InteGreyted, International

Environmental Health & Safety Liability Assessment Systems

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Courtesy of InteGreyted, International

An excerpt from the book, "Information Technology Solutions for EHS Professionals," by Thomas J. Morahan, Vice President of EHS Technology at InteGreyted, International

Assessing an organization’s exposure from issues related to workplace environmental, health and safety (EHS) is a complex task. This type of exposure can take many forms. EHS exposures are commonly tracked to avoid fines and penalties and implement best management practices. Yet, EHS exposures also manifest as financial liabilities for past contamination, legal liabilities for violation of laws, regulations, or other government mandates. Or, they can be less tangible, affecting employee morale or public opinion of an organization. Inventorying, analyzing and minimizing these exposures is a key function of today’s EHS professional. While important in routine operations, evaluation of EHS exposures is especially significant during the transfer of real property. This is particularly important in the United States and other jurisdictions where mere ownership can subject companies to full exposure for past practices and conduct of others. In this day of rapid reorganizations, spin-offs, mergers, divestitures and acquisitions, the quick identification and analysis of EHS exposures has become the challenge of many scientists, engineers, financiers and risk managers. With recent advances in software and the interconnectivity of the world-wide web, systems are now available that provide immediate access to real-time information, offering the business community unprecedented capability and speed in understanding the EHS risks related to acquisition and/or divestiture of a company, division and/or real property.

Until recently, information related to possible EHS risks or exposures was collected and maintained primarily on paper-based systems. This data was typically accessible only during a meeting or at the time when "hard copy" reports were delivered. In the fast-paced environment of a business transfer, paper-based systems often cannot effectively deliver the steady stream of time-critical information necessary to support a company’s negotiation and/or integration team. This is particularly true in "larger deals" where complete business units or multiple facilities are involved in the transfer. Frequently, this leads dealmakers towards one of two common pitfalls. The first, and less common, problem is that a buyer may be overly conservative prematurely "killing" the deal. The second, and more common problem, is ignoring EHS exposures altogether, hoping that the "skeletons in the closet" aren’t too big.

Web-based systems are now available that provide immediate access to real-time field information. Using these systems, evaluation teams can quickly provide information on EHS exposures for timely incorporation into business decisions. These systems allow authorized users to quickly review, share, update, track, compile and maintain this information using tools as simple as a web browser and an Internet/Intranet connection. As these tools mature, web-based systems will greatly increase the speed and accuracy of determining EHS exposures, creating a more reliable model from which to make more informed and sound decisions and avoid the most commons pitfalls of quick turnaround business transfers.

Evaluating EHS Business Exposures

Before examining the technologies that enable the efficient accounting, analysis and communication of possible exposures, it is first appropriate to understand the underlying complexities faced in identifying and estimating the magnitude of potential EHS exposures.

As indicated above, possible EHS exposures generally fall into one of three categories. First, exposures can result in financial liabilities for past or on-going contamination. Second, EHS issues can arise when there is non-conformance with laws, regulations or other government mandates, exposing an entity to fines or criminal liability. And third, less tangible but equally impactful, are EHS issues which may affect employee morale, like poor safety records or the public’s opinion of an organization or one of its facilities from odours or nuisance-related concerns. The following paragraphs provide some background on common EHS exposures faced by companies buying and selling operations today.

Contamination-Related Exposures

In the 1980’s, organizations involved in business transfers began to experience the impact of past spills, leaks, disposal or other uncontrolled contamination events on properties acquired. Many times these parties acquired properties without any knowledge of the conditions, only to discover contamination problems after closing that resulted in unexpected and significant costs. Without "appropriate inquiry", regulatory agencies in the United States held these new owners liable under Superfund laws and forced actions to correct the acquired problems. In addition, financial institutions were foreclosing on contaminated properties and unknowingly assuming the liability.

In the late 1980s, the American Society for Testing and Materials (ASTM) convened a Committee to develop standards to assess these conditions in a systematic way thereby establishing an "appropriate level of inquiry". This approach, today commonly known as a Phase I Environmental Site Assessment (or Phase I ESA), establishes a process for the identification and characterization of possible contamination exposures or what ASTM Standard E 1527 refers to as "recognized environmental conditions". The ASTM Phase I ESA has become the de facto global standard for assessing risk associated with historic or current contamination. There are some elements of the ASTM standard, however, that are not applicable outside the United States. For this reason, Canada developed a separate but closely aligned standard (Canadian Standards Association – Standard Z768 –94, Phase I Environmental Site Assessment.) In addition, the Industrial Standards Organization has also developed a standard for worldwide development called ISO 14015.

Exposures Faced by non-conformance with Legal Requirements

Environmental liability from a distressed property was only the first type of potential exposure recognized as important for the purpose of business acquisitions/divestitures. By the mid-to-late 1980s, proactive businesses were also performing internal compliance audits and quickly recognized that findings of non-conformance with EHS regulations could also be a source of tangible, and frequently significant, liability. These non-conforming conditions often required large monetary expenditures to acquire permits or authorizations to modify processes and/or upgrade pollution control equipment. In addition, many of the laws also brought the potential of criminal sanctions, a liability that all executives and EHS professionals clearly hope to avoid. This high downside potential drove many risk-savvy organizations to incorporate compliance reviews as a standard part of their due diligence process, finding out early the potential EHS costs that might accompany newly acquired plants or businesses.

Intangible EHS Exposures

Recently, companies acquiring businesses and facilities have been looking at a third type of potential exposure, referred to as "EHS goodwill". EHS goodwill relates to workplace environmental, health and safety issues that can affect an employee’s or the public’s perception of an organization. While the indicators of this type of potential exposure are more subtle than a leaking underground storage tank or an unpermitted discharge, the monetary impact of EHS "ill will" can certainly be significant and warrant investigation during any major due diligence project. Consider the following example from Harvard professor Forest Reinhardt’s recent book, Down to Earth. Reinhardt describes exactly this type of unanticipated risk that arose after an acquisition of property and timber harvesting rights by a forest products company in 1993.

Alberta-Pacific Forest Industries (a Japanese joint venture between Mitsubishi, Oji Paper and Crestbrook Forest Industries) acquired rights to harvest vast tracts of timber on government-owned land in northern Alberta, Canada. The venture also acquired property to build a new mill in the vicinity to process harvested timber into market pulp. From a business and EHS perspective the project seemed to have relatively minor risks or exposures that could negatively affect the company’s plans. Raw material costs were low, there were no stringent forestry or environmental requirements and the pulp mill was to be located in a predominately uninhabited area 100 miles north of the provincial capital of Edmonton.

As plans were being formulated for construction of the mill and harvesting of timber, the project encountered substantial opposition from local farmers, aboriginal residents of the area, environmental activists from southern Alberta and elsewhere in Canada as well as from other nations. Alberta-Pacific was forced back to the drawing board and was ultimately required, not by law, but by social pressures, to construct a mill that would keep pollution far below levels mandated by the government and drastically modify planned clear-cut harvesting practices to address concerns of their new neighbors. While Alberta-Pacific successfully addressed these concerns, the effort invested was substantial, unexpected and clearly the type of exposure acquirers can ill afford to miss.

Liability Management System Design

Web-based systems enabling the EHS due diligence process are emerging to help organizations quickly and accurately identify potential exposures and their associated cost to mitigate or remedy. While these systems can include many functions and features, several key elements that define the utility and effectiveness of these tools are discussed below.

Whether potential exposures relate to traditional contamination concerns, unfulfilled legal obligations or the absence of goodwill, clearly an organized process of identification, analysis and communication must exist if business decision makers hope to effectively evaluate EHS liabilities and factor associated costs into their business decisions. Nowhere is this need more exemplified than in the rapid-paced environment of business acquisitions. As previously mentioned, lack of a systematic approach or inefficiencies here can lead to "killing" the transaction from being compliant or ignoring EHS exposures altogether with the hope that the potential issues aren’t too big to be managed once the transaction is complete.

Until recently, paper systems, faxes, teleconferences and other less than optimal means have been used to try and avoid these pitfalls and potentially costly mistakes. Today, emerging web-based systems are beginning to fill the efficiency gaps, rapidly delivering results from the field directly to business decision makers. The following paragraphs discuss the attributes of these new types of systems and provide actual case study data from Abbott Laboratories where these types of tools were used in the recent multi billion dollar acquisition of a global pharmaceutical business.

System Access

Probably the most important prerequisite of any computer application today is its ability to allow as many parties as necessary to access, link, share and compile information from numerous and disparate sources. Without exception, web-based systems provide the highest level of access. Access begins with a standard and ubiquitous user interface, the web browser, which allows easy access and navigation to content which is delivered over a shared and common network, like the Internet, a private Intranet or some hybrid.

Evaluating potential EHS exposures is certainly a process that requires an "open" system if it is to be utilized efficiently. This is particularly true when exposures are being examined for the purpose of an acquisition where the work of EHS due diligence involves many individuals. Oftentimes these individuals serve different roles in the exposure evaluation process, and in many cases participating professionals are affiliated with different organizations such as:

  • Company representatives
  • Consultants
  • Outside counsel
  • Financial institutions
  • Insurance underwriters

In large transfers, multidiscipline teams may be working simultaneously across broad geographies all needing access to tools and repositories for identified EHS exposures. Without the standard and open approach web-based systems offer, user training and instantaneous evaluation of information would be difficult and time-consuming at best, and impossible under most circumstances.

Design

Another key element defining the utility for these systems is software design. Specifically, the most useful systems incorporate the expertise of professionals experienced in conducting EHS assessments where potential exposures are quickly identified and analyzed. Without this attribute, users can become bogged down in irrelevant details or become lost in the complexities of what software designers might think is important. An effective EHS exposure tool will allow users to:

  • Rapidly characterize conditions that can create liability
  • Provide a collaborative environment where experts can determine and document associated financial and other risks
  • Include functions and features that enable rapid, real time communication of these risks and recommendations regarding appropriate management
  • Ultimately provide a tracking mechanism that ensures identified conditions are mitigated or remedied as necessary

More advanced systems also include utilities that further optimize the process by simplifying or replacing tasks once relegated to the EHS professional. For example, sophisticated tools can include a "library" of commonly encountered EHS exposures or "findings". Within this library, specific exposures are cataloged along with possible remedies or mitigating actions and typical costs that may be associated with addressing the identified risk. This library is then made available to EHS professionals in the field. When similar risks are identified, the collective knowledge of the organization (embodied within the library) can be rapidly reused, reducing the time required to document, analyze and communicate risk while simultaneously improving the reliability, accuracy and consistency of the analysis.

Other advanced features, like the library, are also becoming more common. These include support tools such as "reference guides" – a place to demonstrate to users the correct approach to, say. Answer a question, to provide standardized guidance for those conducting exposure evaluations, and more pragmatic tools like "bulletin boards" – places where teams can collaborate on a specific assignment’s real time for activities such as travel, distribution of background materials, or communication of specific assignments.

Security

In addition to design and access considerations, systems that contain information related to possible EHS risks or exposures require robust security. Security of sophisticated systems extends far beyond limiting who can access the system and who cannot. Advanced EHS applications like those required for exposure analysis must include security that can accommodate the many types of users that will interact with the system. For example, a system’s security must be easily configured to accommodate:

Depositors – or those who need only to input information into the system, but have no reason to view the data once entered. For due diligence assignments, an example might be a data entry clerk supporting the projects technical team.

Read-Only Users – as the name implies, this level of access would allow only viewing of data in the system without privileges to amend, append or enter new information into the application. Facilities being assessed or third party insurance underwriters participating in the transaction might be examples of read-only users.

Authors – this level of access would allow individuals to edit information they have added, with read-only privileges for all other data. EHS professionals or other analysts participating in a due diligence project would typically require this type of access.

Editors – these users would be allowed to enter or edit any information throughout the system. Project managers or team co-ordinators involved in EHS exposure analysis typically would require this level of access.

In addition, advanced security systems should accommodate "roles" associated with any given assignment. For example, assume John Johnson and Jane Jones are project managers charged with evaluating EHS exposures for a potential business acquisition. John will be responsible for assessing all European sites and Jane will have the same assignment for US facilities. Ideally, systems should provide editor access for John on only his sites (with read-only access for the US facilities) and visa versa for Jane.

Given the sensitive nature of EHS information, security features such as those described are a "must" and any advanced system for managing EHS exposure data will address and include these requisite features.

Other Attributes

Beyond the fundamental aspects, there are a number of other special functions/features many EHS and business professionals are finding to be particularly useful. For example, the system used in the case study presented below was an application maintained by a third party. This type of arrangement, discussed earlier in this book, offered by an ASP, or Application Service Provider, is one of the newest and most convenient ways to access this type of application. While traditionally, environmental, health and safety applications have resided on internal computers or servers, the support and maintenance requirements, coupled with the time and expense of installation, are rarely justified in the EHS manager’s world. This alternative approach allowed all of the personnel involved in the transaction to focus on the information and not the information management.

The case study system also included the ability to deliver media-enriched items, such as photographs, drawings and file attachments, useful in supporting the evaluation, discussion and communication of potential risks identified in the field.

A more complete understanding of these attributes and their utility is best established within the context of an actual EHS assessment that has used these tools. The next section provides a case study of one such recent assessment where these advanced tools helped successfully facilitate a major acquisition within the pharmaceutical industry.

Summary

It is clear that technology is changing the way EHS risks and potential exposures are assessed. Technology-enabled assessments can allow environmental due diligence teams to report findings with all associated documentation to management in a secure environment over the web. The access to real-time data can have an immediate positive impact on a transaction. The data collection and reporting streamlines the time and associated cost of the assessment, and identified conditions remain in these systems for historic review and future management of identified issues. Available technology coupled with ease of use will someday ensure wide acceptance of these tools to streamline the understanding and management of environmental, health and safety risks and their potential implications.

 

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