VideoWhile much hard science goes into the tidying up of a polluted corporate site, gauging the future costs of that job can involve skills that are a good deal softer.
Armed with varying and sometimes patented cleanup strategies, different environmental consultants can come in with cost estimates that vary by as much 500 percent on a given site, says David Dybdahl, president of American Risk Management Resources Network, a Chicago-based environmental insurance brokerage firm.
But the Sarbanes-Oxley Act, combined with pressure from environmentally minded shareholder activists, could place a much higher premium on precision in environmental reporting. "The stakes are higher under Sarbanes-Oxley," says John Nevius, an attorney who represents corporations for Anderson, Kill & Olick in New York. "The consequences if you get it wrong are greater."
Until recently, however, difficulties in predicting cleanup costs haven't mattered much to senior finance executives. That's because, under Securities and Exchange Commission rules and Financial Accounting Standards Board dictates, they've had the latitude to report the cheapest cost estimates. "There isn't much of a carrot associated with reporting," notes Dybdahl. "You increase your environmental reporting and you decrease earnings."
If there's not a carrot, perhaps Section 302 of Sarbanes-Oxley will provide a stick. Some say that Sarbox 302, which directs CFOs and their bosses to personally sign off on their companies' financials, could cause top executives to demand more scrupulous accounts of future costs from their environmental managers. Yet coming up with such estimates can often be a matter of hitting a very movable target. For example, in a recent review by Dybdahl of proposals by two consultants for a site with polluted groundwater, the cleanup cost had the potential to vary by as much as $40 million.
The first consultant suggested that the company take a conventional approach: pump the groundwater out of the soil, run it through treatment facilities, and continue the flushing-out process for 30 years. Estimated cost: $40 million.
The second consultant proposed bioremediation, an approach involving the use of bacteria, other microorganisms, or plants. The remedy would be to pump a common household item into the soil; that ingredient (which Dybdahl wouldn't reveal, since its use in bioremediation is proprietary to the consultant) would bond chemically with the pollutant in the groundwater and neutralize it.
If all went well, the cleanup would take just 10 years, and the cost would be a mere $20 million. If it didn't work, however, the tab could be as high as $60 million — $20 million for the failed bioremediation and $40 for the conventional pump-and-treat cleanup. Further, there could be more costs and other risks, since the bioremediation could turn the pollutant even more toxic than it had been.
In the end, the company chose bioremediation, largely because it might be faster. Since the situation on the site had become an issue in a local mayoral election, the owners felt it would be a good idea to present a plan to clean up the site as swiftly as possible, according to Dybdahl.
Indeed, the length of time to clean up a site is one of the biggest causes of variability in expense estimates. Besides changes in the political and regulatory climate, lengthy cleanups provide more time for pollutants to migrate offsite and cause damage in unexpected places. If a remediation lasts as long as 30 years, say experts, unexpected zigs and zags can crop up in a company's cost structure. That jibes badly with the short timeframes of quarterly and annual reports into which executives must cram their future pollution-liability estimates.
While the disconnect between environmental and financial reporting and the anticipated pressures for greater transparency spell possible woes for corporate polluters, however, they represent an opportunity for environmental insurers. Corporate managers — wary of signing off on inaccurately low estimates of their future pollution costs, the reasoning goes — will be moved to more fully acknowledge the risks of future pollution expense, and to insure for them.
Forms of Muzak
Buying coverage for the newly reported hazards could stave off a pretext for shareholder lawsuits, insurers and brokers argue. If a company reports a bigger pollution liability than in the past, and its share price subsequently plummets, investors might take directors and officers to court. The presence of environmental insurance could, theoretically, calm investor response to the added risk being reported.
What's more, since directors' and officers' liability policies typically don't cover lawsuits generated by environmental conditions, pollution insurance can help companies manage their D&O risk, contended Peter Gilbertson, director of marketing for AIG Environmental, widely thought to be the biggest carrier of the coverage in the market. (Other sellers of the insurance include XL Insurance, ACE Limited, Zurich North America, Arch Insurance Group, and Quanta Capital Holdings.) Gilbertson also asserted that covering the risk is already prompting some of the company's clients to report their liabilities in greater detail than "the vague, opaque, elevator music" that characterizes much current environmental reporting language in company 10-Ks.
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