+1-631-475-0231 barrister@yannalaw.com

 

Home » About » Yannacone Publications » The Environmental Audit

The Environmental Audit

U.S. EPA and the many state equivaqlent agencies have adopted environmental audit policies or laws to encourage companies to review and disclose instances of non-compliance with federal and state envionmental regulations.

Shortly after the National Environmental Policy Act of 1970 was signed by President Nixon, the newly established Environmental Protection Agency (EPA) began to develop rules and regulations concerning the newly mandated Environmental Impact Statement. By 1972, a number of models for environmental impact statements had been proposed beginning with model presented to the federal court in the Cross-Florida Barge Canal litigation against the Army Corps of Engineers months before the National Environmental Policy Act was signed by Presiudent Nixon and some sophisticated tools for environmental impact assessment soon became available such as the Environmental Impact Matrix developed by Luna Leopold and the n-dimensional layer/overlay system pioneered by Ian McHarg.
The concept of the environmental audit was first presented to the business community in 1973 because of the immediate need to evaluate the risk of liability for the environmental effects of real estate activities which had recently become acute because the broad umbrella of liability insurance protection had been removed by the provisions of the now ubiquitous “environmental exclusion.”

Today, an environmental audit is a self-evaluation of current compliance with applicable environmental regulations typically performed by an outside environmental consultant or in larger businesses by company EHS personnel using advanced electronic compliance software.

Environmental Audit or Environmental Impact Statement?

The difference between a conventional environmental impact statement and an environmental audit is one of emphasis and objective.
The conventional environmental impact statement is an exercise in data collection and scientific research designed by natural scientists primarily for consideration by other natural scientists. The environmental audit is designed to meet the needs of management and the investor and establish underwriting criteria for the substantial self-insured risk of environmental damage from business activities and operations. You might say that the environmental impact statement is government or prosecution-oriented, while the environmental audit represents a first line of defense for the business organization.

While the preparation of conventional environmental impact statements is generally directed by scientists and engineers, the environmental audit must be commissioned and managed by the Company itself. To be useful, the environmental audit must contain a certain minimum amount of information generally involving description, identification and evaluation.

An environmental audit can be wide in scope (i.e. compliance with all applicable regulations) or it can review just one issue at a specific facility such as whether a particularindustrial  process requires a permit. Common areas of noncompliance identified in audits include:
• Failure to obtain permits or update expired permits;
• Failure to evaluate waste streams; and
• Failure to perform mandatory reporting

The environmental audit: Description

The basic element of the environmental audit is a description of the regional ecological system in which the of which the operations of the company take place or their effects can be perceived. This area includes considerably more than merely adjoining landowners. In many cases, such as activities taking place in or affecting watersheds of a major river or stream system, the regional ecological system may include parts of dozens of geopolitical units.

The regional ecological system is properly defined as the area in three dimensions for each of three systems: air, water and land where any effect from Company operations can be observed or measured. The extent of such effects represents the entire area of concern for the Company, real estate operator, because there is a risk of liability for damage occurring anywhere in that region which may be attributable, directly or indirectly, to Company operations.

The environmental audit: Identification

The environmental audit has to identify the effects of all the Company operations involved in order to fully and adequately describe the regional ecological system, and the initial description and identification phases of the environmental auditing process generally proceed contemporaneously, although not necessarily simultaneously.

While the descriptive phase of the environmental audit only required determination of the limits of the detectable effects from Company operations, the identification phase concentrates on consideration of the effects of these operations on natural resources and operative natural processes within the regional ecological system.

It is during this identification phase that first contact is usually made with the environmental science community, and it is here that Company executives, as well as members of the Board and substantial investors must begin to assemble the information that will be required to fully appreciate the risk of continued unmodified operations. It is at this time that Company counsel must begin to evaluate the evidence which may become available during litigation over the environmental effects of Company operations.

The environmental audit: Evaluation

The environmental audit concludes with evaluation of the environmental impact of each operation of the Company and an estimate of the potential liability exposure from each such environmental impact.

It should be apparent that this is why the description of the regional ecological system is so important, for this defines the geopolitical areas in which liability may arise.

There are many reasons why a Company should consider performing an environmental audit, among them:
Environmental Audit Policies and Immunity Laws

The states and federal government have laws and policies designed to encourage performing environmental audits. These policies and laws provide incentives as well as qualified privilege protecting communications related to the audit.

U.S. EPA has its own environmental audit policy which encourages environmental audits and self-disclosure of violations. To take advantage of these incentives, regulated entities must voluntarily discover, promptly disclose to EPA, expeditiously correct, and prevent recurrence of future environmental violations.

Each of the states which have passed environmental audit & immunity laws has different requirements with regard to self-disclosure and penalty forgiveness. However, in many cases State immunity laws provide very strong protections and incentives for self-disclose and to correct violations, often much better than under the U.S. EPA audit policy, which, for example, does not recognize privilege for an environmental audit unless the audit is performed in a state that has passed an environmental privilege law.

When a Company reviews compliance and consultants with legal counsel prior to making a determination whether to self-disclose any violations identified during the environmental audit, management must consider the fundamental exceptions to any privilege.
• Criminal activities are not entitled to privilege
• If there is a mandatory duty under existing environmental regulations to report a violation
• The audit cannot be performed under a claim of privilege after the company is aware it is the subject of a possible environmental enforcement action.

The Environmental Audit as an Element of the M&A Process

Most transactions rely upon certain common strategies to address the risk that a business being acquired may not be in compliance with environmental laws, rules, and regulations: being purchased may not be in compliance:

Representations and Warranties in the Purchase Agreement, however, while affording the buyer a right to indemnity, it does not protect the buyer from the regulators—the current owner is responsible for ensuring compliance.

An empty Data Room does not mean that there are no environmental issues; merely that there are no historical documents which might help identify compliance issues.

An ASTM 1527–13 Phase I Environmental Assessment is of no value because it only identifies past contamination, not whether a business or facility is in current compliance because evaluation of compliance is generally considered a non-scope item.

Only a material compliance evaluation can establish whether or not a business or facility is in compliance with the appropriate environmental and laws and regulations.

Risks of Noncompliance

Failure to comply with environmental laws and regulations at the federal and state level creates an immediate risk of exposure to the civil, and under certain circumstances criminal, penalties. Most environmental statutes impose penalties on a per day basis, therefore, the longer violations exist without an attempt to correct them, the larger the potential civil and criminal penalties.
Many of the laws and policies associated with privilege, immunity & self disclosure have unique and complicated requirements, Therefore, it is important to determine a strategy before initiating an environmental audit.