1. Environmental Risk Management
8803 Business and the Environment
Beril Toktay
College of Management
Georgia Institute of Technology

2. Flow of Course Product Sustainability Fundamentals Eco-efficiency
Stewardship
Sustainability
Strategy
Fundamentals
Eco-efficiency
Environmental
Impact
Pollution
Prevention
The Role of
Companies
Waste
Reduction
Core Dilemma:
Tragedy of
the Commons
ISO 14000
Life-cycle
Analysis
The Role of
Legislation
Risk
Mitigation

3. Environmental Risk
Legal/environmental perspective: possibility of damage to ecosystems or human health
Business perspective:
loss of firm value that may result from environmental concern (similar to currency risk, price risk, etc.)
e.g. business interruption, loss of goodwill and reputation, liabilities (e.g. fines for violating environmental laws), contingent liabilities

4. Contingent Environmental Liabilities
liabilities arising from unforeseen environmental risks where the dollar amount was unknown and depended upon future events
can be incurred even if in compliance with all environmental laws and regulations
e.g. PCB, asbestos
e.g. Superfund (strict, joint, several liability)
Strict = no fault standard
Joint and several = can be found responsible even only if partial contribution to pollution

5. Impact Insurance companies Banks Businesses
Reduced ability to collect on loans
Contamination can reduce value of collateral
Responsible for cleanup on foreclosed property
Low priority in a bankruptcy proceeding
profitability
cost of capital
stock price
Under-pricing

6. Types of financial risk management
Risk avoidance
Eliminate exposure by ceasing activity
Loss prevention and control
Reducing probabilities and impacts
Risk retention
Bearing risk internally
Risk transfer
Reducing risk responsibility (hedging, insurance)

7. Environmental Risk Management
Factors affecting environmental risk
Probability of adverse event
Total social burden if event occurs
The fraction of total burden firm is responsible for
Risk reduction tactics:
Invest in reducing factors above
Improve information to make better decisions
Example: Marine spill

8. Quantifying Environmental Risk (using DEMA)
Goal: make env. risk mgt more systematic and efficient, supplement judgment with analytic reasoning
Motivation: present value of benefits should exceed costs to deliver value to shareholders
Method: Calculate expected benefit/cost ratio, prioritize high-ratio projects
Difficulty: assessing benefits (using conversion factors)

9. Quantifying Environmental Risk (using DEMA)
Yes because
Clarify costs and benefits, reduce more risk w/ less funds
Forces consideration of long-term consequences, limiting risk retention, focusing attention on changing business practices at possibly low cost
No because
Bad publicity associated with explicit valuation
Low value since factors are bound to be arbitrary
Expected net benefit may not be appropriate goal (e.g. reducing from 50% to 40% a $10M risk versus reducing from 0.01% to 0 a $1B risk)

10. Trends Today
More systematic analysis of risk and risk reduction proposals
Integrate more closely with core risk management function of the firm via
Closer consultation with financial risk management officers
Systematic consideration of entire set of managerial incentives

11. Interesting Links http://www.chevron.com/cr_report/2004/
Environmental Risk Resources Association:
Wharton Risk Management Center