Moving to Environmental Management

For some years already, one can detect a developing global trend for demand, by the consumer, by industrial and other corporations, and by financial institutions, such as banks, investment banks, and insurance companies, for educated management in the environmental protection area.

This trend can be related to two main catalysers: the development of the consumer culture and the sophistication and penetration of issues pertaining to environmental protection at world agenda’s center stage.

In Israel, consumer demand for proper management in environmental areas is not yet widespread. A large gap exists between the Israeli consumer and his European and American counterpart. Nevertheless, as in many other areas, this gap is expected to narrow at a very fast in the coming years.

‘Culture of compliance’, ‘corporate governance’, ‘corporate responsibility’ or ‘self compliance’, all are expressions which describe the contemporary managerial behavioral pattern of corporate entities of the 21st century.

As regulators in countries of the modern world develop an understanding that, unfortunately, citizens do not always comply with the law, and that an enforcement system, with various degrees of efficiency, is not always sufficient, a culture of educated management and preventive behavior started to develop among those subjected to the law.

Environmental management, or the management of environmental hazards, is part of such broader outlook. It is in fact a self compliance mechanism for purposes of increasing corporate compliance with the law, and protection of corporate officers.

With regard to issues related to the environment, one can detect, in the western world, a clear evolution from the dissuasive approach of restraint, expressed by putting criminal liability (corporate and personal liability) as well as more severe sanctions, to an approach encouraging a combination of traditional means of enforcement and tools encouraging self compliance. In accordance with the multidisciplinary trend described above, the feeling existed that the repressive approach, also with regard to environmental protection subjects, when applied exclusively, does not provide a satisfactory solution for dealing with environmental hazards and preservation of the environment.

Self enforcement and management of environmental hazards are in fact an ensemble of educated actions, and the more they are applied, the lesser the possibility that the occurrence of environmental hazards caused by corporations might result in civil, criminal or administrative liability. By means of prior examination, and by setting forth internal practices and creating organized mechanisms of documentation and reporting, it is possible to gain a lot of knowledge which would not have been revealed otherwise, and in such manner it is possible to localize beforehand problems and malfunctioning, and repair them prior to the occurrence of the environmental hazard.

Self-enforcement and management of environmental hazards mean, inter alia, the following: the execution of environmental due diligence in the course of merger and acquisition transactions, construction of infrastructure, financing of projects, investments, underwriting insurance, etc.; the integration of contractual protection in the company’s comprehensive contractual framework; the undertaking of environmental insurance; compulsory as well as voluntary reporting to the authorities, as well as adapting the organs of the company to environmental management.

The Duty To Report
Increased transparency, broadening of the duty to report to the public and institutionalization of a dialogue with the public, are inseparable parts of educated management of environmental hazards. All those, in fact, create a new level of service to the public of consumers and to the public at large in the area of environmental protection.

The public companies’ duty to report with regard to subjects related to the environment did in fact always exist pursuant to the Securities Law, 5728 – 1968, and the regulations made according to such law. It exists in the framework of the duty to report about material issues, however, issues relating to the environment were not considered, as usual, material, according to the Israeli managerial approach.

In the year 2004, as a result of the paper by the committee headed by Prof. Amir Barnea, which examined the requirements of the law regarding the extent of the duty to report and their de facto application by corporation, the securities regulations inserted explicit instructions regarding reporting of matters relating to the environment. The instructions set forth the duty to report with regard to material consequences the environment might have on the investments of a company, its profits and its competitiveness. In addition, a company is required to report about expected material costs and investments.

Such duty to report benefits, first and foremost, the public, of course, since it increases transparency, and transparency also benefits the companies who report, by lessening the risk that their investors may initiate legal procedures against them for reason of concealing information or because of failed management.

The duty to report environmental issues is also set forth in Freedom of Information Law, 5758 – 1998. As an exception to the instruction regarding information not to be provided or information which is not an obligation to be provided for reason of trade secret, it is set forth that there is a duty to provide information regarding substances discharged in the environment, and to provide the results of environmental monitoring tests made in public. An amendment to the law, made in 2005, added a section dealing with the manner in which a public authority shall provide information regarding environmental issues.

The Regulator Needs to Give Incentives
Alongside the mandatory duty to report, there also exists today a growing trend in the world of voluntary reporting in matters relating to environmental conduct (next to reporting of social issues), amidst the industry as well as amidst financial and public institutions. This trend in fact stresses the fact that an increasing number of companies recognize the importance of environmental and social responsibility by a company, as a tool for enabling a dialogue with the public by increasing transparency. This approach is presently a part of the managerial strategy of leading companies in the world, and is also considered a business and economic stimulus.

A leading international initiative in that regard is the Global Reporting Initiative (GRI), an international organization which operates as the executive branch of the Agency for the Protection of the Environment of the U.N. (UNEP) which is active in divulging and instilling the practice of voluntary reporting among companies. During the year 2006, the “third generation” of the GRI guidelines were launched, and very recently, those guidelines have been translated into Hebrew.

Increased transparency, the broadening of duty to report to the pubic and the institutionalization of mechanisms of public dialogue, are, as previously mentioned, welcome results of a built-in system of management of environmental hazards. Since, as described above, the adoption of a culture of risk management is part of a global trend which also increases in Israel, it is already at present possible to find companies which take such actions in the area of environmental protection. Nevertheless, only a small number of companies act in such manner. In order for this practice to become more prevalent, it is essential to receive incentives by the Israeli regulator, i.e. the Ministry Environmental Protection.

Senior members of the Ministry appealed to companies, in recent months, to broaden their reporting activities and to take voluntary actions to increase transparency. Such appeal has been welcomed by all, however, in order to implement it de facto, the Ministry of Environmental Protection, similar to its European and American counterparts, have to publicly initiate and proclaim a cooperation with the companies for the furtherance of activities relating to management of hazardous material, reporting and institutionalization of a public dialogue.

The expectation by senior members of the Ministry of Environmental Protection, that a significant number of companies will take a number of voluntary actions, only because they were requested to do so by the regulator, and without any obligation on its part with regard to the process, and with regard to leading such process, the recognition of its importance and the creation of incentive mechanisms for companies who participated in such activities, might be revealed as expectations made in vain.

Although such process is a national necessity, and even though there is a sense that the parties recognize that the time is ripe to realize such process, it is nevertheless the Ministry of Environmental Protection who has to lead such process. The regulator has many diverse ways to provide incentives: from economic, fiscal and commercial incentives, to the alleviation of criminal enforcement and the use of civil penalties, which enables some flexibility in determining the level of sanctions, while distinguishing between companies who do possess a mechanism of environmental management and others who lack any preventive mechanism.

In the United States, for instance, it is possible to find “institutionalized” recognition by the Environmental Protection Agency and the American Ministry of Justice regarding the importance of the existence within a company of an environmental hazards management mechanism. In 2002, both governmental bodies declared that they are considering to reduce fines, or consider refraining from filing an indictment against a company which is under investigation for alleged breach of the provisions of the environmental law, if such company proves that it applies effective environmental management, and that the event which triggered the investigation is a single isolated even.

Taking into account preventive – managerial actions taken by a company in the Unites States is also made possible by the existing legislative framework which enable legal proceedings relating to breaches of environmental laws to take place on the “criminal – civil” procedure level, which intertwines criminal and civil law principles. This creates the possibility to adjust the severity of the penalty to the type of breach and to its context, and to take into account the existence or non existence of a system of environmental management in determining the penalty, by using civil fines.

The regulator, the Public and the Industry
In the Unites States, it is possible to find a number of policy papers which provide incentives by the Environmental Protection Agency and by the American Ministry of Justice, for the methodological instillation of environmental management by companies.

In addition, there exist many examples in the United States of cooperation between the regulator, the public and the industry. The most striking example is the National Environmental Performance Track Program, a voluntary program lead by the American Environmental Protection Agency, in the framework of which companies undertake to improve their environmental performances beyond the requirements set forth by the law, whereas the regulator, on its part, undertakes to provide the tools, the knowledge and the necessary guidance needed for the execution of the companies’ obligations. In the framework of this and similar programs the American regulator provides incentives for the emphasis on environmental managerial practices, and provides assistance to companies who wish to improve their environmental management.

Management of environmental hazards by corporations and financial institutions, a process which is made in transparency, and the creation of a fertile dialogue with the public, are in fact, today, the necessity of the hour, and as a result, they create an improved level of service to the consumers, to the clients, to the investors, to the insured and to the public at large.