[Ed. note: Today is last in our 3-part guest blog on how EPA’s revised National Enforcement Compliance Initiatives (NECIs) relate to company ESG initiatives. Part 1 was published 2 days ago and Part 2 yesterday. The articles were written by Doug Parker and Mary Ann Grena Manley. Doug is the Co-Founder and CEO of Ecolumix. Mary Ann is the Founder and President of 15E Communications.]
How the NECIs Impact ESG Performance and Disclosures
The credibility of a company’s reputation and the ESG data they rely on, use and report are foundational. In one company’s recent sustainability report, they made following statement:
“Our global Environment, Occupational Health and Safety Philosophy, endorsed by our President & CEO drives us towards continuous environment health and safety (EH&S) improvement, as measured by our leading environmental and safety indicators and implemented through our EH&S management approach. We are committed to complying with environmental laws and regulations and to protecting natural resources.”
A closer look at this company found it had a single facility with over 300 water discharge violations and was in significant non-compliance in its water operations for 19 of the last 20 quarters. This company squarely has a target on its back for violating one of the agency’s NECIs, putting it at significant risk for reputational damage, agency enforcement action and third party (NGO) lawsuits. It also undermines their ESG strategy and related performance measures, and calls into question public statements about the company’s sustainability initiatives. At the very least, it’s not a good look: at the worst, it sets the company up for lawsuits.
As legal mandates for ESG disclosures increase, so do the risks and the importance of accurate reporting and using validated environmental data. It is critical to remember that legal mandates are not limited to national laws and regulations, but also include contractual requirements between suppliers/vendors and their customers. Even further, ESG disclosures can impact loan covenants, ESG ratings and commitments to investors. Certainly not last, as we highlighted in the first two parts of this series, EPA’s emphasis on environmental justice contexts of environmental compliance cast this risk in a far different light.
[Ed note: It is important to keep in mind that any ESG messaging – such as tweets – can be fodder for regulatory enforcement as we wrote last year. Doug and Mary Ann’s comments should be viewed with that in mind.]
How Companies Can Incorporate the NECIs into an ESG Strategy
Although the NECIs are compliance-focused, they should not be addressed on a singular basis. Environmental compliance remains an important element of ESG – and arguably one of the longest-standing. Here are a few tips on how to best ensure compliance – NECI and otherwise – doesn’t get lost in what may feel like higher priority ESG activities:
- Understand how the NECIs may impact your company, suppliers, and investments. This requires deep understanding of company operations, manufacturing processes, products/raw materials purchased from suppliers and your own relationships with your customer – and the regulatory agencies. Investors and ESG ratings organizations may also express concern about your company’s compliance status – although they may not voice such concerns directly.
- Pressure test operations. You need to closely assess operations to see where they are subject to the NECIs, and if the company you’re evaluating (whether your own or someone else’s) is meeting its legal EHS obligations as a minimum. If you are a company in non-compliance with environmental regulations, particularly those involving a NECI, engage with your EHS leadership team to fix problems expeditiously. The government is much more accommodating to organizations that take on deficiencies, cooperate with regulators, and address non-compliance.
- Consider investors/raters. Investors face something of a different situation. ESG ratings may or may not adequately consider EHS compliance performance, so additional due diligence may be necessary. In recent years, new information technology services have made this easier, faster and cost effective – at least in the US. Investors and ESG ratings looking at a company that is not meeting EHS compliance expectations may take the opportunity to lean in, ask why, and request a plan to address them.
- Keep the environmental justice context in mind. Much about environmental compliance management is old hat, meaning it sometimes doesn’t get the attention it deserves. However, the new NECIs look at environmental compliance through environmental justice and local community impact lenses, which changes the risk landscape – and potential liability. Given the current visibility ESG has in executive and board conversations, you may get more attention and action by highlighting environmental compliance in those ESG conversations.
- Ensure that your sustainability and EHS teams work together and communicate effectively. Laying out a rosy picture in a sustainability report that doesn’t align with environmental performance is one of the quickest ways to lose credibility and diminish the good work that is being done across an organization. Silos are good for storing commodities but not for managing risk. Effective communication between sustainability and EHS teams is essential to maintain credibility and ensure the organization’s sustainability efforts are accurately represented. As more regulators check ESG data consistency by comparing legally-mandated reports with voluntary ESG/sustainability reports, risks related to inconsistent reporting are increasingly significant.
Conclusion
The proposed new NECI plan changes the environmental compliance game by putting social impacts (i.e., environmental justice) front and center. Ultimately, what the government, business partners, stakeholders and general public think about a company’s sustainability performance will be informed to a large extent by its environmental record, compliance practices and how the company discloses that information. The first step is understanding the critical concerns of environmental regulators (e.g., the NECIs), the second is ensuring strict compliance with them, and the last is transparently communicating the company’s sustainability performance, highlighting its fundamental commitment to obeying environmental laws within the broader context of a well-considered ESG strategy.
