What is risk? Risk is generally considered a probability of loss or a negative occurrence that is caused by external or internal vulnerabilities, and that may be avoided through preemptive action(s). Often, in the world of environmental matters, such risk can take the form of subsurface contamination, resulting in possible impairment of land value or exposure of building occupants or neighbors to contamination.
Environmental Risk Assessments (ERAs) are a key component to understanding how these potential risks affect investments, and more importantly, how to create management plans that prescribe future mitigating actions and minimize the chances of these risks being realized.
Because ERAs are based on scientific methodologies, they can seem like a burdensome process to take on. However, when the components of an ERA are boiled down to manageable steps, the underlying scientific principles make sure you as a risk manager are able to reach conclusions that let you determine how much risk you are willing to take, and how to manage the risks you decide you are comfortable with.
The US EPA’s definition of an Environmental Risk Assessment is a tool used to “characterize the nature and magnitude of health risks to humans (e.g., residents, workers, recreational visitors) and ecological receptors (e.g., birds, fish, wildlife) from chemical contaminants and other stressors that may be present in the environment.” The US EPA considers ERAs to be a scientific, iterative process, in which the risk assessor uses available data to fill in gaps of understanding the quantity of and exposure to an environmental pollutant that is present in a target area.
The US EPA’s ERAs can be multi-year processes, involving the collection of massive amounts of data to be digested, distilled, and analyzed before a conclusion can be drawn; this is because the ERAs performed for the US EPA tend to affect large populations or large regional land areas. In the business world, such timing and resources are generally not available or applicable, as investment decisions are often made in a matter of months, sometimes just weeks. Even so, you can distill the principles of environmental risk management, or ERA approach, to the basic elements and use these on a smaller scale to put everyday risks into a business context, helping environmental risk managers make sound decisions that fit within business goals and objectives.
In essence, the steps of an Environmental Risk Assessment are:
These should sound familiar to those who make investment decisions. Business managers often use these steps in determining whether an investment makes sense.
As noted above, there is no single methodology for performing ERAs, because the issues being assessed vary greatly and the analytical methods needed to study pertinent issues are often specific to the risk being evaluated. However, all ERAs have four common principles:
By following these principles when evaluating environmental risk, you can make sure that the information you are using is evaluated using scientific methodologies, while also making sure the risk management decisions you make are in line with your risk tolerance for the investment at hand.
While the overall environmental risk assessment process is relatively established throughout the environmental assessment community, the specific type of environmental risk assessment you perform will depend on number of factors, including resources, budget, and timing. When weighing these factors, it is important to consider them in the context of your business objectives. Understanding this will help ensure that you generate meaningful information you can then use to design an environmental risk management system that will work for your investment.
A good environmental risk manager considers the following when choosing what type of ERA to perform:
The advantages of environmental risk assessment considering the above questions means that you will have less surprises down the road, and that you are prepared for seemingly unexpected events because you’ll have considered the potential risks and severity of these events, and have a preconceived strategy for managing them, should they occur.
Once you understand your purpose of environmental risk assessment there are several specific paths that use available information to help you draw conclusions about the potential risks you are facing. The more typical approaches are described below.
Regardless of the type of ERA you choose, you will want to make sure that your final assessment includes a characterization that provides usable information that follows the ERA principles above (transparency, clarity, consistency, and reasonableness). It is important to note that all ERAs are based on some level of uncertainty, and simply providing scientific quantification may not be sufficient to make business decisions. Therefore, part of the risk characterization process should include taking external factors into consideration. Risk managers should be able to understand the risk assessment in terms of external factors, such as economic, legal, social, technical, and political. These factors can all play a role in how effective your risk management decisions are.
The advantages of an environmental risk assessment mean that you will have fewer surprises down the road and a plan for managing those that do occur. A good risk characterization should consider possible risk scenarios in light of current and forecasted financial conditions for your business, as well as available resources moving forward; the risk characterization should facilitate discussions by risk managers about the potential downside of not selecting particular courses of action.
Managing your environmental risk is a critical component in running a successful, sustainable business. Understanding the key components of environmental risk assessments, and how to use that information to manage your environmental risk, can be complicated. Using a risk assessment approach that is founded in scientific principles and also takes into account key external factors, can help make sure your path to sound environmental risk management is a solid one.