EHS Journal Article on Sustainability, Financial Valuation

Recently, Elm posted a piece discussing comments from Kevin Parker, the CEO of Deutsche Asset Management, an investment firm with three-fourths of US$1 trillion under management.

We expanded that original post for EHS Journal, who just published it.  The expanded version dives deeper into trends in the past decade supporting Parker’s assessment of why capital markets are bullish on carbon-intensive investment opportunities even in light of this era of sustainability.

View the article in its entirety here.

An Inconvenient Reality For Environmental/Sustainability Professionals?

For years, those of us in the environmental/sustainability profession have sought credible ways and metrics for quantifying the economic value of our efforts, activities and programs.  A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”.  Most of these studies have shown rather tenuous linkages or used meaningless metrics.

Interestingly, most of these studies link to equity markets – i.e., stock prices.  Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.

The problem is that environmental/sustainability matters don’t fit into this model, either because they tend not to be financially material, or they don’t develop economic certainty within the “current quarter” myopia of corporate management, financial markets and analysts.

A recent article on the topic was published in The International News.  The article includes an interview with Kevin Parker, CEO of Deutsche Asset Management (DeAM) on the subject of how capital markets currently view environmental/sustainability risks.  DeAM manages over US$775 billion in assets.

With simplicity, clarity and unquestionable credibility from the financial market viewpoint, Parker made key points in the article and interview:

• Bond markets are poised to punish polluting companies in the aftermath of the Macondo oil spill and Fukushima nuclear crisis.
• “The process of re-pricing carbon and environmental risk has begun, because these two events were catastrophic.”
• By contrast, shorter-term equity and commodity markets have continued to chase high-carbon opportunities, including voracious emerging market demand for coal.
• But investors in longer-term debt including bonds will increasingly avoid unsustainable companies … an inexorable trend that will push up their borrowing costs.
• “What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it.”

Pension investment managers realized this years ago since they emphasize stability and a long-term investment horizon.

But there seems to be far less recognition of this by environmental/sustainability practitioners, as the amount of studies, white papers and pseudo-financial metrics is mounting, with continued emphasis on the equities side of capital markets.  Perhaps the driving forces for this are general economic pressures facing companies are pushing staff to find ways to justify their existence and cost, consultants are trying to come up with that elusive short-term ROI metric for the cost of their services to clients and much of the HSE/sustainability media are vying for limited attention on the part of their readership.

Given Parker’s comments – and the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.

In limited circumstances, financial value of environmental/sustainability initiatives can manifest in material and short-term impacts.  Those instances give practitioners hope of riding those coattails.  But generally, the reality is a little inconvenient.

Voluntary Environmental Management Standard Turns Into Third Party Whistleblower

It is not uncommon for EHS auditors to be asked (or ask themselves) “If you find a noncompliance during your audit, do you report it to the regulators?”

The answer depends on the company and audit program, but a recent news item caught our attention due to a variation on the theme.

We have no information other than what is publicly available here, but it appears that an organization managing a voluntary electronic waste management certification program found alleged significant non-conformities at a specific company seeking certification.  As a result, the organization declined to issue its certification to that company.

So far, so good, but the story doesn’t end there…

In its declination letter to the company, the organization states:

Further, there is substantial reason to believe that such exports may violate Public Act 095-0959 (Electronic Products Recycling and Reuse Act, recycler requirements) of the State of Illinois, the Federal CRT Rule, (40 CFR Parts 9, 260, 261, 271; Cathode Ray Tubes; Final Rule) as well as the waste importation laws of Hong Kong/China. Further, while it is not our policy to disclose the results of certifying body audits, we can state that the audit only further substantiated all of our concerns.

In an apparent contradiction to the “policy” referred to in the above statement, the organization’s cc’d “Selected news media”, the Illinois State Environmental Protection Agency and the US Environmental Protection Agency Enforcement on its letter, which can be seen below the signature block.

It is certainly possible that the company themselves had made prior disclosure to the regulators on this issue.  But this event may cause companies pursuing voluntary programs/certifications to carefully consider how the company and auditor will manage regulatory non-compliances that are found or alleged in the course of related audit activities.

UPDATE:  Reports today indicate that the company is taking legal action against the certifying organization stating that the allegations on which the organization based its decision – as well as its disclosure to the press and regulators – are false.

Elm Launches Groundbreaking Low Cost Conflict Minerals Audit Preparation Tool

The Elm Consulting Group International LLC today announces a groundbreaking cost effective tool to support companies preparing for conflict minerals traceability audits or customer inquiries.

The delay in SEC’s final rule triggered many questions from companies about planning and pre-audit preparation.  This led us to a solution that is valuable in almost any foreseeable final regulation scope/content and companies planning responses to customer inquiries – yet significantly reduces costs during this period of uncertainty.

Elm’s Self-Implemented Conflict Minerals Audit Preparation^© (SICMAP℠) is conceptually similar to a self-audit checklist.  SICMAP℠ is a spreadsheet tool that maximizes the use of internal company staff for cost reduction and implementation flexibility to develop and review conflict minerals programs in advance of third party auditing.

SICMAP℠ focuses on basic program elements equally relevant to companies responding to customer inquiries/procurement requirements and those working to comply with the upcoming SEC regulations on conflict minerals.   Successive and more complex tasks – for both program development and audit preparation – are identified based on initial SICMAP℠ findings, lessons learned from working through the SICMAP℠ process, and the final regulatory requirements once they are known.  The final rule, when published, will clarify the level of detail for some of the efforts.

Screenshots (which can be enlarged by clicking on them) show some of the features and functionality in SICMAP℠ include:

• “At a glance” color-coding indicates progress/status of both program development and audit preparation
• Live links to reference materials on the internet
• Summaries of language from the U.S. legislation (which will not be changed by SEC’s final regulations)
• Step-by-step pragmatic guidance on specific program elements
• Highlights of emerging international initiatives in comparison/contrast to SEC audit standards

Sample Page Showing Detailed Guidance

Topics covered in an intuitive and pragmatic way include:

• Initial scoping
• Reasonable assurance and representative sampling concepts reflecting SEC auditor standards
• Information management systems
• Internal controls
• Supply chain mapping
• Communications planning and content
• Scrap materials – special definitions and challenges in traceability efforts
• Considerations in selecting an auditor and preparing for the site visit

Summary Tracking Page With Color Coding. This image shows covered topic tabs along the bottom.

The tool is based on Elm’s experience as one of four firms worldwide that have completed conflict minerals traceability independent audits. Elm’s tantalum traceability audits in 2010 resulted in the first ever “Conflict-Free Smelter” designation^*, covering sites in the US and Japan.

We continue to recommend that companies move forward with planning activities, but defer third party audits until planning is substantially complete and the SEC regulations are final.  As with almost any new management program, a formal third party audit should be the last step of the implementation process – not the first.

SICMAP℠ will be commercially available beginning June 6, but feel free to contact us beforehand with questions.

* Issued by the industry association sponsoring the audits.  The Conflict Free Smelter (CFS) program is emerging as the leading conflict minerals third party certification program for smelters by the electronics industry.

SEC Provides Preview of April 15 Final Rules on Conflict Minerals Supply Chain Traceability

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FOR AN UPDATE ON SEC’S DELAY OF THE FINAL RULE, CLICK HERE.

As veterans of regulatory research, we are accustomed to spending hours poring over a plethora of governmental regulations, background documents, guidance and other reports.  Our work with conflict minerals supply chain traceability and SEC’s regulations has been no different.  In addition to having completed such audits, we have read and re-read

• the proposed SEC regulation and its preamble;
• the OECD Due Diligence Guidance for Responsible Supply Chains of Materials from Conflict-Affected and High Risk Areas, and the Supplement on Tin, Tantalum and Tungsten;
• the ISO 19011 standard;
• comments submitted to the SEC on the proposed regulation (approximately 700 total comments were submitted, of which 433 were standard form letters.  Of the remaining 270, approximately 75% provide substantive content);
• hundreds of relevant media reports, legal advisories and NGO documents;
• various auditor standards under SEC, including Government Accounting Office Government Accounting Standards GAO-07-731G, AICPA Statements on Standards for Attestation Engagements (SSAEs); and
• industry commentary and alerts on the topic.

Yesterday, we completed an analysis of the 263-page report from the Boston Consulting Group (BCG) titled US Securities and Exchange Commission Organizational Study and ReformMarch 10, 2011 to see what insight might be hidden therein on the upcoming final conflict minerals regulations.

BCG’s report establishes the ultimate context for the other documents which, in turn, essentially provides a preview of the final rule.  Our opinion is that SEC will meet the statutory deadline of April 15 with a rule that will:

• clarify procedural aspects, such as applicable audit standards (i.e., GAO-07-731G, AICPA SSAE, etc), the need for annual audits and the question of “furnishing” versus “filing” the report;
• establish a materiality threshold for conflict minerals content in products;
• specifically exclude retailers and contract manufacturing arrangements under certain conditions;
• defer most substantive compliance requirements to allow further study; and
• defer the initial reporting compliance date.

By doing this, SEC can meet competing priorities with which it is currently struggling.  Such a rule would appease the regulated community and buy SEC time, while allowing SEC to claim victory in meeting the legal deadline.  During the deferral period, we expect SEC will implement its overarching organizational restructuring and internal risk assessment processes spelled out in the BCG report, then come to a final position on Section 1502(b).

What does this mean for companies impacted by the due diligence/audit requirements?

We have written and directly counseled clients and others on business risks associated with completing the audits in advance of the final SEC rules.  As we see it, the risks are somewhat different depending on your company:

• Companies directly regulated by SEC. Audits conducted “pre-rule” risk being non-compliant with the final SEC requirements.  Early adopters may be faced with paying for audits a second time to achieve compliance.  Reputational damage is possible where companies publicize or market the results of audits that are non-conforming to the final rule.  At an extreme, companies could face lawsuits over nonconforming audits in a manner similar to lawsuits filed for non-GAAP financial reporting or certain corporate social responsibility reports.
• Privately-held companies responding to customer demands. For these companies, the risk is not compliance oriented, but centers on unnecessary costs and reputational damage.  Where customers demand this information of suppliers, the demands must be met.  The question becomes is SEC compliance driving the customer’s request?  If so, (assuming our prediction is correct) the customer’s need may not be so urgent or burdensome as originally thought; and early adopter efforts on the supplier’s part may be overkill/overly expensive in light of a rule deferral period.  Legal action from customers who rely on the “pre-rule” audit information and reputational damage are both possible where companies publicize or market the results of audits that are non-conforming to the final rule.  Suppliers would be wise to work with customers to find an acceptable balance between the drivers, timing, scope and cost.

Companies want to be proactive and responsible corporate citizens.  But we live in a command-and-control legal setting – combined with third-party lawsuits and governmental performance metrics that incentivize fines, penalties/aggressive enforcement.  Early action in a time of regulatory uncertainty carries risk.  In US corporate sustainability activities, this is perhaps most vividly demonstrated by last year’s complete collapse of the voluntary US GHG emissions trading market - specifically established in advance of US legal requirements on GHGs to create “first mover advantage”.

Elm continues to recommend that companies move forward with implementation evaluation, scoping and planning activities, but wait for SEC’s rule to be finalized before conducting audits.

New Guide Published on Conflict Minerals

MetalMiner.com, one of the world’s foremost on-line publications on global procurement of metals and related products, including global pricing trends, capacity constraints, supply market M&A activity, today published its guide to planning compliance with the US Conflict Mineral Law and the (soon to be final) implementing regulations under the Securities and Exchange Commission (SEC).

This guide, titled What Your Company Should Know About Conflict Minerals, is a concise resource containing:

• Elm’s insights from having conducted audits under a leading industry association program for conflict minerals supply chain traceability, and
• MetalMiner’s expertise in metals trading/sourcing, with a unique perspective on how the scrap loophole may become exploited by operations in the conflict region.

The date is looming for SEC promulgation of the final regulation and over 160 comment letters were submitted to SEC on the proposal.  To help you prepare for these new program requirements, this report provides valuable substantive information based on first hand knowledge of conflict minerals programs and issues.

MetalMiner.com was founded more than four years ago and since then has become a recognized leader in providing unique insight, analysis, and tools for buyers, purchasing professionals, and everyone else for whom metals and their related markets matter.

Click here to obtain a copy of this report from MetalMiner.

Joseph Cotier, CPEA joins The Elm Consulting Group International LLC

The Elm Consulting Group International LLC, a specialty health, safety, environmental and sustainability (HSES) management consulting firm, is pleased to announce the addition of Joseph B. Cotier, CPEA as a Director of the firm beginning January 3, 2011.

“Joe brings 22 years experience in HSE auditing excellence and client focus to our team” said Patrick Doyle, Elm’s founder and Managing Director.  “He is a perfect complement to the firm.”

“I have known Joe personally and professionally for close to 20 years and know first hand about his expertise and exemplary qualifications.  We are very excited to have him become a part of Elm” said Robert Bray, Elm Co-Founder and Managing Director.

Cotier said, “I am happy to be a part of Elm and look forward to continuing to have a positive impact on the HSE auditing field – driving innovation both in the US and across the globe.”

Joseph B. Cotier, CPEA, has completed more than 350 EHS audits and management systems consulting projects in more than 35 states and 20 countries.   He has experience in a wide range of industries including petroleum refining and chemical manufacturing, electric utilities, breweries and consumer and pharmaceutical products manufacturing. Mr. Cotier is an air emissions expert with particular strengths in emissions inventories, leak detection and repair, and a wide variety of MACT programs.  Joe his has performed inspections and managed compliance orders as a Senior Air Pollution Control Engineer for the Connecticut Department of Environmental Protection. He is a BEAC Certified Professional Environmental Auditor and recently completed his fifth year on the Board of Directors for The Auditing Roundtable, the leading professional association for HSE auditors.   He served as Secretary, Vice President and President, and now serves the Roundtable as Director on the Board.

Mr. Cotier will be working out of Glastonbury, Connecticut and can be reached at jcotier@elmgroup.com, +1-860-794-3617 (cell) or +1-860-430-1653 (office).

EHS Journal Publishes Detailed Article on Elm iPad Trials

We recently announced our trial of and results from using an iPad for EHS auditing.  These articles were intentionally short and provided summary information.

We were subsequently contacted by the Editor of EHS Journal to provide a more detailed article for their respected publication.  That article is now available.

We invite you to read it.

In Tampa, a Mining Company Shutdown Highlights Business Interruption Risk from Environmental Issues

In Tampa Bay, an all-to-real demonstration is playing out of the trickle-down economic impact of a company operation being shut down for environmental reasons.  The Tampa Bay Business Journal reported this story.

The Mosaic Co. is a publicly-traded company with over $6billion in annual revenue reported last fiscal year.  Mosaic mines phosphate ore.  The company has been mining in Polk County since 1995 and recently filed for an expansion of operations to access reserves in Hardee County.  These ore reserves represent about 10 years of active mining operations.

The Sierra Club, along with other NGOs challenged the issuance of a federal permit that would allow Mosaic to expand, alleging that the expanded operations would cause environmental damage to the headwaters of the Peace River and other streams that drain into the Charlotte Harbor estuary.

On July 30, in response to the challenge

U.S. District Judge Henry Lee Adams Jr. in Jacksonville issued a preliminary injunction against the expansion, saying the Army Corps had failed to adequately explore alternative plans that would cause less environmental damage to the area.

The article reports that, if the Mosaic expansion does not move forward, the economic impact would be dramatic.

At least 18 companies that do business with Mosaic would be out at minimum of $80 million in combined annual revenue, and about 400 of their employees would lose their jobs, in addition to the 221 Mosaic workers who would be laid off …

“If Mosaic is prohibited from further mining, it will mean that Bul-Hed Corporation would cease to exist sometime in the near future,” Ronnie Hedrick, president, said in a court filing.

Mosaic has estimated it would lose $250 million to $300 million in operating earnings in a worst-case scenario.  In its fiscal year ended May 31, Mosaic had earnings of $1.75 billion before interest, taxes, depreciation and amortization on net sales of $6.76 billion.

Business Interruption Planning

The company’s most recent 10-Q (Item 1A – Risk Factors), filed April 1, 2010, did  disclose this potential risk:

Expansion of our operations also is predicated upon securing the necessary environmental or other permits or approvals. Over the next several years, we and our subsidiaries will be continuing our efforts to obtain permits in support of our anticipated Florida mining operations at certain of our properties. In Florida, local community participation has become an important factor in the permitting process for mining companies, and various local counties and other parties in Florida have in the past and continue to file lawsuits challenging the issuance of some of the permits we require. In fiscal 2009 environmental groups for the first time filed a lawsuit in federal court against the U.S. Army Corps of Engineers with respect to its issuance of a federal wetlands permit and similar lawsuits could be brought in the future. A denial of, or delay in issuing, these permits or the issuance of permits with cost-prohibitive conditions could prevent us from mining at these properties and thereby have a material adverse effect on our business, financial condition or results of operations.

Even so, how should the company – and its business partners – respond to such a risk?  And did business partners understand, assess and plan for such a contingency?  In many discussions we have had with clients about potential shut downs, it is common for companies to plan production volume shifts across other operating locations to make up for the lost volume and continue operating.  In Mosaic’s case, however, the article states:

Although Mosaic has four other mines in Florida, their output would not offset the impact of a shutdown at South Fort Meade, the company said.

Even where a company has the physical capacity at other locations to make up for lost production at one plant, environmental restrictions may not allow timely production increases at others.  Wastewater and air permits typically contain conditions limiting production.  These limits can take various forms:

• Direct limits.  For example, plant operating hours or volume; emissions limits for production equipment or material use; wastewater flow or contaminant concentration limits.
• Indirect restrictions.  For example, fuel use or emissions limits on supporting equipment such as generators or boilers; wastewater treatment capacity/retention time for adequate treatment.

Suppliers, contractors and vendors may attempt to recover losses from Mosaic through the contractual obligations in place between the parties.  However, in this case, Mosaic has notified at least some of their business partners that this is a “force majeure” event – an extraordinary circumstance beyond their control – which releases Mosiac from contractual obligations.

Has your company evaluated/assessed the myriad business continuity risks associated with environmental matters in your supply chain?  And what contingency plans do you have in place to protect yourself?

Elm Completes Field Trial of iPad in EHS Audit

Elm has completed its initial field trail of the iPad for EHS auditing.

Lawrence Heim of Elm’s Georgia office:

In our week-long test of the iPad in an actual client audit setting, we used many of the features available in our selected data collection application.  There were other relevant features that we did not use this time, but expect to in the future.  To sum it up, the iPad and our selected application performed flawlessly.

• Data capture – over 50 pages of handwritten notes in this case – was efficient and error-free.
• We were able to create charts, tables and diagrams, as well as use a “highlighter pen” feature.
• The user-defined data tagging function worked extremely well to quickly identify matters needing further information or clarification.  That feature also allowed quick, easy access to – and certainty in locating – findings in the notes.  Data tags clearly indicated finding summary information for further convenience.
• Exporting the notes was rapid and seamless.  The resulting file can be viewed/emailed to the client in PDF form as well as other formats if needed.

I believe that our use of the iPad created a time efficiency of between 15% – 20% on this particular field trial.  I anticipate that we will see even greater savings as we become more experienced in using the available features the device and app offer.  Any company seriously seeking ways to improve on-site audit efficiency and reducing errors/omissions should evaluate the iPad.

As a result of this successful trial, Elm will be adopting iPad use more broadly across the company before the end of 2010.

If you are interested in having us demonstrate the iPad’s power in an upcoming EHS audit at one of your sites, please contact us.