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PARTNERSHIP SEEKS TO LINK PROFITS, POLLUTION PREVENTION

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Pilot projects launched by the Merit Partnership for Pollution Prevention, a cooperative venture of public and private sectors, ultimately could result in significant economic benefits for businesses beyond insurance premium savings.

The purpose of Merit, launched by the U.S. Environmental Protection Agency in San Francisco in 1993, is to develop and promote pollution prevention practices and technologies that protect the environment as well as contribute to economic growth.

One of the key elements involved is a market-oriented, voluntary approach to environmental cleanup known as ISO 14000, which to date has been more widely accepted in Europe than in the United States. ISO 14000 is a series of environmental standards issued by the Geneva-based International Standards Organization (BI, Nov. 11, 1996).

The core of ISO 14000 is section 14001, which sets the standard for environmental management systems. These systems concern a company's management structure and how it addresses the impact of the company's products and services on the environment. Under section 14001, companies can receive certification as complying with the ISO standards.

The Merit Partnership programs include its EMS-Template project, which involves tailoring an existing EMS to the ISO 14001 standard at Los Angeles-based Northrop Grumman Corp.'s small 775-employee Hawthorne, Calif., electronics plant. The template developed at Northrop Grumman is expected to be implemented eventually at smaller defense manufacturing facilities and small businesses to determine whether this approach can help small businesses come into full regulatory compliance.

In addition, Merit's financial incentives projects are intended to explore whether companies can report various financial benefits as a result of having an EMS in place.

The common denominator of all Merit's programs is to find pollution prevention practices and techniques that not only are good for the environment but also make "good economic sense" in the real world, said Bonnie Barkett, Merit's project manager.

As part of this effort, "what we are doing is measuring and trying to develop projects that will help us understand better how environmental management systems work."

She cautioned, however: "One of the sets of guidelines we're using is the ISO standard for environmental management systems, but we're not in the business of promoting the ISO standard. We are trying to determine what the environmental and economic impacts of it may be."

One major focus is Merit's financial incentives project. The original intention was for this project to focus on insurance, said Donna Herrmann Sandidge, managing director of consultant Nashville, Tenn.-based Sedgwick Environmental Services, which is working closely with an American International Group Inc. unit, AIG Environmental.

Ironically, the soft insurance market presented a problem. "As we actually got into it, due to the fact the market for environmental coverages is so competitive right now, there was some reticence," because the soft market could make it difficult to pin down how much of the credit for lower premiums could be attributed to a company's efforts to become ISO-certified.

As a result, said Ms. Sandidge, those involved in the pilot project decided to look at an EMS' overall financial impact, taking a "holistic approach," and examining the issue in its totality rather than just the insurance portion of it.

For instance, if an EMS prompts a company to use a less hazardous solvent with lower disposal costs, the savings there "could be a significant number to enhance the bottom line," said Ms. Sandidge.

The problem remains, though, that when looking at financial incentives, there are many numbers to calculate, and it is hard to say whether a cost reduction is because of a situation an EMS has improved or if there are "other things going on," Ms. Sandidge said.

Pilot project planners decided that the best approach may be to study specific financial performance indicators, Ms. Sandidge said. These are being developed right now, said Ms. Sandidge, who noted the project is now talking with a few companies about participating in a demonstration project.

Once a company is selected, said Ms. Sandidge, it probably will take 18 to 20 months to implement an EMS at that particular company and "to get a true read" of its impact. "You need at least 18 months to get into a place and see what's happening in the whole system, the whole process," she said.

With regard to the Northrop Grumman project, Ms. Barkett said that the Merit Partnership always has worked closely with the company, and "this particular facility in north L.A. was already pretty far along the way to having a pretty high-functioning EMS and being in conformance with the ISO standard."

Although the facility is slated to be closed at the end of this year, Merit decided to see if a template based on what had been done there could be created and tested at other facilities that were perhaps less advanced in environmental management or that may have regulatory compliance issues that must be resolved.

At this point, said Ms. Barkett, the Merit Partnership is in the final stages of pulling this template together. "Over the next several months to a year, we will be looking for companies that would be appropriate places to pilot that template," she said.

"We want to test it out in various companies that may have some compliance issues and see whether we can figure out if environmental management systems can have a measurable effect on improving their compliance," she said.

Some observers say one problem with pinpointing the insurance benefits of environmental management systems is obtaining the insurance to begin with.

David J. Dybdahl, managing director of Environmental Risk Management Services, a Nashville, Tenn.-based division of Willis Corroon Group P.L.C., said the ISO 14000 environmental management system should create a "self-improving environmental management program."

But, "it is difficult to objectively and verifiably quantify the hard-dollar benefits of these programs. You do *it all, and so what?

"One place they could receive some benefit is in insurance premium credits," but businesses have been frustrated because the insurance policies they purchase often exclude environmental coverages, said Mr. Dybdahl.

Commenting on efforts to relate insurance premiums to environmental management systems, William McElroy, assistant vp for Zurich-American Insurance Group's Zurich-American Specialties division in New York, said: "I think the market is competitive. I also think that anytime you're trying to measure the impact of a specific development in the marketplace, you have to be able to benchmark against where you were before that development. The ability to benchmark environmental coverage price, etc., historically is not very sound because the market hasn't been very broad and the segment that actually buys environmental coverage in the environmental area has been quite narrow. It's a difficult problem. What impact does this even have if you don't have a real good way of quantifying where you were before?"

One advantage of environmental management systems is that they ultimately could improve the environmental insurance market, he said. "To the extent (environmental management systems) help our underwriting people and our customers better quantify long-term environmental risk, we think that will enhance the marketplace for environmental insurance by making coverage available, making price more risk-sensitive, etc.," he said. "Whether any specific element of that accomplishes that objective is not at this point very clear."

Kurt E. Sweetland, vp at consultant Environmental Science & Engineering Inc. in Peoria, Ill., said one problem with the insurance marketplace is "a lot of the environmental activities are really excluded by many policies. I'm not sure it has much bearing one way or the other on that." However, where there is a specific environmental coverage, "then of course, anything you do to manage your risk up front should pay dividends."

But, he said: "Any efforts that provide a proactive approach tend to pay benefits. With proactive environmental management, whether it's pollution prevention or proactive voluntary cleanups, it tends to allow the participant to really control more of their own efforts and more of their own destiny, so it really fits into more of a true risk management perspective.

"The whole environmental perspective is changing to one of voluntary approaches. . .and what is happening from a regulatory standpoint is there is more and more of a drive to have as much of it voluntary as possible.

"More and more, the cost and time frames to develop regulations are so intense that if agencies can get the private sector to develop those for them, they'll be better off."

An EMS can help lower premiums, according to another observer. When a company, through its EMS, has tight control over the environmental impact of its activities, "the insurance premiums will reflect that," said Margaret Takaki, an environmental management consultant who operates Business & the Environment in Phoenix.

Where there is less control, or the risks have not been identified, "the insurance coverage is going to be high because the risk is so high," said Ms. Takaki. From the information obtained from an EMS, the risk assessment process "really becomes more refined, much more so than it used to be because of activities going on within the EMS."

It also could turn out that at least hypothetically, one of the results of introducing an EMS is some protection from lawsuits, said Sedgwick's Ms. Sandidge.

"We believe that it will make (businesses) less of a target for litigation because they're being more up front and open with the communities and the customers that they serve" as well as helping the environment, said Ms. Sandidge.