In 1814, William Wordsworth, the first of the English romantic poets, declared the Industrial Revolution an “outrage done to nature”. As the birthplace of that Revolution, the UK gained a bad reputation for harbouring polluting industrial activities.
But over the past 200 years, pollution from industrial processes has been largely curbed and environmental protection has become de rigueur. It has become evident that cleaner air, land and water are just as good for commerce as for society in general. The UK is increasingly seen as a thriving economy in which to invest and do business, a safe and healthy place to live and a prime location to enjoy the rewards of hard work.

Falling foul of environmental law could result in prision

But let us not get carried away by idyllic visions of rolling hills and babbling brooks – the picture is not quite as straightforward as that. Would-be investors are advised to turn a few stones and look carefully at the way environmental risk and opportunity is managed before making investment decisions in the UK.
Every year there are examples of serious pollution caused by poor management, inadequate systems, material failures and, in some cases, criminal negligence. According to the Environment Agency, the environmental regulator for England and Wales, there were 1,200 serious incidents in 2004(1). 233 companies were prosecuted, with an average fine of around £8,500, and 13 directors were fined a total of £2.3 million for environmental offences.

As well as financial penalties, those who fall foul of environmental law now run the risk of a jail sentence. A few operators consider the penalty of prosecution worth the risk and continue to play a sort of environmental “Russian roulette” with the law. However, UK regulators like the Environment Agency (and its counterparts, the Scottish Environment Protection Agency and the Environment and Heritage Service of Northern Ireland) continue to push for tougher penalties to ensure that the punishment for breaching environmental law truly acts as a deterrent. This has cross-party support in UK parliament, which means that there is likely to be some movement on this front over the coming years.

Set against examples of poor corporate environmental performance, there is evidence that business as a whole has become increasingly aware of the role it plays in protecting the environment, which is, after all, the basis for a healthy economy. Most large companies, and many smaller businesses, now have effective environmental management systems (EMS) in place. This is reflected by the gradually increasing average EMS score in Business in the Community’s Environment Index, an annual benchmark of the UK’s top companies; the score has increased by 30% over the last 10 years.

By the end of 2004, nearly 6,250 UK companies had environmental management systems certified to ISO14001 (the international standard for such systems)(2). The Environment Agency’s own Operator Pollution and Risk Appraisal (OPRA) scoring system – which measures how seriously a company takes its environmental responsibilities at site level – has shown gradual year-on-year improvement with over half the sites regulated by the Agency achieving “good” ratings at the end of 2004.

The UK’s environmental regulatory framework is robust. It has developed over time, with many laws having their roots in the days of the Industrial Revolution. The central twin stems of this legal tree are the Environmental Protection Act of 1990 and the Environment Act of 1995. These key pieces of UK legislation strengthen and consolidate a variety of previous environmental laws and support branches of comprehensive legislation covering air emissions, protection of aquifers, rivers and seas, waste handling and disposal, building development and more. As a member of the European Union, the UK follows the lead given by the European Parliament in Brussels. Consequently, UK law is now supplemented by regulations designed to apply European Directives such as the Waste Electronic and Electrical Equipment Directive and the End of Life Vehicles Directive.

The relationship between regulators and business is, on the whole, a good one. Thus, rather than being an “arms-length” law enforcer, the Environment Agency’s aim is to develop a more even-handed, risk-based and proportionate approach – a regime it calls “modern regulation”. It wants to work with and not against business, and recognises the need to develop trust and mutual understanding. Low-risk, well-managed businesses should expect a lighter touch.

UK companies that think strategically about their environmental impacts also gain competitive advantage. Minimising energy use, raw material inputs and waste reduces cost and improves efficiency, with direct benefits to the bottom line. Often, the effort and resource required to address these issues is minimal compared with the savings that can be made.

There are several organisations set up to help UK industry in these areas, including the Waste and Resources Action Programme (WRAP) and the Carbon Trust. The government- funded programme Envirowise offers UK businesses free, independent, confidential advice on practical ways to minimise waste, increase profits and reduce environmental impact. Envirowise’s recent work with the retail sector (“Retail Therapy”) has helped companies to work with their supply chains to achieve savings of £2.3m.

There are, in fact, numerous sources of information and support for UK businesses to address environmental issues. For example, the Environment Agency runs an excellent, free, web-based service called Netregs³ which provides information on relevant environmental laws for a range of sectors and offers guidance on good practice in meeting these. It is designed principally for small and medium-sized enterprises (SMEs), although it is helpful for anyone wishing to get a better understanding of UK environmental legislation.

Business has a role to play in protecting the environment

Other organisations such as Groundwork can provide practical support, information and training to companies. Most trade associations have an environmental arm that can provide sector-specific guidance. The Regional Development Agencies (RDAs), non-departmental public bodies set up across England, are strategic drivers of regional economic development that promote business efficiency and sustainability. Central UK government also provides assistance to business – including on environmental issues – via the Business Link service.

For some enterprises, the environment is central to their business. The current UK environmental industry is strong, well-established and diverse. It employs approximately 400,000 people in around 17,000 companies, with an estimated annual turnover of £25 billion(4) – and it’s growing. Good examples include Fonebak and Redeem (both IT and mobile phone recycling operations), packaging solutions provider Loadhog and carbon offset service Climate Care; all awarded Business in the Community’s Environmental Impact Award “Big Ticks” in 2005. Between them, these companies have reduced over 50,000 tonnes of CO2 emissions and 5,000 tonnes of landfill waste.

Although proposals have now been put on hold for introducing non-financial reporting requirements for UK companies via the Operating and Financial Review (OFR), all large and medium-sized companies will still need to comply with the EU Accounts Modernisation Directive(5) which places broadly similar requirements on companies. US-quoted companies will already be familiar with increasing scrutiny of corporate accounts through the requirements of the Sarbanes-Oxley Act 2002. Companies are increasingly recognising the benefits to shareholders of reporting on “non-financial” performance and are likely to continue to do so even without a regulatory requirement. Indeed, companies who are members of Business in the Community make a specific commitment to integrating environmental and social issues across the whole of their business, measuring their impact and reporting on this.

Arguably, a company’s environmental strategy should play an important role in investment decisions – not only can it save money and reduce prosecution, reputation, supply and infrastructure risks, but it also puts companies in a better position to plan for legally enforced changes and identify environmentally related business opportunities. For example, the ability to trade carbon “permits” provides an opportunity for companies to be financially rewarded for efficient processes to reduce greenhouse gas emissions. Initiatives such as the new European Emissions Trading Scheme enable businesses whose emissions are lower than their allocated quota to sell credits to companies unable to meet their own.

There are clearly many things to weigh up when considering investing in a UK enterprise. The balance of environmentally related risks and opportunities, and the associated strengths and weaknesses of the proposition, must be assessed as part of the decision process. No overview like this can hope to provide a conclusive guide – indeed, it would be dangerous to try to do so. However, the overarching framework of sensible legislation, practical and focused support and a prevailing historic respect for the natural environment in the UK does make the stock portfolio of UK plc worth further investigation.

For more information, contact:
Business in the Community
137 Shepherdess Walk
London N1 7RQ
Tel: +44 (0) 870 600 2482
E-mail: jim.haywood@bitc.org.uk
daianna.rincones@bitc.org.uk
Website: www.bitc.org.uk

(Footnotes)
1 - Spotlight on Business – Environmental Performance in 2004
(www.environment-agency.gov.uk)
2 - www.iso.org
3 -www.environment-agency.gov.uk/netregs
4 - www.dti.gov.uk/sectors_environment.html
5 - www.trucost.com/uksurvey.html