the issuer to meet both short-
and long-term costs/needs.
Q (E. Meyers): When you are developing information on management factors, can you tell
us how you do that research?
A: It is a combination of things. We rely on engineering, financial and planning reports and
information but our research is heavily weighted on financial factors such as capital plans, the
cost of programs, debt, and rate increases.
Q (J. Home): What is the viability of integrating management systems under the umbrella of the
traditional EMS framework to bring in capital and financial planning (including capital assets)
with traditional risk management and environmental compliance. Our colleagues in the water
industry are facing a real challenge in dealing with the large costs of sanitary sewer overflows
and we would like to see if this integration concept could help.
A: Moodys recognizes that environmental concerns can have a huge cost impact in cases
such as the one described.
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Q (J. Petersen): Quantitative analysis, the traditional government cash flow analysis does
not seem to explain much relative to credit risk, but a qualitative emphasis on good management
does. Political culture is also a factor as it impacts the management system. Are policy issues
more important in a qualitative determination, because they are generally reflective of the
management and community take on things?
A: . Yes.
John Thome, Capitolink
• Capitolink is a lobbying group and policy development think tank.
• Capitolink EMS work has focused on Agriculture non-point source issues with the
United
Egg Producers (318 entities)
• They have worked with USEPA through Project XL to develop their model.
• EMS plays a critical role in moving the egg industry from a non-regulated to regulated.
• The EMS approach has allowed the industry to self-direct environmental policies/goals.
• The industry's overall permit process has been tied to a continuous improvement process
with a third party audit.
• The EMS concept is very new to agriculture.
• The EMS presentation to agriculture has to simplistic, bottom line-oriented, talk about
r«, the benefits, and minimize the use of jargon.
• They cannot be an ISO 14000 modeled EMSs, but must be based on minimum critical
,•• management programs everyone agrees to up front.
• They must be adaptable to local conditions and the differences between hogs, dairy,
* poultry, and beef.
EMSs won't work if they are one size fits all in agriculture.
• & Farmers have a keen eye on the bottom line and if you show them something that will get
to greater profits, they will run with it.
• List of areas where they think the EMS will help:
reduce accidents,
improved cost controls
improved food safety
improved public relations
improved regulatory status (qualify for one general permit)
smaller environmental footprint
improved employee morale
reduced liability
• Insurance company has already given a 20% reduction in premium costs to producers
taking part in the program.
• The EMS should be a cookbook for addressing environmental and societal issues.
• I view the EMSs as a long-term permanent solution for the egg industry.
• Capitolink is also helping to develop a risk model/platform for livestock and poultry
facilities to help with dealing with underwriters, bond rating agencies, etc.
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Q (J. Greer): What is the difference between Best Management Practices (BMPs) and EMSs?
A: BMPs are a simple form of standard operating procedure. EMSs are structured ways of
using BMPs in a systematic manner to meet bottom line business plan needs and to address
social concerns.
Q (S. Meiburg): As the agricultural shakeout leads to consolidation and franchising in the
industry, how are the integrators (the franchisers) getting involved.
A: The big corporate entities are developing EMSs that are ISO 14000 compliant, while
their
(smaller) contract farmers are focusing more on BMPs.
Q (S. Diefendorf): In California, wineries and vineyards implementing EMSs are finding that
they are helping to produce a better product. Do you see this in other agricultural endeavors
A: At one farm they were implementing BMPs to control dust by misting systems in an area
that they were raising animals and found that there was a reduction in veterinary calls for
respiratory problems and that animal weight gains were recorded. He doesn't know that it was
just due to dust reduction and doesn't think they have proven that.
Q (P. Lanham): Is the statewide permit available in all states? Is the process self-regulation?
A: It is an alternative for states who are in the process of adopting new regulations for large
feedlot and livestock operations. It is not self-regulating. The EMSs are non-regulatory, self-
imposed structures following certain guidelines. They are audited by a third-party. To qualify
for the state-wide general NPDES permit they must apply and send in the third-party audit
report.
J. Home: The challenge that we all face is to move beyond BMPs to a larger, better
integrated system that will ensure that they implemented and communicated effectively.
Q (E. Meyers): There seem to have already been some insurance benefits. Given the
capital-intensive nature of the industry, have there been any impacts among lenders recognizing
the efforts (through reduced costs).
A: Not yet, it is too early.
E. Henry: The commercial bank traditionally requires a low level of environmental due
diligence. I could envision that once a (EMS-type) certification program is in place it would also
be acceptable to the bank once it established a track record of success.
EMS and the Public Sector
S.E. Kiner. I just wanted to call everyone's attention to the National Academy of Public
Administration's (NAPA) study which examines the third party certification system approach.
Our findings indicate that this approach is developing in the right, but it still has a ways to go
before it matches certifications that exist in the financial arena.
J. Home: This was a study of the ISO 14000 registration system.
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John B. Cook, Charleston Commission of Public Works
• He works for a public water and wastewater utility serving 400,000 and employing 400.
• They looked at the ISO 14001 system to become a best-in-class utility — seeking better
public health and environmental output.
• The utility was and is looking for continuous improvement and better service.
• They started with the water distribution system because it was a well-defined area.
• ISO 14001 is a goal-oriented model. It examines how jobs relate to the environment.
• Some findings/observations:
improved training critical
risk reduction/reduced liability embedded in all work
corrective action plans are a key
performance improvement targets
must develop SOPs for all processes (reduces variability)
• Important goal: optimization of all technical processes and outputs
• Important aspects of the EMS:
quarterly compliance self-assessments
monthly internal audits
quarterly management meetings
monthly operating reports
? — periodic legal/regulatory requirement reviews
•v — documentation
••- — vibrant maintenance program - leads to robust operations
70% preventive, 30% corrective
training, training, training ....
4 — third-party registration route is a key factor.
•:f — emergency planning is a critical component.
capital improvements program important
• The incentives to adopt the system have be 100% intrinsic and 0% external.
• Rating agency did not care about ISO 14001 certification and did not know what it was.
• There was no State agency interest either.
• Given this lack of interest, there is a need to quantify the tangible economic benefits
associated with no problems or the effect of implementing EMSs.
Q (J. Greer): It seems that compliance was not driving the utility, but rather efficiency
improvements and tangible financial benefits. Is this accurate?
A: Yes, but it sure would be nice if the regulators were to give some benefits recognizing our
efforts financial (say 50 basis point savings in SRF loans) or otherwise.
Q (M. Deane): Have you approached your insurance carriers seeking credit for your EMS/
ISO 14000 certification?
A: No, but that is a good question. Our insurance is tied to a subsidized state program where
all participants in the pool pay the same inexpensive premiums.
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Q (S. Diefendorf): Do any EMSs actually incorporate the cost savings/risk avoided into a
company's financial statistics.
A (J. Thorne): ConAgra has a corporate-wide sustainable development council that empowers
managers and employees to develop (EMS) procedures that make improvements. ConAgra has
documented huge dollar savings over the past seven years in this effort.
R. Wells: The national database on EMSs is disappointing. The information is operationally
* focused and compliance focused, but not business (financially) focused.
F. Dixon: It is often difficult to quantify the benefits of environmental performance. Only
the very best organizations are able to do so to any degree of success.
Mary T. Francoeur, Moody's Investors Service
• Over the past twenty years, they have seen two water and sewer trends:
1.) increase in water quality; and
2.) increase in credit quality (for bonds).
• They believe the two trends are related.
• The Rating agencies have been moving away from a pure financial ratio analysis to
looking at credit quality on a systems basis (which determine real quality).
• They are trying to give more attention to environmental compliance and capital
programming.
• But, debt service coverage ratios are still important.
• Recognize that finances are a function of public policy choices/decisions.
• The rating agencies have found that management issues are very important.
• The capital improvement program is a key management issue.
She accepts that tools such as EMSs/GASB 34 are ways to capture some of the needed
information.
• She will not advocate an EMS because of costs, but will talk about important EMS
issues.
• Any additional disclosure/information is good.
• Standardization of EMSs would help.
• Regarding environmental compliance, they try to put orders and consent decrees in the
proper context.
• Good management is very important in all this, since confidence in management is also
key.
• One area that EMSs might be particularly important is with regard to project financing of
specific parts of systems.
• She believes that EMSs would/could/will play a more important role in project finance.
Q (J.Greer): Can you ever have too much information?
A: Sometimes there are information overloads, but not often. Our job is to sift through all of
the information. As analysts, we get to know a lot about our issuers over time.
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Q(audience): Can we assume that in looking at a utility, the rating agency analyst reads audits,
consent materials, NPDES permits, etc.?
A: Yes
Q (J. Home): I am glad that your answer to the last question was yes. Would you also be
interested in examining specific cost savings?
A: Yes, but they would usually only be important at the margins. They are an outgrowth of a
strong/good management team. Hopefully such information would be captured more generally.
John Petersen, Government Finance Group
• First thing that we must understand is that we are dealing with markets.
• Private investors have an interest in the economics of good government and enterprise
especially vis a vis debt obligations.
• Standards and how they become important to financial markets is a key point.
• For example, government audits and government accounting standards exist because of
one thing, a program begun in the 1960's by the federal government known as revenue
sharing.
• Strong private accounting systems exist because of two things: 1.) companies sell
securities to the public, and 2.) they pay corporate income taxes.
• * We should have more appreciation of the value of efficiency improvements.
• This is true in the debate on standards for government audits and even in GASB 34.
• Emergency and disaster response are even more vital now. Plants must be protected.
... Thoughts on GASB 34:
its handling of depreciation and the treatment of fixed assets will show
governments running a deficit
'* -- it will be a vehicle by which politicians will be forced to focus on asset
replacement
Q (G. Ames): What is the relationship of EMSs to GASB 34?
A: The tie together within the overarching concern about efficiency. We are entering a new
fiscal climate will require cuts and new efficiency drives, particularly at the state level.
..;t
Michael Sweeney, Louisville & Jefferson County Metropolitan Sewer District
• The District is a sewer, stormwater, etc. utility.
• It manages treatment, pre-treatment, natural restoration, hazardous materials/waste, and
biosolids production and sales, and .
• It also runs an environmental education center and uses an advanced GIS.
• The utility first got involved in EMSs when the CERES principles were signed in 1990.
• These principles supported self-audits, transparency, a compliance focus, energy
efficiency, and purchasing efficiency.
• The utility's EMS is part of their strategic business plan.
• Their total debt now exceeds $1 billion, but its debt service ratios are still manageable.
• The utility stresses full disclosure of information.
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• They are doing an EMS to ensure the optimal use of resources and responsibility.
• They benchmark their operations, run an information clearinghouse, participate in
industry initiatives such as QualServe, and actively participate in peer review activities.
• The utility has an aggressive program to upgrade, improve, educate, and reinvest.
• They do believe that some regulatory refinement/improvement is needed to provide more
consistency with regard to the environmental standards against which they are judged.
Billy G. Turner, Columbus Water Works
I work for a water authority that serves 200,000 people in a consolidated city-county
government.
• We have kept rates low and won a lot of awards over the past five years.
• I want to talk about where the water and wastewater industry is at right now. How does
the industry view EMSs? The EMS focus is more on public acceptance than on financial
improvement.
• The EMS for biosolids is being developed with public involvement.
• Competition in the industry has led to improved management over the past 10-15 years.
• QualServ is a peer review self-assessment developed by the AWWA.
• The industry has had to struggle with the fact that there is no industry data base and no
standard accounting system.
• EMS offers the potential to capture a lot of valuable needs (integrate management
improvement, financial improvement, etc.)
• Need: third-party evaluations and a good data base
• Utility highlight: achieved energy savings through automation, $200,000 investment
saves $ 250,000 every year
Working Lunch
Richard P. Wells, The Lexington Group
• impressed with the presentations and perspectives that he heard in the morning sessions
EMSs and ISO 14000 are tools.
They reward up front effort in the design phase and good maintenance.
• They need to be integrated with other business tools.
Perhaps the most important factor is the skill and commitment of the people who
implement the EMS.
• EMSs: How can you tell a good one? What is an EMS?
Characteristics of the ISO 14000 model:
1.) engages senior management;
2.) uses a process to identify how the organization relates to the environment;
3.) prioritizes;
4.) plans - assigns people and resources;
5.) stresses continuous improvement;
6.) trains staff to develop an environmental culture;
7.) maintains an emergency management plan(s);
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8.) measures and monitors environmental performance;
9.) reviews performance; and
10.) documents.
• The organization can use ISO 14000 to truly transform itself or just to get certified.
• EMSs are good for achieving reliable consistent performance, but they are not so good
for promoting creativity.
• How do you tell what is a good EMS? Answer is deep commitment.
• Seven habits of a good EMS:
1.) strong senior management involvement with staff involvement/cultural
transformation;
2.) well thought through policy (linking environmental policy to business objectives;
3.) significant criteria - risk reduction, savings, image;
4.) objectives and targets tied to business;
5.) performance measures, transparency, external reporting;
6.) emergency preparedness and response plans; and
7.) frequent and serious management reviews with a consistent format. This last
habit is a springboard to follow-up and improvement.
• Finally, remember that you get what you pay for in an EMS.
Q (J. Thorne): I have consistently encountered opposition to EMSs over the years and
have been told that they are sellouts vis a vis compliance. Is that right or why is that?
A: There has been a lot of miscommunication about EMSs. EMSs were oversold when they
first came out. EMSs are good things, but they are not the be all, end all.
-••},
Q (J. Home): Are EMSs relevant to all? I did not think so when we started, but I feel
better now as you seem to be saying things that indicate they do or can.
A: A lot of my experience comes, from working with small companies. I know of companies
with as few as three employees that have been ISO 14000 certified.
Q (E. Meyers): What is the hardest thing for EMSs to get right?
A: Probably getting middle management buy-in.. It is much easier to get the buy-in of top
management and the line workers.
S. Meiburg: When first introduced, EMSs got tangled up with two things — audit privilege
and the either EMS or .regulatory enforcement issue. I think we have gotten past this now.
R. Wells: Do not look only at certification as needed to make EMSs worthwhile.
Do look for a good EMS and understand that good companies use them and incorporate
environment in their thinking.
EMS Roundtable Discussion and Wrap Up
J. Greer: We have been exposed to a lot of interesting information during the day there are
many questions that one might have. One that I might suggest is getting us back to our original
question: What is the relationship between EMSs and the financial community?
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J. Home: USEPA is slowly but surely moving to a new phase that moves beyond promoting
EMSs on a voluntary basis to integrating them into the fabric of what we do in our regulatory
framework. For some sectors EMSs may be a reasonable alternative regulatory approach. I am
also interested in devising appropriate third party oversight.
M. Deane: EFAB and the Cost-Effective Environmental Management Workgroup are
interested in how EMSs help to maximize performance and want to find the financial service
nexus between EMSs and business. Personally, I have not yet put the EMS picture together yet
and am looking for the next step and/or information.
Q (J. Thome): What kind of information would you like. We will try to provide whatever data
you want.
A (J.Horne): We need tangible examples of the value of EMSs and the relationship between
EMSs and finance. We even welcome anecdotal examples if that is all there are.
Q (S.Diefendorf): There are a lot of different EMSs. Standardization is needed. Would it help
the rating agencies?
A ((M. Francoeur): Bond rating agencies look at a lot of factors. EMSs will not be a ratings
determinant.
Q (P. Lanaham): Doesn't the company/issuer have an obligation to present its case to
the ratings agency?
A (M. Francoeur): Yes.
Q (E. Meyers): Is it more likely that as EMSs are used more, that rating agencies will rate those
who don't have them lower?
A(A. Lasky): Yes. But this is not always a good thing. It may crowd out other valuable
information tools.
Q (J. Greer): Is there a way that you would rather hear the question?
A (A. Lasky): The bottom line is the rating agency's confidence in management. The impact of
an EMS on a highly rate water system's credit is likely to be minimal.
Wrap up
R. Berringer: Struck by the large numbers of companies (organizations) that have gone
beyond compliance for no recognition. Maybe EFAB should look at the economics of the firm.
B. Turner: I would like to see EMSs function as a different type of permit.
J. Home: I am interested in EMSs and the public sector and non-traditional sectors.
E. Meyers: The is a need to make the business case for EMSs.
M. Francoeur: Dialogue helpful... it allows Moodys to learn and explain its own role.
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A. Lasky: EMSs impact likely to small for water systems
M. Francoeur: EMSs are already captured through strong management quality
R. Wells: Don't oversell EMSs, they are one factor like having an automated accounting
system.
E. Henry: Even presupposing that you find some linkage, it will have to have value. It
probably will only have incremental value. Companies must sell rating agencies/lenders on the
value of their EMSs unless it is required by government regulators. The first step must be taken
by the companies themselves.
M. Deane: Thanks to all, especially Jack Greer, our moderator. EFAB now has the challenge
to carry this discussion further and craft a product for USEPA.
S. Meiburg — At this point, he gaveled the meeting closed.
13
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systems are fostering. I look forward to working with you and other EFAB members to help
address this challenge through ongoing dialogue with the financial community and other
partners.
Thank you for your continuing leadership in this important area. Please feel free to
contact me or Jim Home in the Office of Wastewater Management at (202) 564-0571, if you
have any additional questions.
G. Tracy
Assistant
Enclosure
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Summary of
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January 29-30,2003
At the University of Pennsylvania
Wharton
DIVERSITY
This effort is co-sponsored through a cooperative agreement between:
rffe
United States Environmental Protection Agency
and
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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Summary of
ENVIRONMENTAL MANAGEMENT SYSTEMS (EMS) AND
FINANCIAL INCENTIVES IN THE PUBLIC SECTOR WORKSHOP
January 29-30, 2003
At the University of Pennsylvania
This workshop was held at the University of Pennsylvania and sponsored by the
US Environmental Protection Agency, the University of Pennsylvania Institute for
Environmental Studies, the University of Pennsylvania Risk Management and Decision
Processes Center, and the Global Environment & Technology Foundation. The goal of
the workshop was to identify relationships and benefits between entities in the public
sector that implement environmental management systems (EMS), including ISO 14001,
and the three "financial communities" (i.e. insurance, bonds, and investments/access to
capital).
Case studies were presented to demonstrate linkages between EMS and the
respective financial community. The Port of Houston identified the positive experiences
they had with their insurance carrier through their EMS efforts, the readiness to respond
to risks as a part of their underwriter review and the potential for significant insurance
savings as well as other costs savings. Jefferson County, AL also presented the benefits
accrued through their application of an EMS, costs savings from EMS, and potential
savings for a significant bond rating increase for a 2 billion dollar bond for their
wastewater treatment plant partially due to the EMS. Both public entities made the
transition from compliance issues to model national organizations meeting and exceeding
compliance requirements through the EMS application. In fact, Jefferson County is now
on EPA's list of recognized performers as a Performance Track member. Representation
from the other stakeholder groups included an array of state and EPA officials as well as
2
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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representatives from the financial communities who play an important role within their
organizations in terms of potential linkages between EMS and financial instruments.
Listed below are the key findings from the workshop and suggested next steps. A
workshop agenda and list of attendees is attached.
Key Findings
1) The use of EMS by public entities is growing and has established itself as a
valuable tool for environmental protection.
A small but growing number of public entities (municipalities, counties,
authorities) have adopted an EMS and have begun to see the benefits from having
systematic management processes and procedures in place. Several participants
voiced the opinion that EMS are here to stay and are in the process of becoming a
significant tool in reducing environmental risks and liabilities. One government
official indicated that EMS is sufficiently institutionalized to transcend political
party changes. Another participant observed: "EMS transform environmental talk
into management action."
One Perm researcher pointed out that his research on the private sector has shown
that "verifiable, credible" environmental results lead to better overall
organizational performance and that in the long run these results influence
financial institutions. The full degree to which EMS contribute to these
improvements is not known, although there are some current studies to address
that relationship. Several participants suggested that further data be collected and
assessed to determine the extent of the relationship between application of an
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
-------
EMS, impact upon risks and liabilities, improvement in the public entities' overall
operating and financial performance, and the potential for beneficial treatment by
financial institutions.
Several participants noted that EMS has certain overlooked limitations and
potentials. One participant from the financial community observed that most
losses come from past practices and it needs to be shown how EMS would
address that issue. For example, it was noted that the once legal disposal of
hazardous waste now results in tremendous liabilities. Although little can be
done to correct for past issues, EMS can employ strategies to mitigate further
liabilities from past practices and to identify potential problems with current legal
practices before additional legal requirements or liabilities are imposed.
2) The Financial Community needs more specific, targeted data showing that
EMS results in quantifiable risk reductions
Financial community members made it clear that EMS has the potential to
significantly and favorably impact their decision-making processes. Almost all
the attendees from financial institutions, however, acknowledged that they need
time to become more comfortable with EMS and, more importantly, they must be
shown considerably more data regarding actual risk reductions before they can
quantify specific cost savings or benefits (e.g., insurance premium savings,
favorable bond ratings and loan conditions). However, even without risk
reduction data, the presence of an EMS can be a positive factor in the financial
community's overall evaluation of a public entity if the public entity's
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
-------
management shows a commitment to fully utilizing the EMS (e.g. document
controls, defined procedures, consistent compliance, etc.). Suggestions were
made that a "crosswalk" be undertaken between criteria used and made available
by the financial institutions against the EMS criteria for conformity and
differences. Such an effort would help to better characterize the risks and
opportunities for favorable treatment by the financial institutions to the public
sector as a direct result of EMS implementation.
Attendees also emphasized the importance of "outcomes" that are linked to
quantifiable risk reduction, not just having an EMS in place. EMS must be
presented to the financial community in the right form in order to influence
decision-making. There seems to be a need for much more work to bridge the gap
between the information financial institutions need to understand risk and the data
that public entities collect to support EMS and ISO 14001 certification. (This is
made somewhat more difficult since the specific formulae used by financial
institutions for evaluating risk continue to evolve and may be proprietary. It was
recommended that further discussions take place with individual financial
institutions on how to overcome the availability of data or utilize what is
available.)
The bond community noted that in making its decisions on revenue bonds for a
public entity it considers factors such as: regulatory risk, construction risk, new
technology, system size, competitiveness of rate base, local economic and
demographic wealth indicators, governance, quality of management, strategic
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
-------
focus, rate structure and financial ratios (e.g., debt coverage). Bond ratings are, in
a sense, a ranking of risk. At least one participant stressed that a public entity's
track record with environmental regulators is very important in setting the rating,
and that environmental compliance is often considered a minimum requirement
for a favorable rating. EMS is often referred to as a means to move "beyond
compliance," or to insure that compliance is met. The participants from the
banking community observed that current awareness of EMS in the banking
community is not high (note that only about 50 of 7000 banks have an
environmental department). It was also noted that Europe is generally ahead of
US on recognition and implementation of EMS and environmental applications
and that, in general, both loan officers and the banks' regulators (e.g., FDIC,
OCC) need to be educated. More effort could be made by the regulatory
community to help educate on EMS and better demonstrate the linkages between
EMS, compliance, and risk reduction.
More specific information on the ability of EMS to reduce risk is needed to
increase the acceptance of EMS by insurance companies. At least one insurance
community representative pointed out that certain coverages are significantly
increasing in costs, and that a public entity needs to show a decrease in risk or
face an increase in insurance premium. Therefore, EMS can be an important
"driver" or tool to accomplish the needed risk reduction. Two questions then
arise: 1) Can the level of risk reduction from an EMS be quantified to the
satisfaction of the financial community? and 2) How can we best accomplish that
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
-------
effort? To be fully useful in standardizing decision making by the financial
community, it was felt that such measurements may need to be documented
within individual agency "sectors" rather than for all public entities, generally.
Case studies were suggested. Attendees also recommended that the EMS drivers
be fully identified through this type of workshop and that other outreach
opportunities be identified within the financial, regulatory and academic
communities to increase public awareness. Within the insurance sector, there was
the belief that an "EMS would more likely induce insurance firms to grant
additional coverage rather than to reduce premium."
3) Public entities need to show quantifiable benefits in order to gain management
support
Public entities need incentives, especially financial incentives, to be convinced to
adopt EMS. The cost of implementing an EMS (relative to the quantifiable
savings) concerned several participants. The documentation of costs and savings
generated by EMS needs to be greatly improved and the results must be
communicated to all stakeholders, including public entity executives and elected
officials. Several participants mentioned that there is evolving documentation
with regard to energy savings, reduced materials usage, better compliance, and
improved management. Others suggested that although the cost of developing an
EMS may seem high, the cost of EMS development and implementation in the
context of total environmental expenditures (capital improvements, operations
and maintenance, and regulatory compliance) is minimal, and quite cost effective.
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
-------
It was also noted that statistics from the private sector show that if process
management is in place, the cost of EMS implementation is much lower. One
public entity representative claimed that their experience in having an EMS has
shown considerable internal benefits including employee motivation and
empowerment, lower risk, greater environmental stewardship, and an estimated 5-
10% increase in operating efficiency. He also mentioned that having an EMS
could result in the public entity feeling comfortable with an increase in their
insurance deductible, thereby reducing costs further to the public sector. Further
documentation along this area should be gathered since any entity with an EMS
that feels "comfortable" accepting a higher deductible is quite significant and
represents important acknowledgment of risk reduction. There was general
agreement that these success stories need to be fully documented across the
country using a consistent methodology that would "make the case" for EMS to
all stakeholders. Some monetary returns for environmental factors have been well
documented, but too often these results are taken for granted or not fully
developed in a consistent manner.
4) Better education, communications, and marketing is needed for EMS to reach
its full poten tial
Participants generally agreed that better communication in all directions and
between many groups is needed to increase the understanding and usage of EMS.
This includes developing opportunities for consistent, on-going communication
between the government, public entities, and the financial community so that each
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
-------
understands the other's needs and processes. Participants emphasized that a
common language for EMS needs to be identified, a marketing approach
developed, and the message kept simple.
Education is essential to the future success of using EMS. This includes
education of the public (who is generally not very interested in environmental
management intricacies), the financial community (who are interested in EMS
and need more data on risk reduction if their decisions are to be influenced), and
public entities (who generally would like to see documentation of cost savings
and other advantages). There is need for more communication between EMS and
financial communities for both to understand the other's needs and processes. The
level of information exchange between and within the different financial
organizations and sectors is weak, especially within the bond-rating sector.
5) Government regulators need to continue to find ways to encourage public
entities to use EMS and to continue to take a leadership role in advancing the
relationships between EMS/ISO, financial, and environmental interests.
Many attendees voiced the essential role of the government officials, not only
environmental regulators at both the state and federal level, but also the regulators
of the financial community. President Bush's January 2003 State of the Union
address was referenced because he encouraged movement away from command
and control and towards "technology and innovation." EPA and state officials
also noted that government environmental regulators continue to encourage non-
regulatory approaches, such as EMS, as important ways to meet the nation's
Sponsored by: 9
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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environmental goals. The use of EMS within Supplemental Environmental
Programs (SEP) was "strongly encouraged" by one senior EPA official,
recognizing that the SEP offers the opportunity to implement an EMS that helps
public entities monitor its compliance with the laws. Further, the EMS provides
the opportunity to use some of the penalties that would be collected by authorities
to support a public entity's EMS to better protect the public and the environment.
This opportunity was recognized as a major step to link the enforcement/
compliance program with the EMS effort, and to support the concept of reducing
risks and liabilities. Data should be regularly collected through the SEP effort
whether the SEP is applied to the public or private sector, recognizing that
benefits would be similar.
Many questions were identified that would benefit from government leadership,
including the following:
Finding ways to merge EMS, financial, and environmental reviews to avoid
duplication and increase overall efficiency.
Examining the value of third party audits. Third party audits were mentioned
by some invitees as being very important in verifying the implementation of
EMS. It is believed that such certification could play a significant role in
emphasizing the importance of environmental issues within an organization.
One participant mentioned that the financial community sometimes does not
accept third party audits and would rather depend on its own risk reviews.
Sponsored by: JQ
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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One government official mentioned that approximately 65% of EPA
Performance Track companies have ISO certification, and those with
independent third party audits don't seem to have as many environmental
problems.
It was suggested that it would be very beneficial to have EPA review and
approve specific EMS in addition to its current general support of the EMS
concept. Government invitees agreed that this is not likely. There was
considerable discussion by attendees of how do financial communities
compare different EMSs, especially with the reality that not all EMSs are
equally successful. This same issue was raised with third party auditors. How
do we keep this process transparent and credible?
Continuing to lead in the development of techniques and methods to
standardize risk reduction documentation in an EMS.
Determining what constitutes an acceptable EMS in terms that the financial
community and the public can understand.
Coordinating the interests of the various regulators: EPA (and state
counterparts), Federal Reserve, FDIC, OCC, SEC. Expanding of the
workshop with other organizations, especially regulators, was recommended.
Continuing to expand environmental regulatory relief for public entities with
EMS.
Sponsored by: J J
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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Using academia as a resource for research. By virtue of its independent
position, academia has an essential role in convening the parties from the
various sectors, identifying the critical issues, conducting special research, and
educating all parties on these issues.
Some Potential Next Steps
During the day and a half meeting, many ideas and viewpoints were
expressed. At the end of the meeting participants identified "potential next steps."
The following are offered as a general sense of what the attendees noted were
some of the most important next steps to take. It is by no means an exhaustive list
but rather an attempt to highlight the strongest collective messages.
1) Assemble a working group of key representatives from the financial
community, government agencies, and EMS practitioners to address the
following needs:
- A strategy for increasing awareness, conceptual understanding, and ultimately
support by the financial community of EMSs for risk mitigation. Present
EMS in a "proof of concept" context that the financial community can easily
grasp (e.g, linkages with traditional management systems such as ISO 9000, 6
Sigma, and Risk Management.)
- Defining, extracting, and compiling precisely what information the financial
community takes into account in assessing applicant risks (e.g., EMS
practitioners should be able to understand exactly what the financial
community needs to see when assessing risk). Included in the analysis could
be links between enforcement/compliance programs and EMS (how EMS
Sponsored by: J2
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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supports and strengthens compliance programs) in reducing risks and
liabilities.
- Building on the information gathered above, evaluate 5-10 case studies across
the United States to provide the financial community with a specific data set
of information about the effect of EMSs on reducing risks and liabilities and
assess the value (changing the perceptions of EMS, facilitating more efficient
communication between public entities and the financial community, etc.) of
collecting such data.
2) Promote within the financial community a better understanding of and
confidence in the EMS audit and third party certification process.
- Develop a strategy to make the audit process more transparent and
understandable to the financial community including:
- Understanding the selection and certification process of auditors;
- Understanding the audit checklist used in certification audits;
- Understanding the audit plan and process (including pre-, certification,
and surveillance audits);
- Understanding the management of nonconformances.
- Cross walk the audit checklist with the checklist used by respective financial
community sectors in assessing risk
- Develop training, awareness, and outreach materials using the information
above and determine the best opportunities and methods to disseminate the
information
Sponsored by: J3
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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- Involve the Registrar Accreditation Board (RAB) and other registrars in
material development and all future discussions to ensure that the ISO
registration process is properly understood
3) Continue to build the business case and disseminate information in a format
that resonates with the financial community and other stakeholders (e.g.
public entity executives and elected officials) demonstrating the rich benefits
of EMS in public entities, including:
- Cost-benefit analyses
- Confidence of regulatory community and citizens
- EMS as a platform for integrated management (e.g., security,
health/safety, quality, efficiency)
4) Collect information from steps 1-3 above as well as information from key
representatives from public entities, the financial community, government
officials (both environmental and financial) and legislators and develop a
rigorous public entity EMS marketing plan with a simple message geared
towards financial communities. .
- Develop a clearinghouse of information (possible on the Public Entity EMS
Resource Center website www.peercenter.net), case studies and data, and a
calendar of meetings where there is an opportunity to present a paper or be
part of a discussion
- Develop an EMS communication toolkit for public entities to use in their
interactions with the financial community
Sponsored by: J4
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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Enlist the support of organizations that typically serve public entities (ICMA,
LGEAN, NACO, WEF, AMSA, etc.) and the financial community (Moody's,
FleetBoston, EBA, XL Environmental, etc.) in disseminating awareness and
information about the linkage between EMS and financial obligations.
The sponsors gratefully acknowledge the role and support received from all attendees who
contributed information, publications, case studies, and through open dialogue made the
workshop successful.
For additional readings see the following websites:
www.epa.gov/ems for EPA's position and policy statements on EMS
www.peercenter.net
Feedback on this report is most welcome. Please contact Faith Leavitt
(fleavitt@earmvision.net) or Steve Wassersug (swassersug@getf.org) at GETF,
Stan Laskowski at the University of Pennsylvania (slaskows@sas.upeian.edu), or
Jim Home at USEPA (horne.james@epa.gov) with any thoughts you may have.
Sponsored by:
US Environmental Protection Agency
University of Pennsylvania Institute for Environmental Studies
University of Pennsylvania Risk Management and Decision Processes Center
Global Environment & Technology Foundation
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