With continuing economic uncertainty and the Securities & Exchange Commission’s (SEC’s) recent proposed rules on greenhouse gas (GHG) emissions reporting, organizations should be taking a closer look at their environmental reserves to help free up capital and drive firm-wide sustainability-focused investments.
An often-forgotten asset within planning initiatives, environmental reserves refer to the amount of capital a company has set aside and can access to address potential liabilities related to environmental contamination or regulatory requirements. Traditionally, most large corporations have focused their internal environmental reserve evaluations on their largest remediation (e.g., Superfund) sites or long-term maintenance type environmental issues without making accurate adjustments as those projects progress through their lifecycle. As a result, reserves can be over-estimated at sites where there was substantial, recent cleanup progress or where a strategy change can reduce future costs, unnecessarily tying up capital. By prioritizing and implementing a consistent evaluation of environmental reserves, organizations can potentially reduce balance sheet stress and ensure capital is being strategically deployed for their most important future activities.
Having access to capital that can be freely used is critical for any organization to grow and meet its objectives. This is now more important than ever in the environment, health and safety (EHS) and sustainability arenas with companies recognizing that 2030 GHG reduction targets are fast approaching and won’t be achieved without a significant investment of time and money. This urgency has been compounded by the “great resignation” and the challenges many organizations currently face to staff their most critical environmental programs. Over-reserving for other environmental issues where it may not be needed increases the cost to access capital on more critical programs and may delay implementation of EHS and Sustainability initiatives causing irreparable harm to an organization’s brand and reputation.
In today’s dynamic business climate, a framework to put in place real-time reserves management can greatly improve an organization’s EHS, ESG (environmental, social and governance) and sustainability programs. Historically, reviews of environmental reserves are completed annually but little detailed examination is done – many organizations simply note what was held the year prior and carry that amount over. In many cases, this is a manual “paper” exercise that does not take advantage of the digital tools that can improve the efficiency and accuracy of the exercise through analytical or even predictive modeling. By reviewing reserves quarterly using more advanced processes, organizations can gain a better understanding of their risks to identify areas where they may be most vulnerable or where they can free up cash for other initiatives.
When looking at current and future environmental liabilities, organizations need to prioritize them by risk with the following questions:
What are the current – and probable future – environmental projects that should be considered in reserves?
What is the significance and risk involved for each one?
What reserves estimates were made and how do they compare to how much is currently held and how much is really needed?
Has anything changed significantly (e.g., new regulations, planned facility expansions or closures, merger and acquisition activity, etc.)?
How much has already been spent therefore reducing the overall risk and amount required to remediate future issues?
What new alternative processes (digital tools, modeling, technical innovations, etc.) are available to track and reduce the risks (and costs) identified?
Organizations should give each project a baseline risk valuation and then begin tackling them individually — if a review results in a reserves reduction or addition, there will be an audit trail to showcase the numbers and legitimize the findings. Following prioritization, the higher-risk projects should be given a more detailed risk valuation to identify opportunities for improvements and to make sure the strategic path identified for each site aligns with corporate goals and risk tolerance philosophy. This is a critical step in the overall process as many companies find that a strategy originally established years ago no longer is optimized for present-day technological advances, the current economic climate, or change in business strategy/direction following an ownership or leadership change.
Ultimately, by implementing a more formal environmental reserves management process, organizations can gain a much greater understanding of what’s working and what’s not in their overall environmental program strategy. The firms that invest the time and resources today for a full re-evaluation will be better positioned to build a consistent framework that will help meet long-term EHS and sustainability goals with less organizational risk in the future.