by Leslie Nicholas
BBJ Group LLC is an IMA member environmental consultant…
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.
Understand Your Purpose for Environmental Risk Assessments
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:
- What is our timing on making this investment?
- What is the value of this investment to us?
- What are our immediate and long-term goals for this investment?
- How involved will we be in managing identified risks?
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.
Types of Environmental Risk Assessments
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.
- Phase I Environmental Site Assessment (ESA): The “classic” environmental assessment performed for real estate. The Phase I ESA considers information from historical and current sources to draw conclusions about the likelihood of environmental contamination. This scope is excellent for sites where limited or no due diligence has been conducted previously, and where there is an expectation that past or current uses of the property have resulted in some level of contamination. Where risks are identified in Phase I ESAs, additional data gathering and risk characterization is commonly needed, such as through a Phase II investigation.
- Phase II Investigation: Typically performed when environmental risks are identified as part of a Phase I ESA, the Phase II investigation can be used to gather additional data that is then analyzed to further quantify potential risks associated with past uses of real estate. This scope is often staged into multiple investigations, with each stage providing more information that risk managers use to map future costs to manage the identified risks.
- Desktop Review: This assessment uses “desk‐based” resources such as online research and phone interviews to evaluate potential risks. They are best suited in these situations:
- During the early stages of risk assessment, desktop reviews can be used to screen and prioritize environmental risks. Lower risks can be quantified as such, which allows risk managers to focus on more significant risks. For those sites where higher risks are identified, additional risk assessment (e.g., through Phase I ESAs or Phase II investigations) are often needed.
- Alternatively, when you are considering contaminated real estate that has already been extensively studied, a desktop review can take the form of a risk assessment that focuses on data analysis and re-characterization of risk in the context of the current investment.
Using the ERA to Make Risk Management Decisions
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.
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