Environmental Risk Management: A Critical Part of Corporate Strategy

Abstract

Environmental risk management is becoming a critical component of corporate strategy. Until the 1960s, there was little concern with environmental risks on the part of businesses, governments or societies. An unrealistic and nao Eve attitude existed which considered that natural systems had an in®nite capacity to absorb the pollutants and wastes of industrial economies. Environmental risks and costs were externalized with internal risks and costs effectively at zero; thus there was no ®nancial incentive for environmental risk management systems to exist. Various events, such as Rachel Carson's book Silent Spring, smog levels in Los Angeles, Love Canal, and the burning Cuyuga and Rhine Rivers, began to gradually shift public opinion to the realization that environmental risks do indeed exist and require the attention of risk management systems. The ®rst level of environmental risk management was termed command and control and basically involved compliance with various regulations. Compliance responsibilities were typically handled by engineering departments with little involvement of risk managers. While environmental regulations were seen as being necessary to protect the environment, they were often felt by business to be excessive, inef®cient, and unreasonably expensive. Regulations were typically seen in a negative light as adding only costs and no bene®ts to a business. More recently, a newer, second-level approach for dealing with environmental risks has been developing. Under this approach environmental risk management is seen as an integral part of overall business and strategic management. Sustainable development and environmentally friendly systems and products are emphasized. It is proactive rather than reactive. The orientation is positive rather than negative. Environmental risk management systems are seen as adding value to products and services, creating a competitive advantage, improving community image, reducing costs, and increasing the bottom line. Recent texts like Natural Capitalism (Hawken, Lovins and Lovins, 1999) and The Sustainable Business Challenge (Williams, 1998) provide strategic direction and numerous corporate examples and models. These second-level systems are largely voluntary and motivated by the notion that this is the right way to go for both ethical and business reasons. European businesses and societies have been the most accepting of these second-level systems. Certainly not all businesses have voluntarily developed second-level, environmental risk management systems, particularly in