Risk Analysis and Environmental Management

The issue of environmental citizenship can be a complicated one for many reasons. Not the least of these is the fact that our knowledge of the environmental system and our understanding of the impact of our actions on it is an emerging science. As a result, it is sometimes difficult to know what the environmental impact of an organization's activities is. Risk assessment defines the nature of the risk and the estimated probability of its occurrence. Once the risk has been assessed, its value is estimated. There are a number of ways to perform this task, each with concomitant advantages and disadvantages. However, organizations are not on their own when attempting to manage environmental risk. ISO 14000, developed by the International Standards Organization, provides a structured program to both measure and manage environmental risks.

Systems Theory

One of the cornerstones of organizational behavior theory is systems theory, which assumes that the organization comprises multiple subsystems and that the functioning of each affects both the functioning of the others and the organization as a whole. However, it is not only the subsystems within the organization that are linked and affected by one another. The organization is also part of larger systems, including the supply chain, society as a whole, and even the environment in which it operates. Although the primary goal of an organization may be profitability, the organization also has a responsibility to all its stakeholders including society and the beings with whom it shares its habitat. To focus merely on profitability while ignoring greater issues is short-sighted at best and the local actions of an organization can have far reaching effects. An organization that is not viewed as a good environmental citizen can soon find itself awash in negative publicity and legally forced to clean up its act both literally and figuratively.

Environmental Citizenship

The issue of environmental citizenship can be a complicated one as is illustrated by the current contention over the reality of global warming and human contributions to it. There are successes, too, as illustrated by the recent removal of the bald eagle from the endangered species list. However, for every success story there are stories of problems, from the continuing destruction of the South American rainforest with it untold riches of natural resources, to the environmental impact of the Alaska pipeline, to the Exxon Valdez oil spill. Water, air, and land pollution can poison the environment and affect not only the local floral and fauna -- upsetting the balance in the local ecosystem -- but the human residents in the area, too. Environmental links to health problems such as heart disease, lung disease, and breast cancer have been scientifically demonstrated.

As humans have learned more about the potential links between some corporate activities and the environment, various agencies and concomitant regulations have been set in place. These agencies are concerned not only about the environment as a whole, but more particularly about the natural surroundings in which an organization operates. This includes air, water, land, natural resources, flora, fauna, human beings and the interaction between these elements. Organizations whose actions may affect the environment are typically required to develop environmental policies, plans of action or guiding principles regarding their environmental performance. Sometimes this is as simple as recycling materials used in the performance of day to day business. However, this may also require the development of complex environmental management systems responsible for the development, implementation, and maintenance of environmental policy. The environmental management system includes the organizational structure, strategic activities, responsibilities, practices, procedures, processes, and resources related to these activities. The environmental performance of the organization is based on the environmental policy of the organization and measured against its targets and objectives.

Understanding the Impact of Our Actions

However, our knowledge of the environmental system and our understanding of the impact of our actions on it is an emerging science. Sometimes it is difficult to know what the environmental impact (any positive or negative change to the organization's environment that result in part or in whole from the actions or inactions of an organization, including its activities, products, or services) of an organization is. As a result, an uneasy alliance often occurs between environmental concerns and corporate profitability. Various risks (both the quantifiable probabilities that a financial investment's actual return will be lower than expected as well as the quantifiable probabilities that the organization's actions will have environmental impact) need to be weighed against each other. Risk assessment is the process of determining the potential loss and probability of loss to the organization's objectives. Risk assessment is one step in risk management. Risk management is the process of analyzing the tasks and activities of the organization, planning ways to reduce the impact if the predicted normal course of events does not occur, and implementing reporting procedures so that projected problems are discovered earlier in the process rather than later.

Components to Environmental Risk Assessment

During risk assessment, the nature of the risk is defined and the probability of its occurrence is estimated. There are four components to environmental risk assessment: Hazard identification, dose-response estimation, exposure assessment, and risk characterization. The process of hazard identification comprises the collection, organization, and evaluation of the relevant biological and chemical information about the potential risk situation in order to determine whether or not the organization's actions are potentially hazardous to environmental or public health. The goal of this qualitative process is to determine whether or not the potential hazard reaches the level of risk that requires a full scale quantitative investigation. For example, if the collected data include evidence of cancer, genetic mutation, or childhood development problems, a more in-depth, quantitative investigation is warranted. The second component of risk analysis is dose-response estimation. This process quantifies how health is affected by different levels of exposure to the potential risk. This is a quantification of the effects of various exposure levels (dose) of the hazardous substance in terms of percentage of illnesses or deaths (response). Part of the dose-response estimation is the determination of threshold exposure. This is the level of exposure to the hazard below which only minimal health risks occur. The third aspect of risk assessment is exposure assessment, or the identification of the population with the greatest likelihood of exposure to the hazard, and at risk for negative impact. Finally, risk characterization summarizes the other three factors as a quantitative estimate of risk. It is this characterization that researchers use to determine threshold levels. For those hazards that are non-carcinogenic, threshold levels are bounded by the lowest observed effect level (i.e., the lowest exposure level at which negative effects of the hazard are observed) and the no observed effect level (i.e., the highest exposure level at which no effects are observed). This latter estimate is more conservative and, therefore, typically used as the threshold measure.

Determining the Value of Risk

Once a risk has been assessed, its value needs to be determined. Not all risks are equally pressing, however. For example, in most cases, it would be unsound practice to spend a large amount of money to eliminate a risk with low impact and low probability of occurring. In addition, no matter how one tries to quantify risk, the perception of risk will always be a subjective thing. Risk involves not only the probability of whether or not an event will occur (e.g., pollution of the river above a certain level will negatively impact the environment) but also the severity of consequences if the risk is incurred (e.g., the dandelions die around the river versus people living in the area sicken and die). Although it is tempting to say that we want to eliminate all risk to the environment, this is not humanly possible both psychologically and practically. For example, last month the state of Virginia enacted a law imposing stiff monetary penalties in addition to the fines already in place for in-state drivers found guilty of certain driving violations. The thought behind the penalties was that it would discourage unsafe driving practices as well as generate additional income needed by the state for highway improvement. However, the law is so controversial for a number of reasons that by the time this article is published, it is unlikely that the law will be in effect in its current state if at all. Although there is the possibility to reduce risks through this law, most Virginians do not believe that it will be either a reasoned or effective response.

Tradeoffs

Similarly, there are tradeoffs to be made for risks associated with environmental issues. We will never be willing to become a zero risk society. Many of the products that we gladly use or consume generate waste that is hazardous to humans and the environment. Concerns abound in some sectors over the possibility of industrial waste contaminating the aquifer or the presence of hazardous wastes in the local landfill. However, this does not mean that people are willing to forego new products or technologies because of the concomitant environmental risk. Some of these concerns stem from inadequate understanding of the safeguards in place, but some are realistic reflections on environmental risk management. For this reason, risk assessment and environmental management systems need to be put in place.

Restraints to Environmental Risk Management

In addition, although most organizations want to be good citizens, they also have to work under the realities of budget restraints and fiscal accountability to their various stakeholders. As a result, it is virtually impossible to eliminate all risks to all people. Further, different people put different value on risk reduction. Therefore, making tradeoffs between the costs and benefits of reducing risks is often a controversial process. Frequently, risk reduction requires putting a value on human health and life -- a perilous process indeed. In general, the value of risk reduction can be calculated as:

Value of risk reduction = Willingness to pay for risk reduction Change in risk

Methods for Measuring Economic Benefits of Risk Reduction

In general, there are two widely used approaches to measuring the economic benefits of reduced risk. In the human capital approach, values are attached to risk reductions based on the individual's earnings potential and future activities. Specifically, the value of risk reduction in this approach is based on the projected contributions to society by the individual as defined by his/her future earnings and consumption. Although using this type of metric has actuarial appeal, the ethical and moral implications are less clear. For example, this approach values a senior citizen less than a young adult and a stay-at-home mother less than her working husband. Although a simple, quantifiable approach, however, the human capital approach is less favored among economists than is the willingness-to-pay approach.

Willingness-to-pay Approach

In the willingness-to-pay approach, the value of risk reduction is based on the theory of welfare economics. In this approach, the theory is that risk reduction is valued if it leads to greater welfare. For example, if the production of a product contributes more to the welfare of humankind than does the condition without either the product or the hazard, then -- under this approach -- the risk is worthwhile. In the willingness-to-pay approach, the welfare change is defined as the most that the average person would be willing to pay in order to lower the risk or the minimum compensation s/he would be willing to accept for an increased risk. This metric is then used to estimate the implied value of health and life. Although this approach is far from perfect, most economists argue that it is better than the alternative.

Four Approaches for Determining Willingness to Pay for Risk Reduction

There are four approaches used to establish the willingness to pay to lower risk The wage-risk tradeoff approach is based on the hedonic price theory that posits that an individual's wage is based on a combination of factors including his/her skill, education, and occupation as well as the location, environment, and safety of the job. This theory explains the reason that more risky professions are often paid at a higher rate than less risky professions when other factors are held constant. Stated preferences approaches to risk reduction ask people directly (e.g., through an interview or survey) how much they would be willing to pay to reduce a risk. Although this makes some sense, this approach typically does not take into account the actual budgetary constraints of the individual. Therefore, in theory, the individual can cite a monetary value to risk reduction that s/he could not pay in actuality.

A newer approach to determining willingness to pay is the experimental auction approach. This is a simulation approach where real goods are sold to subjects in a laboratory setting. For example, this approach has been used to analyze people's willingness to pay for safer food. These experiments used real money and food. Subjects in the experiment were given numerous opportunities to participate in the auction market and were given full information about the safety of the food (i.e., probability and severity of disease resulting from consuming the food with the risk of Salmonella). The results of the study showed that the subjects consistently underestimated the risk of food-borne pathogens. In addition, people tended to place more weight on their prior perceptions about the dangers associated with the risk rather than on the information that they were given in the experiment. Another approach to risk valuation is averting behavior. This method estimates the willingness to pay based on what people actually pay in the real world. This characteristic can be estimated through data such as people's spending habits for items that increase safety (such as smoke detectors, medicine, bottled water, and water filters).

Applications

Although there are a number of environmental issues that face organizations in the early 21st century, one of the most pressing is the question of climate change. An increasing number of businesses are realizing that this is a pressing issue that needs to be managed immediately.

Organizations are not on their own when attempting to manage environmental risk, however. ISO 14000, developed by the International Standards Organization, provides a structured program to both measure and manage environmental risks. ISO 14000 standards have been developed for a number of issues in environmental management, including environmental auditing and internal reviews, development of environmental management systems, environmental site assessments, evaluation of environmental performance, and life cycle assessment. With the aid of these standards, businesses can develop comprehensive approaches to environmental risk management and demonstrate to stakeholders that they are consciously addressing environmental issues.

One of the companies that is applying ISO 14000 standards to their operations is Staples, the office supply superstore. Staples has developed a holistic approach to doing business and to being a responsible corporate citizen. One way in which this philosophy is demonstrated is through their commitment to the environment. Staples is not only dedicated to managing its own business in a sustainable manner but also to helping its customers to do the same. For example, Staples offers easy to use recycling programs for printer cartridges, cell phones, and various electronics. In addition, the company is working to reduce its dependence on outside energy sources, fossil fuel in particular. Working with the Connecticut clean Energy Fund and SunEdison, Staples has installed the biggest solar power mechanism in New England. This installation is part of Staples goal to reduce carbon emissions seven percent by the year 2010 ("The Staples soul, 2007).

Staples efforts can be grouped under several ISO 14000 categories. These include appreciating the environmental impact associated with their business, roles and responsibilities relating to these environmental impacts, the supporting training needed to improve environmental awareness and competence, the interaction of specific job duties with environmental concerns and the organization's goals and objectives, and how an audit program would support them in their efforts. Although Staples itself is not ISO 14000 certified, a number of its suppliers are. The team is working to manage environmental risks and be good corporate citizens ("The Staples soul, 2007).

Terms & Concepts

Dose-Response Estimation: A quantification of the effect of various exposure levels (dose) of a hazardous substance in terms of percentage of illnesses or deaths (response).

Environment: The natural surroundings in which an organization operates. The environment includes air, water, land, natural resources, flora, fauna, human beings and the interaction between these elements.

Environmental Impact: Any positive or negative change to the organization's environment that result in part or in whole from the actions or inactions of the organization, including its activities, products, or services.

Environmental Management System: The subsystem of the organization's management system that is responsible for the development, implementation, and maintenance of environmental policy. The environmental management system includes the organizational structure, strategic activities, responsibilities, practices, procedures, processes, and resources related to these activities.

Environmental Performance: The measurable results of the organization's environmental management system. Environmental performance is based on the environmental policy of the organization and measured against its targets and objectives.

Environmental Policy: The plan of action or guiding principle of an organization regarding its environmental performance.

Exposure Assessment: The identification of the population with the greatest likelihood of exposure to the hazard and at risk for negative impact.

Hazard Identification: The collection, organization, and evaluation of the relevant biological and chemical information about a potential risk situation to determine whether or not the organization's actions are potentially hazardous to environmental or public health.

Risk: Financially, risk is the quantifiable probability that a financial investment's actual return will be lower than expected. Higher risks mean both a greater probability of loss and a possibility of greater return on investment. Environmentally, risk is the quantifiable probability that the organization's actions or inactions will negatively impact the environment or result in hazard to humans and the environment.

Risk Assessment: The process of determining the potential negative consequences of a certain course of action. Risk may include failure to meet the organization's financial objectives as well as negatively impacting the environment. Risk assessment is one step in risk management.

Risk Management: The process of analyzing the tasks and activities of the organization, planning ways to reduce the impact if the predicted normal course of events does not occur, and implementing reporting procedures so that project problems are discovered earlier in the process rather than later. Risk management applies to economic and environmental risks.

Stakeholder: A person or group that can affect or be affected by a decision or action. In marketing, stakeholders may include the organization's employees, suppliers, distributors, and stockholders.

Supply Chain: A network of organizations involved in production, delivery, and sale of a product. The supply chain may include suppliers, manufacturers, storage facilities, transporters, and retailers. Each organization in the network provides a value-added activity to the product or service. The supply chain includes the flow of tangible goods and materials, funds, and information between the organizations in the network.

Systems Theory: A cornerstone of organizational behavior theory that assumes that the organization comprises multiple subsystems and that the functioning of each affects both the functioning of the others and the organization as a whole.

Threshold Level: Level of exposure to the hazard below which only minimal health risks occur.

Bibliography

Bae, H. (2012). Reducing environmental risks by information disclosure: evidence in residential lead paint disclosure rule. Journal of Policy Analysis & Management, 31(2), 404-431. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=76170458&site=ehost-live

Chen, P., Su, H., & Ma, H. (2013). Trace anthropogenic arsenic in Taiwan -- substance flow analysis as a tool for environmental risk management. Journal of Cleaner Production, 5313-21. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89295194&site=ehost-live

Fletcher, C. D. & Paleologos, E. K. (1999). Environmental risk and liability management and its influence on profitability. Environmental Quality Management, 8(4), 21-34. Retrieved July 11, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=2018961&site=ehost-live

Hanley, N., Shogren, J. F. & White, B. (2001). Environmental risk. In N. Hanley, J. F. Shogren, & B. White (Eds.), Introduction to Environmental Economics (pp. 94-119). New York: Oxford University Press. Retrieved July 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12054168&site=ehost-live

Muro, M., Hrudey, S. E., Jude, S., Heath, L., & Pollard, S. (2012). Making it real: what risk managers should know about community engagement. Journal of Environmental Assessment Policy & Management, 14(2), 1-21. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=79683413&site=ehost-live

The Staples soul -- a recipe for saying "That Was Easy" for the environment and ISO 14001. (2007). Business & the Environment with ISO 14000 Updates, 18(6), 1-4. Retrieved July 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=25582206&site=ehost-live

Virginia Department of Environmental Quality. (1996). ISO 14001 definitions (3.0). ISO 14001 Environmental Management System. Retrieved July 12, 2007, from http://www.deq.virginia.gov/ems/pdf/mod3.pdf

Suggested Reading

Beierle, T. C. (2002). The quality of stakeholder-based decisions. Risk Analysis: An International Journal, 22(4), 739-749. Retrieved July 11, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7203578&site=ehost-live

Corporate governance and climate change. (2006). Business & the Environment with ISO 14000 Updates, 17(7), 1-4. Retrieved July 14, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21831762&site=ehost-live

Cowell, S. J., Fairman, R. & Lofstedt, R. E. (2002). Use of risk assessment and life cycle assessment in decision making: A common policy research agenda. Risk Analysis: An International Journal, 22(5), 879-894. Retrieved July 11, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=7572019&site=ehost-live

Drew, C. H., Nyerges, T. L., & Leschine, T. M. (2004). Promoting transparency of long-term environmental decisions: The Hanford decision mapping system pilot project. Risk Analysis: An International Journal, 24(6), 1641-1664. Retrieved July 11, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=15456647&site=ehost-live

Hanley, N., Shogren, J. F. & White, B. (2001). Cost-benefit analysis and the environment. In N. Hanley, J. F. Shogren, & B. White (Eds.), Introduction to environmental economics (pp. 68-93). New York: Oxford University Press. Retrieved July 12, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=12054122&site=ehost-live