March/April 2009
Environmental, health, and safety audits aren't just for real estate deals. They offer powerful compliance, marketing, operational, competitive, and image benefits as well, recyclers have learned.
By Kim Fernandez
In the past, scrap recycling companies conducted environmental site assessments primarily when they planned to buy or sell a property. Such reviews—commonly called Phase I or Level I environmental site assessments—identify potential or existing environmental issues on site or off-site issues that have the potential to affect the property. Buyers frequently conduct them to determine the potential environmental liabilities associated with the transaction, to support the negotiation process, and to satisfy the "all appropriate inquiry" requirement for an innocent purchaser defense under Superfund. Financial institutions also require such assessments as a precondition to financing a real estate transaction.
Like many traditions, however, this one has changed over time. Though recyclers still commission Phase I ESAs for real estate reasons, many now use a more comprehensive assessment of their business—an environmental, health, and safety compliance audit—for other purposes. They use such audits as a yardstick to determine their regulatory compliance status, as a preventive measure to stave off future compliance problems, as a management strategy to achieve continuous improvement in their EHS efforts, as a way to improve their corporate image, and as a way to establish their operational credentials and enhance their competitive position. In sum, EHS audits are a handy and versatile tool recyclers can use to gain a variety of advantages.
Not all recyclers recognize the value of such assessments and audits, however. Some refuse to conduct a Phase I ESA because they believe—mistakenly—that they are not liable for environmental damage that a previous owner caused or for unknown contamination on their property. Such misconceptions only set them up for problems down the road. Many believe that the process of completing detailed, comprehensive EHS audits is too expensive or too time consuming. The truth, environmental consultants say, is that audits yield many benefits, and they do not have to be a financial or time drain. In most cases, they assert, the benefits greatly outweigh the costs. Here's a basic review of Phase I ESAs and EHS audits, with a look at how they work and why to do them.
| EPA Policy Change Helps New Property Owners
The U.S. Environmental Protection Agency created its audit policy—"Incentives for Self-Policing: Discovery, Disclosure, Correction, and Prevention of Violations"—to encourage companies to self-audit their facilities, promptly disclose and correct any violations they discover, and take steps to prevent future violations. As an incentive, the agency offers reduced penalties to companies that meet the audit policy requirements. In August 2008, the agency issued a new interim approach for applying its audit policy to new owners of regulated facilities. The interim approach provides additional incentives for new owners to participate in the self-audit program, offering the possibility of additional penalty reductions for disclosing an even greater range of violations. Key elements of EPA's interim approach include a definition of new owner under the audit policy and a review of the duration of new owner status, the penalty calculation for new owners, and the application of normal audit policy conditions to such owners. Many industry and environmental groups applauded this change. By giving recent property purchasers more time and incentives to remediate problems without facing fines, supporters said, the new policy encourages new owners to perform audits on lands they have purchased, ultimately helping to clean up more properties. The new policy also has its critics. Some claim it lacks strong assurances for the resolution of potential state liability for disclosed noncompliance. That situation, they say, will discourage new property owners from conducting audits and yield inconsistencies in how cases are handled from state to state. |
Understanding the Process
A Phase I ESA is typically the first step in the environmental due diligence process associated with a transfer of property. Performed to identify environmental conditions that could have an adverse effect on the subject property, these basic assessments do not include the collection of physical samples—of soil, air, groundwater, and/or building materials—and do not involve any laboratory analyses. Nor do Phase I ESAs performed in accordance with ASTM Standard E1527-05 include an assessment of the property's regulatory compliance.
In contrast with a Phase I ESA, which takes a historical look at the property, an EHS compliance audit focuses on the operations. In these audits, the consultant will "identify those regulations that are, in fact, applicable to the facility and then assess the organization's compliance with those regulatory requirements," says Reeva Schiffman Kymer of First Environment (Boonton, N.J.), an environmental consulting and engineering firm. Put another way, a compliance audit "will help determine if a business has the proper permits, satisfies permit conditions, and follows procedures to operate in compliance with local, state, and federal rules and regulations," according to Mark Panian of Wenck Associates (Woodbury, Minn.), an engineering, environmental, and consulting services firm. An EHS audit also can require a more detailed study of the property, including lab work, depending on the type of audit.
Unlike Phase I ESAs, which all have the same basic objective, each EHS audit varies based on the property owner's objectives and the type of operation being audited. The auditor must assess that information and ask many questions prior to starting the audit, such as, why is the company conducting the audit? Does it want to sell the property or business in question and ensure that everything is in order prior to the sale? Is it responding to a regulatory inspection or legal decision? Is it seeking specific information? Is the firm evaluating the applicability of EHS regulatory requirements to its operations? What is the scope of the audit?
Is it limited to a particular yard, only environmental issues (such as air, water, waste, and storage tanks), or even a single environmental issue, such as air emissions? Or is the scope broader, encompassing multiple yards in different jurisdictions, multiple environmental impacts, and EHS issues?
Before starting the EHS audit, the consultant will want assurances that "the client is prepared to allocate resources and time to correct anything found during the audit," Panian says. "If you put your head in the sand after an audit, it can create additional regulatory and legal concerns. We tell clients, 'We're probably going to find a few problems. Are you prepared to address them in a reasonable time frame?'"
Larry Berndt, also with Wenck Associates, often advises his clients to consult an environmental attorney up front so that everyone understands his or her obligations regarding the audit findings. On a related note, the client and consultant should decide the format and scope of the final audit report in advance. For example, scrap recyclers might want the report to include suggestions for how to address any problems the audit uncovers.
Then it's on to the audit, which typically begins with a meeting between the scrap company's staff and the environmental consultant to explain the process, answer questions, and ensure buy-in from all participants. "We want everyone to be aware of the process and know what's going on," Berndt says. Kymer notes that her company often will hold a kickoff conference call prior to the audit to introduce its auditors to the customer's staff and request certain documents. Document requests for Phase I ESAs might include site maps and copies of prior assessments, whereas requests for EHS compliance audits can include site maps and permits. "This helps the auditors prepare and frees up more of the on-site time to inspect the site and interview facility personnel," she says.
The consultant will review the facility's records, both on-site and those on file with various levels of government, as necessary. "During a Phase I ESA, consistent with ASTM standards, we file Freedom of Information Act requests with local, state, and federal agencies; search online databases; and retain a service to conduct a commercial database search," Kymer says. In Phase I ESAs, the auditor is looking for evidence of significant compliance problems and materials-handling and disposal issues, both on site and off site, that might have an adverse effect on the subject property. The review of historical operations is the most important, she says. Her firm traces the property's history as far back as possible. The goal during the Phase I assessment is to "get our hands around what activities have been conducted, over what period of time, by whom, and using what materials."
For EHS audits, auditors will review documents and records, including air permits, wastewater permits, stormwater permits, plans (such as stormwater pollution prevention plans and spill prevention control and countermeasure plans), monitoring records, training records, and operational procedures.
After reviewing a company's files, the consultant typically does a site tour: a visual inspection of the property for signs of regulatory noncompliance or environmental concerns, including problems that predate the current owner's operations. "During a Phase I assessment, the consultant will look for stains, disturbed ground, or signs that things could be lurking under the surface," says David Wagger, ReMA's director of environmental management. The EHS audit site tour, Kymer adds, focuses more on current operating practices: Has the company implemented stormwater best management practices? Do employees wear their personal protective equipment? Does the company manage its wastes in accordance with regulatory requirements?
Finally, the consultant conducts one-on-one interviews with yard employees. "We talk with employees who are responsible for implementing procedures," Panian says. "We want to assess their knowledge of their responsibilities, which can tell a lot about future risks for the company. We also want to know what kind of training they've had to do their job duties and whether they can communicate their responsibilities. If they can't, that indicates an opportunity for improvement to help minimize compliance risk." Long-term employees, in particular, can provide invaluable information about previous operations on a property, locations of equipment, materials used, and materials-handling, storage, and disposal practices, Kymer notes.
In most cases, consultants say, they need one to two days on site with staff and additional time to gather and review records. The time can vary, however, based on the size of the site, the type of operation, and the scope of the audit. The whole process, from the initial phone call to presenting a final report, takes about four to six weeks.
Reporting the Findings
The audit findings can be reported in different ways, from a simple oral report to an in-depth written document that spells out what the consultant found, why the discovered issues could be problems, and what options the operator has to correct the issues. Property sales transactions typically require in-depth written reports completed to a specific standard, such as ASTM.
The consultant's goal in the report is to "provide information to management so it can make risk-based decisions," Berndt says. "We might find 10 issues in an audit. All 10 issues need to be resolved, but eight of them could be low-risk items than can be addressed later. The two other items might be more significant, and those are the issues that management needs to resolve with priority."
An environmental attorney who understands a company's specific business or niche can help decipher the findings and determine their relevance based on local, state, and federal regulations. "There are some situations where you want an attorney involved," Panian says. "It can get a little hairy. Not only are there items that can be identified during an audit, but there might be regulatory notification obligations as part of that." Berndt agrees, pointing out that "you're on a legal track here. You don't want to get into a position of knowingly having something wrong and not reporting it. You have to be very careful."
In the case of a property or business sale, this also is the point where negotiations can get tense, as parties decide who's going to be responsible for what actions to close the deal. Fortunately, the parties usually work out such issues, Berndt says.
The Benefits of Regular Audits
Though some recyclers still take a "no news is good news" approach to their property, more and more of them now realize that EHS audits can be invaluable management tools. In some cases, a company even can gain regulatory advantages if it conducts audits voluntarily and regularly. "If your operations trigger EHS regulatory requirements, it's a best practice to conduct compliance audits on a regular basis," Kymer says. "It's good to check what you're doing against regulatory requirements, then identify and correct any findings. It's much more efficient to be proactive rather than reactive."
Some states, in fact, have a voluntary auditing program in which companies that conduct audits when there is no lawsuit and no sales transaction pending can avoid fines if they voluntarily do any required cleanup, ReMA's Wagger says. "You declare what you're going to do, and there's no penalty involved." Further, he points out, by addressing problems quickly, "you're protecting yourself from issues that might come up 10 years down the road."
Regular voluntary audits also can provide marketing advantages both in securing new customers and in selling a property or company. "If you've done an audit and you have all your ducks in a row, that can be a huge advantage if someone wants to purchase your facility or hire you for your services," Panian says.
In addition, more scrap companies are conducting regular audits as checkups that complement their other compliance efforts. In his experience, Panian says, companies with their own EHS managers might opt for an external audit every three to five years, while companies without on-site compliance staff might consider an annual review. The good news is that such audits are not huge investments: Depending on a property's size and scope, a Phase I ESA generally costs $2,000 to $7,000, consultants report. EHS audits typically cost $5,000 to $10,000.
EHS audits also provide a foundation on which recyclers can base their larger compliance efforts, including programs for continuous improvement. After identifying the regulations that apply to a specific facility and determining its compliance status, a recycler can implement an environmental, health, and safety management system—such as ReMA's Recycling Industry Operating Standard, which also encompasses quality issues—that sets forth a framework for managing regulatory requirements, among other items. "Implementing a system like RIOS will help scrap operators be proactive, commit to and achieve compliance with regulatory requirements, improve their environmental performance, and ultimately go beyond compliance," Kymer says.
Berndt concurs. The scrap industry's renewed desire to improve its public image—evident in ReMA's new image campaign—is a great reason for recyclers to assess their environmental efforts, he says. "This is an industry that has had a target on its back," he says. "ReMA's image campaign is going to help address that problem. We're seeing many businesses doing various components of audits, sometimes in response to getting into trouble. Our message continues to be, 'Do this on a proactive level and avoid the problems in the first place.'"
Kim Fernandez is a writer based in Bethesda, Md.
Publisher's note: For more information about ReMA's Recycling Industry Operating Standard, visit www.isri.org/rios or contact David Wagger, 202/662-8533.
Environmental, health, and safety audits aren't just for real estate deals. They offer powerful compliance, marketing, operational, competitive, and image benefits as well, recyclers have learned.