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Environmental audits: a multi-stakeholder perspective Aucoin, Louise 1993

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Environmental Audits: A Multi-Stakeholder Perspective by Louise Aucoin B.Sc, St. Francis Xavier University, 1974 M.Sc, University of Montreal, 1982 LL.B., University of Moncton, 1992 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER IN LAW (LL.M.) in THE FACULTY OF LAW We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA November 1993 0 Louise Aucoin, 1993 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my writ ten permission. (Signature) Department of Law The University of British Columbia Vancouver, Canada Date Dec. 17, 1993 DE-6 (2/88) ii Abstract Environmental auditing is an emerging environmental management tool that provides potential benefits to private industry, the public, and regulatory authorities as well as to the environment. It is a rare convergence of private and public interests. Corporations addressing the concerns of their stakeholders increasingly take environmental issues into consideration. The public is demanding more transparency from corporations and environmental audits are a necessary tool for corporations to do this. Voluntary environmental audits, combined with an effective enforcement program to the "command and control" legislation encourages corporations to seek pollution avoidance rather than pollution control. It is the way of the future. Mandatory environmental audits at this time would be short sighted and most probably counter-productive. Incentives and the actual driving forces in the market will continue to make environmental auditing an environmental tool of choice for forward looking corporations. iii Table of contents Abstract ii Table of contents iii List of tables vi Acknowledgements vii Chapter 1 Introduction 1 A.Environmental audits: an emerging corporate tool 2 B.Corporate environmental responsibility 8 C.Stakeholder perspectives 9 D.Mandatory versus voluntary environmental audits 10 Chapter 2 The evolution of environmental auditing 14 A.Historical background 14 1.Users of environmental auditing 15 (a)Canada 15 (b)United States 18 B.Environmental audits: definitions and types 18 1.Objectives of the environmental audit 20 2.Role of the auditors 21 3.Types of audits 22 (a)Compliance audits 23 (i)Permit audits 23 (b)Issues audits 23 (i)Waste minimization audits 24 (ii)Acquisition/divesture audits 24 (iii)Site audit 25 (iv)Operations audits 25 (v)Associate audit 25 (c)Eco-audits 25 (i) European Economic Community 26 (ii) Elmwood Institute 26 (d)Management audits 27 iv C.The driving forces behind environmental audits 28 1.Securities regulations 28 2.Disasters and/ or accidents 30 3.Environmental codes of conduct 30 4.The legal/ regulatory demands 31 5.Enforcement/ judicial attitudes/ sentencing 32 6.Banking/ insurance demands 33 Chapter 3 Environmental audits: public perspectives 36 A.Environmental concerns of the public 37 l.The change in environmental values 40 2.Environmentalism 41 (a)Environmental groups in Canada 42 B.The right to know 46 C.Government response to environmental concerns 49 1. Jurisdictional Issues 51 2.The politics of environmental regulation 53 3.Government policy on environmental audits 55 4.Command and control: the search for alternatives 56 (a)Incentive based regulation 57 Chapter 4 Environmental audits: the perspective of the corporation 60 A.Environmental audits: the reactive mode 60 1.Compliance audits: a means to reduce corporate environmental risk 60 (a)Corporate liability 61 (b) Liability of officers, directors and agents 63 (c)Corporations and disclosure of environmental information . . . . 69 (d)Prosecution and litigation privileges 72 (e) Attorney-client privilege 72 B.From compliance to management audits: the proactive mode 74 1. Integration of environmental issues in the corporation 75 2.The challenge to business 77 (a)Environmental issues and business 78 C.The emerging role of business: business as socially responsible 82 l.The stakeholder theory: a greater responsibility for corporations 86 2.Codes of conduct 87 V Chapter 5 Environmental auditing in the 90's: mandatory versus voluntary 91 A.The regulation of environmental auditing 91 B.The driving forces 93 1. Acquisition/ divesture audits 94 2.Compliance audits 95 3.Waste minimization audits 95 4.Management environmental audits 96 Chapter 6 Conclusion 98 Bibliography 101 vi List of tables Table 1- Environmental auditing in Canada 17 Table 2- Membership and budget of selected environmental groups in Canada, 1991 45 vii Acknowledgements I would like to thank my husband, Simon Larade and our son Michel for their love, support and understanding. My year at U.B.C. was very worthwhile because of the professors as well as the students. Special thanks to Professors David Cohen and Karin Mickelson. Finally, I would like to thank the New Brunswick Law Foundation for their financial support. 1 Chapter 1 Introduction "The protection of the environment has become one of the major challenges of our time"1 Protection of the environment, as we approach the 21st century, is a tremendous and controversial challenge. Webster's Dictionary defines the environment as "the complex of physical, chemical, and biotic factors (such as climate, soil, and living things) that act upon an organism or an ecological community and ultimately determine its form and survival"2. Respect for and protection of the environment is critical. Since the late 80's, environmental issues have been consistently high on the list of public concerns in the opinion polls3. Problems such as pollution, the disposal of toxic waste, global warming, the eroding ozone layer, and acid rain are serious ecological problems that have obvious implications for everyone. The public, governments and business have taken notice and reacted. In the last twenty years, one of the emerging tools in the corporate environmental sphere is the environmental audit. Environmental auditing is a convergence of private and public interests. It provides potential benefits to private industry as well as to the environment, the public at large and regulatory authorities. It is an effective management tool for corporations wishing to be environmentally proactive as well as for those needing to reduce their environmental liabilities. It is a means to assess and improve the 'Friends of the Oldman River Society v. Canada (1992) 132 N.R. 321 (S.C.C.) Webster's Ninth New Collegiate Dictionary (Springfield, Massachusetts: Marriam Webster, 1988) at 382. 3D.Johnston, "An Agenda for the 1990V in J.O. Saunders, ed., The Legal Challenge of Sustainable Development (Calgary: Canadian Institute of Resources Law, 1990) at 74. 2 environmental performance, to identify and to reduce the environmental risks and hazards of the private firms. Environmental audits increase the certainty, effectiveness and efficiency by which a firm manages its environmental affairs. Environmental auditing benefits the government as it provides more and better environmental protection for the same public dollar, enabling a reallocation of public resources to focus on other serious environmental problems. Environmental auditing benefits the environment by facilitating compliance with regulatory requirements that have been prescribed to reduce the impact of industrial activity to the natural environment. Environmental auditing benefits the public who want to be reassured that they do not have to fear that corporations may damage their health or their environment. Environmental audits are an effective tool in this process. A.Environmental audits: an emerging corporate tool Industries that took for granted our natural resources and the planet's assimilative capacity have had to evaluate their processes and in many instances find new tools and new ways of doing business. Environmental auditing is an emerging tool necessary to accomplish these important changes in corporate behaviour. Environmental audits were developed primarily to assist regulated entities in evaluating compliance and in managing existing and potential pollution control problems rather than reacting to environmental crises4. 4A.J.Danzig, MJ.Walker & C.M.Price, 'Environmental Auditing: Reaching the Bottom Line in Compliance" (1987) Nat. Env. Enf. J. Jan., 3. 3 Environment Canada describes environmental audits as follows: Environmental audits are internal evaluations by companies to verify their compliance with legal requirements as well as their own internal policies and standards. They are conducted by companies, government agencies and others on a voluntary basis, and are carried out by either outside consultants or employees of the company or facility from outside the work unit being audited. Audits can identify compliance problems, weaknesses in management systems, or area of risk. The findings are documented in a written report5. The early practitioners of environmental auditing based the structure of their audit programmes on financial audit procedures, as they seemed the most appropriate that the market had to offer at the time, hence the term audit. It is not surprising as financial and environmental audits deal with certain common issues6. For example, both may have to confront issues that deal with expenditures that are needed to comply with existing legislation. The environmental audit can give a picture of the environmental consequences of the conduct of business operations of a given company, including its overall environmental practices and policies7. Environmental auditing is generally undertaken to determine and increase the reliability and hence usefulness of relevant environmental information. It provides information on the strengths and weaknesses of the corporation, generating data for continual improvement. Environmental audits ensure that environmental risk analysis is incorporated in the decision making process. But it is and should be much more than sCanadian Environmental Protection Act: Enforcement and Compliance Policy, (Hull, Que.: Supply and Services, 1988) at 29. *G.Van Cleve, "The Changing Intersection of Environmental Auditing, Environmental Law and Enforcement Policy" (1991) 12 Cardozo L.R. 1215 at 1217. "Ibid. 4 that. The environmental audit is a critical aspect of the greater scheme of what is known as environmental management. It is just not business as usual for those corporations wanting to thrive into the 21rt century. In today's volatile business environment, world-class companies strive for continuous improvement. While environmental considerations are not the only ones needing attention, environmental auditing is part of the package of the total quality management process. Presently, environmental auditing is one of the fastest-growing areas of business consulting8 and the signs are that it will keep on that way for quite some time. Environmental audits can be proactive (to anticipate ways of reducing the impacts of industrial activity to the natural environment) or reactive (to reduce corporate liabilities and improve image). Corporations with significant environmental liabilities may produce a fairly reactive policy statement, choose a compliance audit and concentrate management effort on risks and liabilities. A corporation seeking new markets, efficiencies, or opportunities may have a very proactive policy statement, do a comprehensive management audit of operations and focus management activities on cost savings and new products 9. There are necessarily potential disadvantages to environmental auditing to the corporation, the regulators and the environment. For the corporation, proprietary or sensitive information may be disclosed to third parties or competitors inadvertently. An The Earth-Works Group, "50 Simple Things Your Business Can Do To Save the Planet" (Berkeley, California: Earthworks Press, Inc. 1991) at 92. 'J.Baldwin, "Corporate Environmental Evaluation" in Planning & Evaluating Your Corporate Environmental Program, Executive Programmes, Faculty of Commerce and Business Administration, University of British Columbia, February 24-25, 1993. 5 audit report could document that corporate officials knew of violations, opening both the corporation and the officials to civil and/ or criminal liability. There are also the financial and human costs of an environmental audit program. These will possibly be passed on to the consumer/ public. Some argue that this will not necessarily be so in the competitive market of the 90's, but somebody has to absorb the costs. Problems may be identified that the corporation may not be in a financial position to solve. Many corporations would be not be willing to shut down because of environmental problems. On the other hand, if the corporation concludes that it is doing more than it needs to in order to meet legislative requirements, will it put less emphasis on environmental protection? A corporation that has an environmental auditing program does not necessarily take environmental protection seriously10. Some corporations may use their environmental auditing results in such a way that it appears better than it really is. These are some of the potential "negative" uses of the environmental audit, but they do not deter from the overall usefulness of the environmental audit. There is now a diversity of environmental audits in use at different levels. When a corporation instigates a compliance audit, it is verifying whether it meets with current legislative requirements, that is, if the effluent is within the permit limits, etc. Obviously, it is more proactive to try and find ways of preventing production or discharge of the effluent. Compliance, permit, issues, waste minimization, acquisition/ divesture, site 10MacMillan Bloedel's environmental auditing program is run by A.D.Little, one of the top environmental auditing firms in the world: J.Howard, Planning & Evaluating Your Corporate Environmental Program, Executive Programmes, Faculty of Commerce and Business Administration, University of British Columbia, February 24-25, 1993. Some environmentalists would question their commitment to the environment. 6 operations and associate audits may all need to be done on a punctual basis, to respond to an operational situation. In themselves, they will be cost effective and inevitably save money. There have been numerous examples of corporations finding creative solutions. Environmental audits often lead to a cost effective method. For example, waste minimization, energy or lighting audits will eliminate waste and in the process increase efficiency. Such programs have been well documented as saving money11. Operationally, corporations tend to look at liabilities, followed by costs and then the environment. For some corporations, they have found that to ignore environmental liabilities is to solicit trouble12. Some corporations are moving ahead to the next-generation environmental management as they realize the limits of the traditional approaches. Many efforts of the past were directed at the end-of-pipe solutions. These did not focus on broad process redesigns that reflected the life cycle of how a product is developed, manufactured and used - and that product's impact on the environment. It is essential to identify which environmental strategies hold the most promise and where major change must occur13. The "greenest" technologies are those that use the earth's "3M, the U.S. multinational computer and computer services corporation, was an industry leader when it launched its 3P Programme, Pollution Prevention Pays in 1975. 3M was the first major corporation to link environmental performance and competitive advantage. The programme concentrates on product reformulation, process modification, equipment redesign, and resource or waste recovery. By 1990, 3M had saved $482 million, cutting air pollutants by 122,000 tonnes, water pollutants by 16,000 tonnes, and wastes by 400,000 tonnes and waste water by 7.27 billion litres: C.Flavin &J.E. Young, 'Shaping the Next Industrial Revolution" in L.R.Brown, ed., State of the World (N.Y.: Norton, 1993) at 185. Estimates are that you save approximately 4% of your bottom line with such programmes: M.MacDonald, "Environmental Liability Beyond Obligation" a Symposium sponsored by the Law Group, Faculty of Commerce & Business Administration and the Centre for Applied Ethics, Sept. 30, 1993. 12J.Lorinc, "The Reckoning" (1992) Can. Bus. Sept., 30. 13J.L.Greeno & S.N.Robinson, "Rethinking Corporate Environmental Management" (1992) Columbia J. World Bus. Fall & Winter, 222 at 224. 7 resources, that is, its raw materials, as frugally as possible while yielding the most benefit. Avoidance or prevention of pollution, rather than the search for the end-of pipe solutions is the way of the future. The aim is to reduce the amount and/ or toxicity of pollutants being generated: •Pollution prevention means the reduction or elimination of pollutants at their source so that waste is not generated. It contrasts with "end-of-pipe", "collect-and-contain", or "release-and-dilute" controls, which are designed to treat or control releases of waste already generated. •Pollution prevention emphasises the efficient, and therefore more profitable, use of material and energy resource wastes that often are by-products of materials or energy. •Pollution prevention reduces the total amount of pollutants in the environment. It does not simply shift them from one environment medium to another, as do many pollution control strategies14. In the United States, the Environmental Protection Agency has created an Office of Pollution Prevention. This Office was justified because prevention measures have been shown to be the most cost-efficient. Environmental auditing is one of the cornerstones of the entire pollution prevention program. Environmental audits are seen as vital to identifying and rectifying problem areas in production, that is preventing pollution. Such a strategy is being considered by Canadian jurisdictions15. MMinistry of Environment, Lands and Parks, New Approaches to Environmental Protection in British Columbia: A Legislation Discussion Paper (Victoria, Ministry of Environment, Lands and Parks, 1992) at 16. 15J.S.Shrives, How to do an Environmental Audit at your Federal Facility ( A Case Study), (Environmental Regulation at Federal Facilities and Lands, Ottawa, Feb. 25-26, 1991). 8 B.Corporate environmental responsibility Environmental auditing is more than a method by which corporations can ensure compliance to environmental legislation. It is also a method by which they can render themselves more accountable to society and to the preoccupations of a large portion of the population. This aspect of management is increasingly pertinent in the 90's as business organizations identify environmental issues as more and more important and ethical in nature16. A recent study on corporate reputations found that a company's environmental attitude carries as much weight on public opinion as do the traditionally influential elements such as dependability, honesty, ethics and value17. The environmental performance of public corporations will increasingly become a critical factor in public scrutinize, similar to the scrutiny of financial results by shareholders18. In order to continue in business a corporation must be profitable and productive while at the same time exercising its responsibilities to society. Productivity, quality, as well as functioning as a benefit rather than a detriment to society are necessary in order to earn profits for their owners or shareholders in accordance with the precepts of the free enterprise system, at least on a long term basis19. Corporations have a responsibility to the community, and environmental audits and reporting are one way of being transparent. The power of business in Canada is such "The Conference Board, "Defining Corporate Ethics" in P.Masden & J.M.Shafritz, eds., Essentials of Business Ethics (N.Y.: Meridian, 1990) at 22-23. 17J.L.Greeno & S.N.Robinson, supra, note 13. 18Ibid. at 223. "A.S.Farha, "The Corporate Conscience and Environmental Issues: Responsibility of the Multinational Corporation" (1990) Northwestern J.Int.L. & Bus. 10, 379. 9 that its power must be balanced with responsibilities. If business does not respond appropriately, the demand will be for intervention by the State. The demand for social responsibility is increasingly felt. Corporations can be negatively impacted if they are seen to be irresponsible as Union Carbide was perceived in Bhopal, India, Exxon in Exxon-Valdez, etc. C.Stakeholder perspectives Environmental audits can have two distinct purposes: to provide feedback on performance to those in charge of the organization being audited, and to provide information about that performance to outsiders, be it the government or community. The community challenges corporate polluters and their power to make decisions that threaten the community's health and well-being. Environmentalists are identifying corporations that see protection of the environment as a challenge rather than a threat, forming alliances to work on a common agenda. It is more productive for environmentalists to press for more reporting and disclosure of information on the products companies use and the waste they produce than to press regulators for mandatory environmental audits at this time in their evolution. What is needed are products that do minimal damage to the planet and that, at the end of their lives, can be put to new uses or, if this is not feasible, safely thrown away20. Regulators must find "cost-effective" ways of protecting the natural environment. Ensuring that it is more expensive to comply than not to comply with the traditional command and control legislation is important. Still, providing incentives to exceed these ^.Cairncross, "Cleaning Up" (1990) The Economist Sept. 8, 2. 10 limits is preferable. Properly constructed regulatory standards, which aim at outcomes and not methods, will encourage companies to re-engineer technology21. Environmental innovation may come from small companies, or suppliers. In their situation, especially, economic incentives are more attractive than regulation22. D.Mandatory versus voluntary environmental audits I will argue that regulators should be encouraging and giving incentives to corporations to set up environmental management systems which include environmental audits, but that these should not be mandatory at this stage in their evolution. Common environmental auditing rules will be more complicated to design, at least in a form as specific as those for financial audits. I will also argue that since the R. v. Batci23 decision, compliance audits are necessary to establish a due diligence defence. Therefore, while compliance environmental audits have not been legislated as such, corporations looking to reduce their environmental liabilities are concluding that they are "effectively compulsory". This is making corporations more environmentally conscious. For regulators, it seems more appropriate to focus efforts on the next level as concentrating on compliance-type auditing will, at best, aim to achieve minimal standards, not encourage exceeding these standards. It is preferable to create incentives to reduce pollution rather than to promote efforts aiming at controlling pollution at today's "acceptable" level. It is more appropriate to focus efforts on promoting a minimum of 21M.E.Porter, "America's Green Strategy'' Scientific American (1991) April 168. zftid. at 23. nR. v. Bata Industries Ltd. (1992) 7 C.E.L.R. (N.S.) 245. 11 management environmental audits or eco-audits based on deep ecology principles. These require a broader, more comprehensive evaluation of processes. Promotion of voluntary environmental audits, emphasizing, encouraging, and rewarding excellence in environmental management will be more effective than concentrating on verifying if such and such a corporation is documenting its environmental compliance. Neither Environment Canada nor provincial regulators can inspect every pollution source or workplace. It is either the luck of the draw or most probably the most visible polluter or workplace that gets inspected on a regular basis. The primary purpose of a voluntary program or any environmental legislation should be to achieve actual improvements in the current state of environmental protection. Environment Canada should look at developing or supporting24 a program that encourages regulated entities to prevent pollution by publicly recognizing those that are successful. While prosecution and punishment have a role, they are not always the best ways of changing undesirable behaviour. Rewards can be very effective in generating high levels of performance in organizations25. Regulators such as Environment Canada should see themselves as stimulating innovation, not just setting limits. Such a program should encourage people to look for systematic solutions to environmental problems rather than methods for reducing wastewater discharges, 24The Canadian Standards Association as well as the international association, ISO are presently developing standards on environmental auditing. An interesting step would be to take this one step further and organize an "Award of environmental excellence" recognizing those industries that have made a significant reduction in their pollution activities. "D. Saxe, " The Impact ofProsecution of Corporations and their Officers and Directors upon Regulatory Compliance by Corporations" (1992) 1 J.E.L.P. 91. 12 generation of solid wastes, or air emissions. The focus should not be on individual permits but organization and processes. Management environmental audits should focus on an entire management unit such as a plant or facility, rather than a single process or product line. While the bedrock criteria for recognition should be compliance with all regulations, the program should recognize efforts and improvements that go beyond compliance, always keeping in mind the ultimate goal or purpose to achieve actual improvements in our environment. Compliance with the law is only a small portion of good environmental management. Oregon has established such a program with its "Oregon Governor's Award for Toxics Use Reduction". The Oregon Department of Environmental Quality administers the program under the Oregon Toxics Use Reduction and Hazardous Waste Reduction Act26 which addresses toxic chemical usage from start to finish. The ultimate goal in changing corporate behaviour is a better environment. There are different methods of accomplishing this. By concentrating on voluntary audits and incentives, combined with refined "command and control" and enforcement, corporations are given certain choices in finding appropriate solutions, a liberal approach. In this paper, I will look at the history of environmental auditing, its evolution and the advantages of voluntary environmental audits. I have chosen to look at it from the point of view of the primary stakeholders, that is those who are affected or that have an impact27 on environmental auditing. These primary stakeholders are the corporations, M1989, HB 3515. 27J.Wang & H.D.Dewhirst,27, 284 "Boards of Directors and Stakeholder Orientation" (1992) 11 J. Bus. Ethics 115 at 115-116. 13 the regulators and the public. The public is an important stakeholder, as it is affected by environmental problems, but also because it influences the regulators and the corporations, solicitous not to offend their potential public/ customers. The public has shown itself concerned with environmental issues. Those having knowledge and demanding environmental audits are probably limited to "specific" environmental groups. But, increasingly, the public wants no more surprises like Love Canal or Bhopal, India. They want information about what is happening in their community. Some corporations are reporting on their environmental progresses. Environmental audits are an important tool for corporations publishing environmental reports28. Indisputably, the regulators, those having the power to regulate environmental audits and those implementing them, the corporations, are fundamental stakeholders. The following chapter will examine the different types of environmental audits, their history and evolution as well as the driving forces behind environmental auditing. The other chapters will consider the present situation and its effectiveness, demonstrating that, for the most part, it is premature and counter-productive to demand mandatory management environmental audits. Voluntary environmental audits and incentives, combined with refined "command and control" regulation and the necessary enforcement, will be more effective in promoting creative solutions to the environmental problems created by industrial activity than mandatory environmental audits. ^Deloitte Touche Tohmatsu International, Institute for Sustainable Development & SustainAbility, Coming Clean. Corporate Environmental Reporting (London: Deloitte Touche Tohmatsu International, 1993). 14 Chapter 2 The evolution of environmental auditing A.Historical background Environmental auditing is a fairly new phenomena in Canada. The practice began in the late 1970's with a number of large corporations in the United States29. Prior to the 1970's, environmental functions in corporations were mostly limited to permitting and monitoring issues. These were fairly low in corporate hierarchy30. The United States Securities and Exchange Commission (SEC) seems to have had a critical role in stimulating the development of environmental audits when it instigated actions against three companies: U.S. Steel (1977), Allied Chemical (1979), and Occidental Petroleum (1980)31. The SEC alleged that these companies were vastly understating their environmental liabilities in their annual reports to stockholders. They required each company to do company-wide audits to determine their environmental liabilities so they would be accurately reflected in their annual reports. Since that time, environmental auditing has been a growth industry32. Canada, the Netherlands, West Germany33, the ^.Edwards, "Confidentiality in Environmental Auditing" (1992) 1 J.E.L.P.l at 3-4. ^F.B. Friedman, "Managing and Resolving Corporate Environmental Issues" (1985) Env. Forum 28 at 29. 3iSEC v. Allied Chemical Corp., No. 77-0373 (D.D.C., March 4, 1977); SEC v. United States Steel Corp., (1979-1980 Transfer Binder) Fed. Sec.L. Rep. (CCH) 82,319 (1979); SEC v. Occidental Petroleum Corp., (1980 Transfer Binder) Fed. Sec. L. Rep. (CCH) 82,622 (1980). 32J.Palmisano, "Environmental Auditing: Past, Present, and Future" (1989) 1 Env. Auditor 7 at 12. 33Ibid. 15 EEC34 as well as the United States35 are now all actively promoting environmental auditing. 1.Users of environmental auditing The early business impetus to do environmental audits and disclosures came from the chemical sector followed by the oil industry36. More and more major corporations in Canada, Europe and the United States have formal environmental auditing programs designed to provide senior management with environmental information37. After the chemical and petrochemical corporations, high profile industries such as power generators, waste managers, metals processors, auto manufacturers and airlines began instigating environmental audits38. Then computer, telecommunications, banks and retail companies followed. Now even lower-risk industry sectors such as manufacturing, high-tech, food processing and other medium-sized businesses are discovering the advantages of the environmental audit39. (a) Canada In Canada, one Ontario firm now conducts at least 200 audits a year compared ^J.Dishington, "Proposed Environmental Audits for Community Companies'' (1991) 10 O.G.L.T.R. 318. 35J.Palmisano, supra, note 32. MDeloitte Touche Tohmatsu International, Institute for Sustainable Development & SustainAbility, supra, note 28 at 18. 37This making it the fastest-growing area of business consulting; The Earth-Works Group, supra, note 8. ^Deloitte Touche Tohmatsu International, Institute for Sustainable Development & SustainAbility, supra, note 28 . 39P.Carson & J.Moulden, Green is Gold: Business Talking to Business About the Environmental Revolution (Toronto: Harper Business, 1991) at 74. 16 with one in 198740. In 1985, a national survey41 done by Environment Canada demonstrated that seven or nine % of the companies surveyed had never heard of environmental auditing. Included in these companies having no knowledge of environmental auditing, were one chemical, one pulp and paper, two mining, and three food and beverage companies42. Of those having knowledge of environmental audits, 20 or 26% of those companies had an established environmental auditing program43. The following table gives an overview of the results of this national survey as to the kinds of corporations involved or having knowledge of environmental auditing. Table 1 shows the results to the following question: Does your company currently conduct an environmental auditing program? While the sample size is relatively small, it is nonetheless noteworthy that even in the 1980's, only 50% of the chemical , 37% of the petroleum, and 20% of the mining corporations surveyed were conducting environmental audits. •While some corporations answered that they conducted an environmental auditing program, the researcher felt that the accompanying documentation did not support this claim. Therefore while 45(58%) of the firms indicated an affirmative answer, in reality only 20(26%) effectively conducted an environmental auditing program. ""J.Lorinc, supra, note 12. 41J.W.Reed, Environmental Auditing in the Canadian Private Sector (Environmental Protection Service, 1985) [unpublished]. 42Ibid. at 49. 43Ibid. at 52. 17 Table 1 Enyironmental auditing in Canada Sector Chemical Petroleum Pulp & paper Mining Steel making Utilities Techno/equip't Food/beverage Aggregate Automotive Tire manufacture Total No 5(33)% 5(63) 6(50) 5(50) 2(100) 1(11) 1(20) 5(63) 1(33) -1(33) 32(42) Yes 9(67)% 3(37) 6(50) 5(50) -8(89) 4(80) 3(37) 2(67) 2(100) 2(67) 45(58) Bona fide* 7(50)% 3(37) 2(13) 2(20) -1(11) 1(20) 1(12) -2(100) 1(33) 20(26) 18 (b)United States In 1987, it was estimated that 50% of large companies in the United States had environmental auditing programs44. Conceivably one-half of Fortune 500 companies presently conduct environmental audits45. In the United States, one hundred to one hundred and fifty companies participate in the Environmental Auditing Roundtable (EAR). The EAR began in 1982 with an informal meeting of environmental managers who got together to discuss auditing programs and practices, as well as policy and regulatory actions related to auditing46. These working groups have gone on to addressing internal compliance auditing, real estate transaction assessments, international issues, computer applications and auditor qualifications and training47. Certification of environmental auditors has already begun in California. Certified environmental auditors are deemed qualified to determine if firms are complying with state environmental requirements48. The following gives an overview of environmental auditing, the types and various definitions associated with the subject matter. B.Environmental audits: definitions and types In Canada, environmental audits have not traditionally been defined in the statutes. For many, they are primarily thought of as an important means of establishing "W.S. Tucker, 'Industry's Self Policing" (1987)17 Env. L.R. 10257 at 10259. ^D.F.Sand & E.A.van Buren, "Environmental Disclosure and Performance: The Benefits of Standardization" (1991) 12 Cardozo L.R. 1447 at 1351. ^L.Cahill, ed. & R.W.Kane, Environmental audits, 6th ed. (Rockville, Md: Government Institutes Inc., 1989) at 1-12. 47D.F. Sand & E.A.van Buren, supra, note 45. 'WK.C.Oliver, "Registering Environmental Assessors in California, USA" (1989) 1 Env. Auditor 21. 19 and maintaining compliance with environmental laws49. Operationally, auditing is approached in a methodological and systematic fashion with various procedures, activities and practices50 leading, at minimal, to verification of compliance with legal requirements51. Yet, even as recently as 1992, Provincial Division Judge MacDonnell of the Ontario Court of Justice52, accepted that: "The term "environmental audit" is not a term of art, and somewhat loosely describes a spectrum of activities. Some corporations deliberately avoid using the term audit , others employ it deliberately in order to establish credibility with outside agencies. Other terms that are sometimes used to describe similar activities include: environmental site assessment, evaluation, survey and review." These terms are not synonymous. There is still some debate among practitioners as to the appropriate terminology, but it seems time to put those arguments aside. It has also been observed that there is very little correlation between a program's name and its design or objectives53. At the present time, there are no widely accepted standards. This is an indication of the dynamism and the diversity of the field of environmental auditing. The wide diversity of environmental audits reflects the fact that different 49R.M. Hall Jr. & D.R.Case, All About Environmental Auditing (Washington, D.C.: Federal Publications Inc., 1987) at 2-2. ^The typical environmental audit will usually be a seven step process: l)establish the objectives 2)select the auditor 3)set the stage for the audit 4)conduct the audit 5)analyze the audit information 6)prepare the final report 7) do the follow up on the audit. Every step of the process is important and crucial to the success of the environmental audit, in P.Carson & J.Moulden, supra, note 39 at c. 4. 5IJ. W.Reed, Environmental Auditing. A Review of Current Practice (Environmental Protection Service, 1984) [unpublished] at 2. S2Ontario (Ministry of Environment) v. Tetrault, (13 August 1992), Toronto O J. No. 1680 (Ont. Prov. Div.). 33A.D.Little, A Survey of Environmental Auditing (Cambridge, Massachusetts: Centre for Environmental Assurance, 1980). 20 corporations have different reasons for doing environmental audits. The type of audit will depend on the company's business, leadership, management philosophy and the goals and objectives of the environmental program54. The scope of the environmental audit depends primarily on the company's management objective in conducting the environmental audit. The type of industry, the area of concern, and the number of sites involved, will all influence the scope of the audit. In the case of a company wanting to focus on a specific area of concern such as compliance with a particular regulation, the scope may be narrow. An audit of a chemical manufacturer will, by its very nature, be more complicated and time-consuming than the audit of a mechanical assembly plant. The number of sites involved will greatly affect the scope55. The financial resources will also by necessity have a major impact on the possible scope. 1.Objectives of the environmental audit The environmental audit objectives must take into consideration the needs and expectations of the Board of Directors, CEO's and other corporate officers as well as other corporate objectives and policies. They should be reflective of the overall management philosophy and consistent with the corporation's culture and values56. The environmental audit will probably incorporate some of the following objectives: •Safeguard health and the environment ^J.T.Funkhouser & J.L.Greeno, "The Growth and Evolution of Environmental Auditing' in L.L.Harrison, ed., The McGraw-Hill Environmental Auditing Handbook (New York: McGraw-Hill Book Co., 1984) at 1-23. 55J.T.O'Rourke 'The Engineer's Perspective" in L.L.Harrison, ed., The McGraw-Hill Environmental Auditing Handbook (New York: McGraw-Hill Book Co., 1984) at 3-39. 5J.W.Reed, supra, note 51 at 43. 21 •Verify compliance with [provincial] and federal environmental laws -keep informed of legal changes -decrease liability of management •Indicate current or future problems and/or risks that should be addressed •Reduce corporate exposure to litigation, accidents and adverse publicity •Assess corporate liabilities in takeovers, expansions, and use of subsidiaries and independent contractors •Produce better, safer, cheaper, more competitive products •Evaluate alternative methods of remediation and environmental impact assessment and management •Stay informed of technical advances in pollution control •Improve corporate environmental performance by highlighting improvements and deficiencies •Identify cost and hazards reduction •Increase employee/management awareness of environmental problems •Assess and provide information for worker education programs •Foster information exchange between divisions or companies •Provide an environmental data base for reporting,planning, plant modification, emergency responses, program evaluation, and employee education •Demonstrate corporate environmental commitment to employees, authorities, stockholders, investors, and the public57. 2.Role of the auditors Environmental auditors will generally investigate the physical conditions and regulatory postures that help determine the nature and amount of environmental liability 57P.Carson & J.Moulden, supra, note 39 at 75. 22 while the lawyers investigate environmental liabilities by inquiring into litigation, administrative matters and indemnification agreements58. 3.Types of audits In Canada, the definition by Environment Canada is often the starting point for many professionals involved in environmental auditing59. The definition stresses compliance with legal requirements, therefore addressing the preoccupations of Environmental Canada. It is accordingly not surprising that in Canada, especially from the legal perspective, the focus in environmental auditing up to now has more or less been limited to compliance, due diligence and acquisition/divesture audits. It has been estimated that 50% of environmental audits are related to property transfer situations, even if there is a diversity of audits in the marketplace60. The definition is limited and does not reflect the diversity of audits being done since the publication of the Canadian Environmental Protection Act: Enforcement and Compliance Polic)/61 in 1988. It seems to lack vision as to the role that corporations can have in protecting the environment. What follows is a description of the kinds or types of environmental audits most frequently encountered. ^ . D e l Duca, "The Environmental Consultants' Opinion Letter: A Step Beyond an Environmental Audit" (1990) 20 Env. L.Rep. 10184. ^Canadian Environmental Protection Act: Enforcement and Compliance Policy, supra, note 5 at 29. ""A.R.Keen, "Environmental Auditing: The Need for Professional Standards-Nationally and Internationally" Environmental Auditing Focus Group Meeting, Edmonton, June 18, 1991. 61Ibid. 23 (a)Compliance audits Compliance audits are basically limited to compliance to regulations62. A compliance audit will provide a portrait of the company's activities, past and present, and their compliance with all relevant laws and regulations. It will look at the terms of any permits, orders, or agreements with governmental agencies63. In the audit, management will look at the substance of the information reported and whether systems are in place to prevent false or inaccurate reporting64. (i)Permit audits In certain situations, permit giving institutions will render the obtention of the permit conditional to the permit seeker doing an environmental compliance audit. To obtain the necessary permit, the permit seeker must demonstrate by means of an environmental audit that the corporation is complying with the appropriate legislation65. (b)Issues audits Issues audits analyze a company's situation as to a specific issue or environmental problem. The focus is usually from the standpoint of goals/ objectives, policies/ 62See Canadian Environmental Protection Act: Enforcement and Compliance Policy, supra note 5; and the U.S. definition: Environmental auditing is a systematic, documented, periodic and objective review by regulated entities of facility operations and practices related to meeting environmental requirements. Audits can be designed to accomplish any or all of the following: verify compliance with environmental requirements; evaluate the effectiveness of environmental; management systems already in place; or assess risks from regulated materials and practices in Environmental Auditing Policy Statement 51 Federal Register, No. 131, 1986, ELR Admin. Materials 35001. "W.J.Huelsman, "The Auditor's Perspective" in L.L.Harrison, ed., The McGraw-Hill Environmental Auditing Handbook (New York: McGraw-Hill Book Co., 1984) at 3-3. "G.Van Cleve, supra, note 6. "D.W.Bisson, Westcoast Energy, personal conversation, February 11,1993. 24 guidelines, and practices and procedures66. (i) Waste minimization audits Waste minimization audits typically review waste generation operations, analyze the potential for waste reductions, and identify solutions to the high-priority problem streams. The objective of waste minimization audits is to reduce the volume and/ or toxicity of wastes. The audit team in this situation is involved in more than verification as it usually will work with line personnel to identify potential reduction strategies such as material substitution and process modifications67. (ii)Acquisition/divesture audits Problems with property transfers have spurred many corporations to incorporate environmental audits as part of their corporate property transfer protocol. Property transfer-type audits are usually divided into three sequential phases: -Phase 1 Review of available historical records and visual inspection of the site -Phase 2 Selective sampling of areas suspected of potential environmental liabilities -Phase 3 Strategy for site utilization and/ or potential environmental remediation While every property will undergo a phase 1 records search and visual inspection, not all three phases will be required for each property. There is no need to proceed to phases 2 and 3 if the phase 1 shows no indications of environmental preoccupations. If the records search and the visual inspection show indications of possible environmental ^J.Baldwin, supra, note 9. 67L.Cahill, ed. & R.W.Kane, supra, note 46 at c. XV. 25 concerns and/ or liabilities such as hazardous/ toxic wastes and materials transport, use, or disposal, then appropriate samples of the soil, groundwater, surface water, vegetation, etc. should be taken. If the site shows present or future environmental liabilities according to the phases 1 and 2, then the next possible though costly and time consuming step is a phase 3 audit, a comprehensive site assessment. This will entail an assessment of the capital and operating cost estimates for future site remedial actions68. (iii)Site audit A site audit is an audit of a particular facility, either because it is believed to be problematic or because it is part of the regular overall audit procedure69. (iv)Operations audits Operations audits evaluate the environmental effects of a particular operation of a company70. (v)Associate audit An associate audit is an analysis of the environmental programs of a subsidiary, a supplier or even a sub-contractor. (c)Eco-audits The terminology eco-audit is utilized by the European Community as well as the Elmwood Institute . "Ibid, at c. XIII. "^.Baldwin, supra, note 9. 70Ibid. 26 (i) European Economic Community The European Commission has proposed a regulation for a voluntary environmental auditing program that they have called eco-auditing. The objective of the scheme is to encourage improvements in industry's environmental performance by promoting the establishment of environmental management systems by companies, periodic evaluations of the effectiveness of those systems, and provision of information to the public on firm's environmental performance in the European Economic Community71 . (ii) Elmwood Institute The Elmwood Institute is a global network of thinkers and activists concentrating on reaching out to the business community in order to raise ecological awareness. It promotes comprehensive systems of ecologically conscious management. Those involved believe that environmental auditing is a defensive attitude, typical of the environmental auditing that was done in the 1980's, and consider eco-auditing a step beyond. The eco-audit is an examination and review of the company's operations on the basis of deep ecology72. Deep ecology and its principles were enunciated in 1972 by Norwegian philosopher Arne Naess. Deep ecology is defined in opposition to the more mainstream environmental movement which it considers "shallow" ecology, anthropocentric and utilitarian. Deep ecology emphasizes interrelatedness in almost every aspect of our lives. Human and nonhuman species are viewed as having inherent and equal value. According 71ENDS Report No. 206, March, 1992. ^ .Capra , "Ecologically Conscious Management" (1992) 22 Env.L.529. 27 to some deep ecologists, their goals are to achieve universal ecological consciousness "in contrast with the world view of technocratic-societies which regards humans as isolated and fundamentally separate from the rest of nature, as superior to, and in charge of, the rest of creation"73. "Deep ecology calls for a holistic worldview that takes into account the interconnectedness of all the components of the planetary ecosystem"74. In this context, the eco-audit is definitely more than a management tool, and broader than a management audit. It is a whole new way of doing business, a new way of corporate thinking. (d)Management audits While management audits are probably anthropocentric and utilitarian, they are nevertheless a more comprehensive and proactive type of audit than compliance or issues audits. Management audits test the company environmental risk systems. This comprehensive type of audit will provide additional information regarding activities that are not currently regulated, but that have an impact on the environment75, and this may "P.Borelli, "The Ecophilosophers" in P.Borelli, ed., Crossroads (Washington, D.C.: Island Press, 1988) c. 4. 74K.Mickelson & W.Rees, "The Environment: Ecological and Ethical Dimensions" in E.Hughes, A.Lucas & W.Tilleman, eds., Environmental Law & Policy, preliminary edition (Toronto: Emond Montgomery Publications Ltd., 1992) vol. 1, at 1:17. 7SThese are more in the spirit of the proposition of the United Nation's Environmental Program: In essence, environmental audits should not be undertaken to facilitate compliance with the law; they should be seen as a means to accomplish much more inasmuch as they provide an in-depth review of company processes and progress in realizing long term strategic goals. One great advantage of regular auditing is that it provides the company with a greater overall awareness of its workers and processes, identifying compliance problems and areas of risk,pinpointing both strengths and weaknesses, and encouraging continual improvement. In that regard environmental auditing encourages the use of low-waste technologies, prudent utilization of resources and identification of potential hazards and risks. 28 enable the corporation to avoid future liability76. It functions as an ongoing, comprehensive management information system to alert corporate officials of potential environmental risks. The audit can serve as a warning system to identify potential hidden liabilities77. In this case, ideally, the environmental audit should give a true and complete picture of the environmental consequences of the conduct of business operations of a given company, including its overall environmental practices and policies78. C.The driving forces behind environmental audits It is revealing to look at the diverse reasons as to why there has been as increase in the use and interest in environmental audits. While Canada is influenced to a certain extent by legal happenings in the United States, the impetus for the growth and evolution of environmental auditing in Canada is a bit different. 1. Securities regulations The securities regulators in Canada have not yet instigated proceedings against corporations for failure to reflect their environmental liabilities in their annual reports. In the early 80's, in Canada, this would not have been as important as it now is, as the fines were insignificant79 at that time and there was very little prosecution80. As the liabilities increase, securities commission are developing an interest in environmental 76Van Cleve, supra, note 6 at 1218. ^.Harrison, "Environmental Auditing: A New Risk-Management Tool" in L.L.Harrison, ed., The McGraw-Hill Environmental Auditing Handbook (New York: McGraw-Hill Book Co., 1984) at 1-3. ''G.Van Cleve, supra, note 6. ''D.Saxe, Environmental Offences (Aurora, Ont.: Canada Law Book Inc., 1990) at 55. ""Ibid, at 73. 29 issues as demonstrated by the Ontario Securities Commission requirement for the following disclosures81: 1. Annual Information Forms- information relating to the financial or operational effect of environmental protection requirements on the capital expenditures, earnings and competitive position for the current fiscal year and any expected impact on future years. 2. Management Discussion and Analysis ("MD&A")-companies are required to disclose any risks and uncertainties likely to affect its financial condition, changes in financial condition and results of operation. The 1991 Report on MD&D includes examples relating to environmental concerns. While public held companies82 are beginning to disclose their environmental costs in their annual reports, comprehensive disclosure of and accounting for environmental impacts, risks and costs are still not the norm in Canada but they probably will be in the near future83. 81O.S.C. Policy Statement No. 5.10. ^Westmin Resources Ltd. (1991), Domtar (1991), Placer Dome (1990), Alcan Aluminum (1991), B C Sugar (1991), The Hoorsham Corporation (1991), Imperial Oil Ltd. (1991), Echo Bay Mines (1991), Suncor Inc. (1991), have all made disclosures in their financial statements dealing with environmental issues, either as to site restoration costs, environmental claims, security for mine reclamation obligations or for capital expenditures relating to environmental regulations. 83The Canadian Institute of Chartered Accountants (CICA) has commissioned a research report to develop proposals on how to account for and report on environmental concerns within the existing financial reporting framework. The study will propose amendments to the Accounting Standards Board in order that 30 2.Disasters and/ or accidents Since the three SEC cases (Allied, US Steel, and Occidental), several factors have contributed to the continued increase in environmental auditing programs. One of these is the 1984 disaster at the Union Carbide plant in Bhopal, India. Two to five thousand people were killed and 200,000 were injured. Union Carbide was assessed $470 million in penalties ($270 million in excess of the company's insurance coverage). The Indian government ordered the confiscation of the U.S. firm's 50.9 percent share of its Indian subsidiary and is pursuing the U.S. based chief executive officer (CEO) on criminal charges84. The negative publicity generated by the incident had a major impact in boardrooms all over the world. For many CEOs, environmental compliance became a primary rather than a secondary interest. Following Bhopal there was an immediate spurt in the number of firms adopting environmental auditing programs. The sophistication of the programs also increased. 3.Environmental codes of conduct Environmental audits are also driven by social and ethical issues. Concern over the environment has prompted industry and other groups85 to instigate recommendations or codes of conduct for industry. These codes of conduct are seen as a means to influence the social agenda86. Some sectors of industry are proposing their own financial statements reflect environmental costs and liabilities. "C.Flavin & J.E.Young, supra, note 11 at 184-185. 85An environmental and investment group, Ceres, developed a general code of conduct for corporations called the Ceres Principles following the Exxon-Valdez disaster. "G.J.Carpency, "The Valdez Principles: A Corporate Counsellors Perspective" (1991) 26 Wake Forest L. Rev. 11. 31 Environmental Codes of Conducts such as the Chemical Manufacturers Associations Guiding Principles for Responsible Care and the American Petroleum Institute's Environmental Mission and Guiding Principles87. These are a way of tailoring the codes of conduct to the particular industry. While they may not be as independent as a general code of conduct undertaken by an independent agency, they can be beneficial and an important first step to industries beginning to establish environmental codes of conduct who are unsure where to begin and what they can mean. 4.The legal/ regulatory demands Theoretically, environmental audits are done on a voluntary basis by industry. Yet they are inevitably driven by the regulatory scheme. An environmental audit was recognized as a critical element in any program of due diligence in R. v. Placer Developments Ltd88. The defence of due diligence was established by the Supreme Court of Canada in the landmark case R.v.Sault Ste.Marie (1978)89. At that time, the court recognized a category of offences known as strict liability or public welfare offences, which include nearly all environmental offences. If accused of a strict liability offence, a person will be held to an objective standard; that of a reasonable person in the circumstances. The Sault Ste. Marie case, followed by developments in environmental law, had an important effect on environmental auditing even if the case did not deal specifically with the issue. A due diligence program is not a guaranteed defence but it 87lbid. w(1983) 13 C.E.L.R. 42 (Yuk. Terr. Ct.) at 51. *\\91%] 85 D.L.R.(3d) 161 at 185 (S.C.C.). 32 may help mitigate sentencing; it may even convince a regulator not to prosecute90. The importance of the environmental audit in the due diligence program has been reinforced with the Bata91 decision. Judge Ormston specified that "dependent upon the nature and structure of the corporate activity, one would hope to find remedial and contingency plans for spills, a system of ongoing "environmental audit", training programs... and other indices of a pro-active environmental policy." 5.Enforcement/ judicial attitudes/ sentencing In the United States, and to a certain extent in Canada as well, the number and size of the penalties, both financial and personal, for noncompliance with government regulations have spurred the interest in environmental audits92. Governments have increased the number and the severity of legislation dealing with environmental concerns93. There has been an increase in enforcement of environmental legislation as different jurisdictions have shown themselves ready to prosecute and have in fact done so94. This seems to be an international trend; for example, in Great Britain there is a threefold increase in prosecutions95. '"G. A.Letcher, "Environmental Regulation of Canadian Mining and Due Diligence" in Singhal et al., eds., Environmental Issues and Waste Management in Energy and Minerals Production (Rotterdam: Balkema, 1992) at 100-101. "Supra, note 23 at 293. "^.Herz, "Environmental Auditing and Environmental Management: The Implicit and Explicit Federal Regulatory Mandate" (1991) 12 Cardozo L.Rev. 1241. '"D.Saxe, "Fines Go Up Dramatically in Environmental Cases" (1989) 3 C.E.L.R. (N.S.) 104. ^D.Saxe, supra, note 79 at 30. ''S.Payne, "Defending Polluters" (1992) 7 Solicitors J. 116. 33 Other developments have had an impact on the growth of environmental auditing. Attitudes among some members of the judiciary have changed in the last fifteen years. In the case R. v. United Keno Hilt6, Stuart, C.J. stated that pollution offences must be treated as a crime and not blameless breaches of a regulatory standard. While this may not be reflected in all courts*7, there seems to be evidence of change. Some judges are taking the environment more seriously, as seen from the provincial courts to the Supreme Court. Financial constraints may no longer be tolerated as an excuse for lack of environmental care in the in the days to come. This was the message from Judge Ormston in Bata: [E]ven in this bleakest of financial times, the environment must not be a sacrificial lamb on the altar of corporate survival98 At the Supreme Court of Canada, as well, judicial attitudes seem to signal the beginning of an era in which the environment will be deemed important09. 6.Banking/ insurance demands Banks as well as the insurance industry have also had a major impact by requiring their clients to do environmental audits before they will lend money for acquisitions100. ^WSO) 10 C.E.L.R. 43 (Yuk.Terr.Ct.)at 46. "R. v. McCain Foods Ltd. (1984) 4 F.P.R.300 (N.B.Prov.Ct.); McCain Foods Ltd. were fined the sum of one dollar on each separate charge for eight violations of the Fisheries Act. */?. v. Bata Industries Ltd., supra, note 23. "Friends of the Oldman River Society v. Canada, supra, note 1. l00J.Palmisano, supra, note 32 at 11. 34 Banks are requiring audits, especially if the firm does not have environmental insurance101. It is a routine part of the credit review of applicant corporations for many if not most Canadian banks before granting loans102. As the cost of poor environmental practices increases, so does the cost of insurance. In some cases, the insurance industry is refusing to sell policies to companies that refuse to clean up their operations103. For some sectors of the business community, even if environmental audits are not compulsory because of regulations, they are effectively necessary simply because of business reasons. While this does not apply to all sectors of the business community, corporations involved in natural resources extraction are by the nature of their operations more or less obliged to do environmental audits. All these different occurrences, from the environmental disasters to the regulatory schemes and codes of conduct are having an impact and are part of the driving forces behind environmental audits. Some, quite obviously, have had a greater impact in the increased popularity of environmental auditing than others. Many of these also feed on each other. For example, environmental disasters have an influence on public attitudes which have an effect on politicians, and eventually the legal regime. The indications are that environmental audits will continue to be an important tool for corporations as our limited resources are exploited and become more and more precious. There are numerous practices obvious to the experienced environmental auditor that present environmental risks but that are not regulated. The fact is, at present, 101Ibid. 102L.Doran, "What about the Environment?" (1989) 96 Can.Banker 24 at 26. 103P.Carson & J.Moulden, supra, note 39. 35 regulatory compliance is no guarantee against liability. Therefore, an audit that includes an identification of risks beyond compliance is advantageous and reasonable in this day and age of environmental concerns104. The driving forces behind environmental audits are such that eventually the environmental audit will be comparable to the financial audit. Governments as well as business and the general community are presently imposing environmental audits on those wanting to do business, even if they are not mandatory. In order to reduce their polluting activities, corporations need to measure what they are doing at present. To obtain the baseline information, they must, at a minimum carry out compliance environmental audits. But it is time to concentrate on the next generation of environmental audits, that is management audits, and aim for eco-audits. As there are no common standards at this time, it is preferable to find incentives for corporations to reduce their polluting activities. It is up to the corporations to find creative methods to solve the environmental problems caused by industrial activity. The following chapters will address environmental audits from the perspective of the major stakeholders: the public, regulators and corporations. 'F.Priznar, "Trends in Environmental Auditng" (1990) 20 Env.L.Rep. 10179. 36 Chapter 3 Environmental audits: public perspectives There are two recent trends that cannot be ignored in the 90's. First of all, society for the most part is concerned with the environment. This concern over the environment does not seem to be just a fad but part of a major shift in public behaviour, similar to the public's perception about drinking and driving, or smoking105 in the industrial world. The environmental movement has attracted many people preoccupied with what is happening on the planet. Secondly, society is not satisfied with the role that business has been playing in the environmental debate. There is demand for greater accountability from business. There are many different ways for the public to demonstrate their concern, from buying more environmentally benign products, investing in green mutual funds, or supporting environmental groups. These actions, increasingly popular, are demonstrating in a concrete fashion the view of the general public. Hence, it is increasingly difficult for governments and industry to ignore environmental issues. In this chapter, I will look at the environmental concerns of the public, and the changes in environmental values of the past twenty years. Environmental values, combined with the advice of experts, affect the environmental public policy agenda. Then, I will look at the environmental auditing policy in the context of the larger context of environmental protection in Canada. T.Carson & J.Moulden, supra, note 39 at 6. 37 A.Environmental concerns of the public The perception of risk to health posed by environmental pollution has increased, regardless of whether it is greater or not. Time and time again, the public has been told by scientists that the new chemical and nuclear technologies are safe. Further down the line, powerful images on television of Chernobyl, the PCB fire at St.Basil Le Grand, the Hagersville fire, the escape of toxic gas in Bhopal, India, reinforce public suspicion and mistrust106. Bland assurances of safety are simply not believed anymore, if they ever were107. That the environment is an important issue is very apparent from the following opinion poll. Two questions are highlighted,108 as to the important problems facing the country as well as the jobs versus the environment dilemma. In 1980 as in 1990, the environment came before jobs and was the number one priority in the minds of Canadians. The following question was asked, "Would you oppose or favour shutting down a major company that provided many jobs in your community if it was polluting the environment?" Sixty percent were in favour of shutting of shutting down the company. As to the question, "What is the most important problem facing Canada in 1990, the one that concerns you the most?", 20 % answered the environment. This was a higher response than to national unity (19%), the economy/ jobs (19%), the government/ deficit (10%) or even taxation (10%). 'D.MacDonald, The Politics of Pollution (Toronto: McClelland & Stewart Inc., 1991) at 66. 'Ibid, at 118. 'anon, "Portrait of Two Nations", Maclean's, June 25, 1990, at 50. 38 Concern about the environment is certainly not limited to Canada and Canadians. A sense of the situation began to be apparent at the 1972 United Nations Conference on the Human Environment in Stockholm. Then came the very important and popular Report of the World Commission on Environment and Development, Our Common Future109 which outlined the challenges that lay ahead as we approach the 2lrtcentury. Acid rain, global warming, ozone depletion, widespread desertification, species loss and the list continues... Environmental trends show that: • "The protective ozone shield in heavily populated latitudes of the northern hemisphere is thinning twice as fast as scientists thought just a few years ago. •A minimum of 140 plant and animal species are condemned to extinction each day. •Atmospheric levels of heat-trapping carbon dioxide are now 26 percent higher than the preindustrial concentration, and continue to climb. •The earth's surface was warmer in 1990 than in any year since recordkeeping began in the mid-nineteenth century: six of the seven warmest years in record have occurred since 1980. •Forests are vanishing at a rate of some 17 million hectares per year, an area about half the size of Finland. •World population is growing by 92 million people annually, roughly equal to adding Mexico each year; of this total, 88 million are being added in the developing world110". It is a cry to better manage the economy and ecology. The concern is not going away. The challenge is great. In 1992, at the Rio de Janeiro United Nations Conference on '"(Oxford: Oxford University Press, 1987). "°S.Postel, "Denial in the Decisive Decade" in L.R.Brown, ed., State of the World (N.Y.: Norton, 1992) at 3. 39 Environment and Development (with the parallel non-government events) attendance totalled 35,000 people. On a daily basis, millions of people around the world focused on Rio through television, radio and newspapers; the importance of the environmental situation could not be ignored. The world leaders were there. With the industrial revolution there had developed a faith that technology could and would solve our problems including our environmental ones111. In modern society, the dominant worldview has been that we can achieve ever more control over the conditions of life through technological advance112. This idea is being challenged. The public's reaction to hazardous material problems and potential technical solutions is mistrust113. Even the scientific community is abandoning the technological optimism that characterized the twentieth century. A joint statement by the U.S. National Academy of Sciences and the Royal Society of London acknowledged that science and technology can no longer ensure a better future unless population growth slows quickly and the economy is restructured: If current predictions of population growth prove accurate and patterns of human activity on the planet remain unchanged, science and technology may not be able to prevent irreversible degradation of the environment or continued poverty for much of the world114. '"O.P.Dwivedi, "An Ethical Approach to Environmental Protection: A Code of Conduct and Guiding Principles" (1992) 35 Can. Pub. Ad. 363 at 365. 112K.Mickelson & W.Rees, supra, note 74 at 1:3. 113A.Kanner, "The Evolving Jurisprudence of Toxic Torts: The Prognosis for Corporations" (1991) 12 Cardozo L. Rev. 1265 at 1276. ""Royal Society of London and the U.S. National Academy of Sciences, Population Growth, Resource Consumption, and a Sustainable World (London and Washington, D.C.: Royal Society of London and the U.S. National Academy of Sciences, 1992). 40 l.The change in environmental values Environmental values have changed in the last twenty years. Attitudes toward the environment are shaped through acculturation and socialization and these are the result of complex interaction between formal education, family orientation, market advertising, employment experience, community participation, as well as a host of other factors115. Definitely environmental values that began as the beliefs of a few are now widely-held societal values116. Law is a reflection of social values and environmental law derives from reactions to nature117. It was only in 1975 that Christopher Stone wrote: .. .neither under present law nor under any imaginable future criminal law is some executive apt to go to jail for actions that lead to a defective product, that adversely affect life-style, employee dignity, or the environment*-or for failure to develop a pollution-free engine. Thus when we talk about regulating corporations through strategies aimed at key individuals, we are considering measures likely to be invoked (if at all) only for the most blatant sorts of acts- which are not necessarily those with the most adverse impact on society118.(* my emphasis) This shows the evolution as reflected in environmental law, and this in less than twenty years. In Canada, more than one executive has been sentenced to jail for violating an environmental regulation119. Environmental damage is no longer thought of as the result IISD.Cohen, "The Regulation of Green Advertising: The State, The Market and the Environmental Good" (1991) U.B.C. L. Rev. 225 at 265. "tr.J.Carpency, supra, note 86. 117K.Mickelson & W.Rees, supra, note 74 at 1:22. ""C.Stone, Where the Law Ends (N.Y.: Harper & Row, 1975) at 60. "In R.v.Varnicolor Chemical Ltd. (3 September 1992) Kitchener 1978 (Ont. Prov. Ct.): Mr. Argenton, the sole directing mind of Varnicolor, received an 8 month jail term for illegally discharging contaminant. Varnicolor, a paint recycling operation had illegally stored thousands of drums of hazardous waste which leaked and contaminated ground water in the area. Mr. Argenton had been personally involved 41 of otherwise legitimate and socially desirable activities carried on by respectable enterprises. It is widely regarded as avoidable and in some cases morally culpable120. 2.Environmentalism In order to advance protection of the environment, Canadians have gone the way of lobbying and environmental activism or environmentalism. Trend spotters predict that in the 90's environmentalism will be the cutting edge of social reform121. It has been shown that private environmental groups like Sierra Club, Greenpeace, the Environmental Defense Fund, and others are very effective and do a good job of "whistle-blowing"; they can be even more effective than regulators122. Environmentalism as we know it probably originated in the last century as the Conservation Movement; an environmental subgroup still calls itself nature conservationists123. Essentially the values of environmentalism can be summarized: l)the belief that the natural world has inherent value in or of itself 2)that we humans are part of that world and not separate from it. Presently, what is noteworthy about the environmental movement is its diversity. in the operations and aware that the company was deliberately violating its permit. ia>T.Schrecker, "Resisting Environmental Regulation: The Cryptic Pattern of Business-Government Relations" in R.Paehlke & D.Torgerson, eds., Managing Leviathan (Peterborough: Broadview Press, 1990). 121D.Kirkpatrick, "Environmentalism: The New Reform" Fortune, Feb. 12, 1990, 44. I22E.Skorpen, "Environment Images in Corporate America" (1991) J.Bus. Ethics 687. 123S.Cotgrove, Catastrophe or Cornucopia: the Environment, Politics and the Future (N.Y.: Wiley, 1982); L.Milbrath, Environmentalists, Vanguard for a New Society (Albany, N.Y.: State University of N.Y. Press, 1984). 42 "Environmentalists" vary from radical groups like Earth First and the Sea Sheperd Society who advocate institution-bashing and monkeywrenching124 to the Sierra Legal Defense Fund who use litigation as their environmental tool125. Many see their activism as a way of protecting themselves and their loved ones. NIMBY, an acronym for "not in my backyard" arises from a natural human impulse for self-preservation. Its impact is tremendous and the activism is spreading126. The environment has probably reached the same level as motherhood statements. (a)Environmental groups in Canada Canadian environmental groups are quite small compared to their U.S. counterparts with commensurate budgets127. Environmental groups go to court more easily in the U.S. than in Canada because of the differences in the systems. Standing128 in Canada, among other things, does create barriers. Also, the Canadian environmental movement has been hampered by intense rivalries and feuds129. Environmental controversy in Canada has been dominated by land use issues rather than pollution per 124D.Russell, "The Morikeywrenchers" in P.Borelli, ed., Crossroads (Washington,D.C: Island Press, 1988) c. 2. 125T.Turner, "The Legal Eagles" in P.Borelli, ed., Crossroads (Washington.D.C: Island Press, 1988) c. 3. 126P. Carson & J.Moulden, supra, note 39 at 7. 127D.Israelson, Silent Earth (Toronto: Penguin Books, 1990) at 222-225. mMinister of Finance of Canada et al. v. Finlay (1986) 33 D.L.R. (4th) 321 (S.C.C.). 12*D.Israelson, supra, note 127 at 224. 43 se130. Table 2 shows a limited sample of environmental groups, their membership and their budgets in 1990. The numbers show strong support on the part of Canadians for environmental concerns. In Canada, environmental activism is more pronounced in B.C., Alberta and Ontario. Activists are generally university educated, have above-average incomes and hold technical/ professional jobs. They believe that environmental quality is declining and often link the environment to health issues. They endorse strong government measures131. Nowhere is the issue more clearcut than in the matter of toxic wastes. Compromise is not part of the picture as the people of the community challenge corporate polluters and their power to make decisions that threaten the community's health. Environmental groups have been effective in putting their point across to the general public as they are perceived as having no vested interest in the matter as compared to the corporations. From the public's view, environmental groups have numerous advantages over the corporations: •Environmental groups are seen as part of the solution whereas corporations are seen as part of the problem •)Members of environmental groups do not appear to be self-interested as opposed to the corporate executives 130The most controversial issues have been related to land use-Clayquot Sound, Great Whale, South Moresby, etc. Another controversial issue, acid rain was dominated by Canada-U.S. responsibilities: Israel son, supra, note 127. 131A.Gregg & M.Posner, The Big Picture (Toronto: MacFarlane Walter & Ross, 1990). 44 •Information provided by environmental groups is generally trusted132. This can be challenged. It is obvious that groups that depend primarily on publicly funded campaigns such as Greenpeace or the Sea Sheperd Society have their own agenda. They will raise more money if there is a sense of outrage, and a perception that there is a crisis and that they are doing a better job than the government. At the same time, it is hard to deny that there are many hard-working and well-meaning people supporting environmental groups who are, above all deeply concerned about the deteriorating state of the planet, be it the diminishing rain forest, the dying belugas, or the air quality in our cities. 132W.Stanbury, Business-Government Relations in Canada: Influencing Public Policy, 2d ed. (Scarborough, Ont.: Nelson, 1993). Table 2 Membership and Budget of Selected Enyironmental Groups in Canada, 1991 Name Canadian Nature Federation Cultural Survival(Canada) Canadian Wildlife Survival Ducks Unlimited Canada Friends of the Earth Greenpeace Sea Shepherd Conservation Society Nature Conservancy of Canada World Wildlife Fund Canada Western Canada Wilderness Committee Sierra Club of Western Canada Number of members(1990) 20,000 dues paying & 20,000 supporters 450 600,000 members & supporters 135,000 contributors 30,000 375,000 n.a. 12,000 50,000 30,000 4500 Budget(1990) $1.05 million $70,000 $11.4 million(1991) $48 million;$14.4 million from Canada $1.2 million $10.3 million(1991) $500,000;$60,000 from Canada $2.3 million $6.2 million (1990/91) $2.8 million(1990/91) $178,000 (1989/90) 'Ibid, at 153. 46 Environmentalists continually call for more open and participatory procedures in environmental decision making134. To participate in the environmental decision making, the public needs more information. Without it there is no basis for decision making. Many Canadians feel that actions are necessary to improve the environment. While some of these suggestions may not have been thought through as to the effect they will have on society in general, it is apparent that Canadians feel that something has to be done to protect the environment and that business and the general population need to be "coerced" into doing more. There is evidence that Canadians are demanding more than what is being done presently. A recent Gallup poll, demonstrated that Canadians are of the opinion that environmental initiatives such as mandatory newspaper recycling, mandatory bottle recycling, higher fines for corporate polluters, reduced product packaging, a ban on styrofoam cups and disposal diapers as well as mandatory jail terms for corporate polluters would be very helpful. They are very supportive of initiatives that would directly affect the public, but also want stiffer penalties for corporate polluters135. B.The right to know The public must decide whether it wishes to continue on the present road, and it can do so only when in full possession of the facts. In the words of Jean Rostand, "The obligation to endure gives us the right to know".136 134R.Paehlke, 'Democracy and Environmentalism: Opening a Door to the Administrative State' in R.Paehlke & D.Torgerson, eds., Managing Leviathan (Peterborough: Broadview Press, 1990) at 43. 135Gallup Canada Inc., releases, January 15, 1991. SR.Carson, Silent Spring (Boston: Houghton Mifflin Co., 1962) at 13. 47 Corporate environmental reporting and environmental audits are part of a greater package that the public and society is demanding from corporations if they want to regain the trust of the public. While the general public has not necessarily been very knowledgeable about environmental audits as such, there is an increased demand for more information and the development of a "right to know". There is a global trend towards greater levels of corporate transparency137. Agenda 21138 identified the right to know as a priority item. It recommends that corporations: -be transparent in their operations -provide relevant information to communities that might be affected by their operations; -report annually on their environmental record, as well as on their use of energy and other natural resources. The Body Shop is among a small proportion of corporations that publish environmental performance reports as a matter of principle139. But other corporations, some who have had major image problems, have also begun to report. Exxon and Union Carbide, both responsible for major disasters have published environmental reports. Others (Dupont, Henkel, ICI, Kemira, Norsk Hydro, Rhdne-Poulenc) had been under sustained pressure from environmentalists and have begun publishing such reports. 137Deloitte Touche Tohmatsu International, Institute for Sustainable Development & SustainAbility, supra, note 28 at 6. mAgenda 21. Program of Action for Sustainable Development. Rio Declaration on Environment and Development (N.Y.: U.N. Publications, 1992). 139Deloitte Touche Tohmatsu International, Institute for Sustainable Development & SustainAbility, supra, note 28 at 26. 48 Monsanto broke new ground in June 1991 with its Environmental Annual Review140. Corporations who have already started to publish environmental performance reports have identified critical components141 to the process: •an environmental policy in place before the reporting process is undertaken; •appropriate management systems in place; •regular performance audits. Environmental audits can be a powerful tool for the general public. Some advocate that environmental audits be mandatory and that they be publicly available. This could be done by establishing a right to environmental information within a Freedom of Information Act142. It does seem premature. These are legitimate long term goals. At this time in the evolution of environmental audits, it seems more appropriate to pressure corporations and governments for more environmental information and reporting rather than mandatory environmental audits. The United States has established a compulsory disclosure measure, the Toxics Release Inventory (TRI) 143. TRI requires companies employing more than 10 employees full-time to provide annual emission data for over 300 toxic chemicals and 20 chemical categories which are manufactured, processed or used in excess of certain , 40rbid. ""Ibid, at 30. M2A.Taylor, Choosing our Future (London: Routhledge, 1992) at 149. ^Emergency Planning and Community Right to Know Act (EPCRA), Title III of the Superfund Amendments and Reauthorization Act (SARA), 1986. 49 threshold amounts. TRI was widely criticized by industry, when it was initiated. It is now seen as beneficial by many, as it became obvious that many corporations had no idea of the waste they were producing. Faced with the information on the toxic chemicals they used, some corporations have been taken important steps to reduce emissions144. Environmental groups are also calling for an environmental auditor, much like the Auditor-General on government fiscal performance. This could be an interesting but obviously controversial appointment. The environmental auditor could report on the progress in meeting environmental goals145. But then there would need to be environmental goals and that in itself would be a tremendous accomplishment. C. Government response to environmental concerns Inevitably, many people are affected and concerned by environmental problems as they can have important repercussions on their health and their children's health. Finding ways of expressing this malaise in a constructive way is a challenge. Ultimately, in a democracy like Canada, we elect a government to weigh the options and to take the necessary and hopefully appropriate decisions. Public pressure as well as support influences the behaviour of governments and business to act appropriately. Regulatory policies in recent years have often been the result of political demands from community, environmental, and consumer groups dissatisfied with what business has been doing146. 144B.Smart, ed., Beyond Compliance. A New Industry View of the Environment (Washington, D.C.: World Resources Institute, 1992). l43D.MacDonald, supra, note 106 at 285. 14<sJ.T.Scholtz, "Political Education is Necessary to Foster Cooperative Enforcement" in J. A.Sigler & J.E.Murphy, eds., Corporate Lawbreaking and Interactive Compliance: Resolving the Regulation Dichotomy (N.Y.: Quorum Books, 1991) at 141. 50 There is demand for greater accountability from business. Public attitudes influence political/ government decisions, partly because the politicians themselves are influenced by prevailing philosophies but also because if they ignore changing attitudes, they will most likely lose the next election and their jobs147. Presently, government involvement in the daily activities of business and Canadians is very high. This meets with the favour of the population demanding "control" or "punishment" of corporate polluters. Undoubtable, large firms invest a lot in lobbying and influencing legislation and regulations, sometimes in preference to spending money complying148. In certain industries, such as pulp and paper, compliance costs are such that it is in the company's interest to delay as long as possible. This is certainly problematic for regulatory departments and agencies with limited investigative and legal resources. If fines for noncompliance continue to increase, this could change. Canadians see the government playing a dominant role in controlling business and initiating adaptation to changing technology or expectations149. In recent years, in the environmental sphere, regulators150 have been focusing on corporations because: •they are a major source of environmental degradation, although by no means the only sources; •they wield extensive economic and political power; 147Ibid. at 19. 148T.Schrecker, supra, note 120. 149N.R.Ball, 'Technology, Business, and Leadership'' inG.B.Doern, ed. The Environmental Imperative (Toronto: C.D.Howe, 1990) at 48. 150In Canada, this is more prevalent in Ontario, British Columbia and Quebec. 51 •larger corporations commit a disproportionate number of violations of the law; •corporations handle the most dangerous types of pollutants-individuals rarely have the resources or the need to handle heavy metals, radioactive waste or chemical residues; •the environmental degradation which corporations cause is relatively concentrated and large in scale compared to the activities of individuals; as a result, corporate activity is more likely to overwhelm natural equilibria; •corporations have very extensive resources with which to reduce pollution, resources which they have accumulated in part by using up clean air, clean water and other public goods; and •the localization and the scale of corporate pollution typically make it easier to control than the equivalent amount of pollution from individuals151. This has been done at different levels of government. 1. Jurisdictional Issues The division of powers between the federal and the provincial governments is set out in the Constitution Act, 1867152. It is to be noted that the environment is not mentioned and that there is no head of power giving Parliament a clear jurisdiction. Federal jurisdiction over environmental matters is fairly clear where there are interprovincial and international effects153. As the provinces have primary jurisdiction 131D.Saxe, supra, note 79 at 21-22. 152U.K., 30 & 31 Victoria, c.3. 153Ibid. 52 over "Property and Civil Rights in the Province154" as well as in "federal and matters of a merely local or private nature in the Province155", they also have jurisdiction to regulate with respect to pollution matters. The environment is definitely a "diffuse subject156" with possible duplication between different levels of government157. There is an attempt at coordination and sharing of experiences with the Council of Ministers of the Environment which functions essentially in a liaison capacity. All the federal and provincial ministers are members of the Council, meeting once a year with a rotating chairmanship. A committee of Deputy Ministers reports to the Council. They appoint committees in the different areas such as the Water Advisory Committee and Air Advisory Committee. These subcommittees, consisting of staff from federal and provincial environment departments, do the work of the Council in addition to their regular duties. Coordination is provided by a secretariat in Winnipeg, headed by an executive director and a total staff of four158. One may wonder if such a structure isn't indicative of a lack of importance and priority accorded to the environment. The federal Minister of the Environment is empowered under the Government Organization Act159 to initiate and recommend programs to promote the establishment I54Ibid., s. 92 (13). 155Ibid., s. 92 (16). l56Friends of the Oldman River v. Canada, supra, note 1 . 157For example, the federal and the B.C. governments have different standards for the control of effluent (pulp & paper). 1S8D.MacDonald, supra, note 106. 15»R.C.S. 1970-71, c.42, as amended, 1979, R.C.S. 1978-1979, c. 13. 53 or adoption of objectives or standards relating to environmental quality or pollution control. The Environmental Protection Service (EPS) of the Department of the Environment is the primary agency responsible for this mandate. In the case of environmental audits, Environment Canada took the lead by undertaking a national study160 and publishing a policy statement which dealt with environmental audits161. 2.The politics of environmental regulation Canadian national governments are fairly free to either pursue accommodations with industry and to balance regional economic objectives (often through federal subsidies for energy and mineral development) or to promote broader environmental goals with less clearly defined and politically effective constituencies162. Canadian politicians have not supported any environmental law reforms which would provide an increased role for legislation or litigation. During parliamentary hearings on the Canadian Environmental Protection Act (basically a consolidation of weak existing environmental protection statutes), the Minister of the Environment on two separate occasions attacked163 the concept of an Environmental Bill of Rights, because it would mean that parliament would be abdicating its environmental responsibility to the courts. This would undermine the capacity of elected officials to represent the public 160J.W.Reed, supra, note 41. l6lCanadian Environmental Protection Act: Enforcement & Compliance Policy, supra, note 5. l6*r.Schrecker, supra, note 120. ""Canada House of Commons, Standing Committee on Bill C-74, Minutes of Proceedings 1 (November 24-25, 1987), 25; (February 3, 1988) 14-16. 54 interest and be accountable to the electorate164. There is also the very important question of economic development. Job blackmail is a very effective tactic used in Canada, especially outside the Quebec-Windsor corridor. Resource-based industries such as agriculture, mineral industries or forest products are extremely important to the economic health of the Maritimes, the Western provinces and British Columbia. Direct threats of plant shut-downs or divestment in response to regulatory initiatives are very powerful, especially in one industry towns. A tradeoff between jobs and the environment exists when the president of Noranda says it does. Also Canada's physical location, that is sharing a border with the United States, has meant that environmental politics has also had to focus on the U.S. and transboundary pollution originating south of the border165. Regulators in Canada, through the permit system sanction the generation and discharge of toxic substances into the environment. Each year, Canadians generate and discharge to their environment many millions of tonnes of polluting substances. Every year, Canada is more polluted than the previous year. Eight million tonnes of hazardous waste is legally dumped into the environment. While everyone agrees the solution is not to produce the waste in the first place, there is still much to be done about it. The human health argument has its limits as a motivator of political change166. We just have to look at the cigarette issue. Most people will acknowledge that it is unhealthy to smoke. l64T.Schrecker, supra, note 120 at 183. 1<S5D.MacDonald, supra, note 106 at 48. '"Ibid, at 259-260. 55 Yet it took high taxes combined with anti-smoking campaigns to reduce the number of smokers. 3.Government policy on environmental audits [T]hose who engage in regulated activity should, as part of the burden of responsible conduct attending participation in the regulated field, be deemed to have accepted certain terms and conditions applicable to those who act within the regulated sphere. Foremost along these implied terms is an undertaking that the conduct of the regulated actor will comply with and maintain a certain minimum standard of care167. Regulators realize the importance of environmental audits as a management tool for companies and government agencies and promote their use. In order to encourage their use, Environment Canada has stated that inspectors will not request environmental audit reports during routine inspections. But if inspectors or investigation specialists have reasonable grounds to think that an offence has been committed and that the environmental audit report would be relevant to the particular violation, the report will be requested if the information cannot be obtained through another source. Demand for access will be made under the authority of a search warrant unless there is exigent circumstances. This would be the case if the delay necessary to obtain a search warrant would likely result in danger to the environment or human life, or the loss or destruction of evidence168. If corporations do not undertake compliance audits, how can they be aware of their environmental failings? A key element of due diligence is taking prompt l61R. v. Wholesale Travel Group Inc. (1991) 3 S.C.R. 154. l(gCanadian Environmental Protection Act: Enforcement and Compliance Policy, supra, note 5 at 29. 56 and effective action to correct any problems2'*. It seems that compliance audits would be necessary to establish a minimum standard of care. It is necessary to ensure that those involved in industrial and manufacturing activities are aware of their responsibilities. 4.Command and control: the search for alternatives Traditionally, government response to environmental problems has been a "command and control" style of environmental legislation, that is government sanctions as prescribed for environmentally harmful behaviour. Generally there is a standard or a rule with a corresponding stipulation of penalty for violation170. Up to now, standard setting in Canada has been a bargaining process between government agencies and industries. With the command / penalty style, for example, fisheries officials who drafted legislation that prohibited putting slash, stumps or other debris into water frequented by fish knew very well that it would be hard or impossible to enforce. It is unclear in what circumstances the debris is harmful to fish. Consequently, standards or objectives must be negotiated in the circumstances of each individual case. The government official is often outgunned171. There have been many instances documenting the failure of federal and provincial environment departments to enforce their own laws and regulations172. For example, in the pulp and paper industry, companies and mills often fail to satisfy the terms and conditions which they have negotiated and agreed to, with Environment imR. v. Placer Developments Ltd., supra, note 88. 170D. Cohen, supra, note 115 at 232. 171 A.R.Thompson, ed., Environmental Regulation in Canada: An Assessment of the Regulatory Process (Vancouver: Westwater Research Centre, U.B.C., 1980) at 33-36. l72D.MacDonald, supra, note 106 at 179. 57 Canada173. (a)Incentive based regulation The "command and control" style of environmental regulation is in disfavour with many economists and policy analysts because it is considered expensive and inefficient. In the case of environmental concerns, it is perceived that the reason we have problems is that the true cost of doing business does not show up as real costs to economic actors174. To change this is the role of society and therefore governments, not the business community. We are moving towards this, to a certain extent, with the notions of "polluter pays". The present system fails to require polluters to bear the true costs of their activity, leading to externalization of costs and therefore to economic inefficiency. It is believed that incentive-based regulation would be preferable and would produce better results175. Partial replacement of income and other taxes with environmental taxes is considered an effective way to move the economy onto an environmentally sustainable path176. Environmental taxes incorporate the costs of environmentally destructive economic activities into the economy, correcting the shortcomings of the market177. 173W.F.Sinclair, "Controlling Effluent Discharges from Canadian Pulp and Paper Manufacturers" (1991) 1 Can. Pub. Policy 86. 174A.J.Jacobson, "Environmental Accountability Beyond Compliance: Externalities and Accounting " (1992) 12 Cardozo L. Rev. 1333. 175M.S.Greve & F.L.Smith, Jr., Environmental Politics. Public Costs, Private Rewards (New York: Praeger, 1992). 176L.Brown, "Launching the Environmental Revolution" in L.R. Brown, ed., State of the World (N. Y.: Norton, 1992) at 182. at 178-179. 1T7Ibid. 58 The most familiar example of a market-based incentive is the high tax on smoking to deter smoking. Consumption taxes such as a carbon tax on fossil fuels in proportion to their carbon emissions during combustion, environmental levies on products, effluent or emission charges for discharging pollutants or waste water, subsidies for energy conservation are some of the examples of market-based incentives178. In the case of air management, emission trading is such a market-based incentive program. The program works as follows: a cap is placed on the total quantity of pollutants allowed to be emitted within an airshed. An appropriate share of the total amount of pollutants allowable is allocated to each participating emission source within the airshed. Participating firms can then buy or sell their emission shares. Firms with low pollution abatement costs would increase their pollution abatement activities and sell their surplus emission shares to firms with high pollution abatement costs179. The Clinton Administration in the U.S. intends to expand emission trading as it is considered an effective program180. Good policy implementation is necessary to ensure that desired changes in behaviour actually occur in an entrenched way over the long term181. Environmental regulation is a reaction of mistrust of markets, a belief that some resource allocation decisions should be the product of collective choices about the kind of society we want. What is needed is a regulatory climate that stimulates new ideas and nurtures 178Emission Trading Working Group, Emission Trading. A Discussion Paper (Canadian Council of Ministers of the Environment, 1992) at 8. I79lbid. '""Vancouver Sun, Sept 9, 1993. '"G.B.Doern, "Getting it Green" in G.B.Doern, ed., The Environmental Imperative (Toronto: C.D.Howe, 1990) at 3. 59 technological creativity rather than stifling the development process at a slightly better level than the present182. The present legislation, with an effective enforcement program, combined with driving forces in the economy seem to be effective in encouraging the use of environmental audits. Keeping management audits voluntary is a way for corporations to look for innovative solutions to pollution avoidance rather than just chase after numbers. Environmental regulations and their prescriptive rules do not necessarily force industry to be creative or to stretch the limits of technology183. It seems desirable that governments use both environmental regulation, an effective enforcement program and markets to yield the most effective and efficient solutions. Voluntary environmental audits are the cornerstone of such an effective system. 182P. Carson & J.Moulden, supra, note 39 at 30. 183A.L.Alm, "A Need For New Approaches" (1992) EPA J. May/June. 60 Chapter 4 Environmental audits: the perspective of the corporation A.Environmental audits: the reactive mode For many corporations, environmental audits and their benefits are linked to the present regulatory regime. Initially, these corporations began using compliance audits to protect themselves, as they are an important tool enabling corporations to examine their environmental liabilities. First and foremost, environmental audits aid the corporation as well as its officers, directors, and employees in reducing risk of civil or criminal actions184. Once the benefits of compliance audits are realized, some corporations go on to a more proactive approach and to the utilization of management environmental audits. Other corporations, because of the type of business, their management philosophy, or other reasons, undertake management environmental audits from the outset. 1.Compliance audits: a means to reduce corporate environmental risk While many corporations are incorporating environmental concerns in their operations, the legal implications must inevitably be considered. Otherwise, this initiative may be very costly for the corporation. Some lawyers for the defense hold that it is unwise to conduct environmental audits at all, especially if the company is not committed to act on the results185. 184M.E.Kriss & G.L.Vannelli, "Today's Criminal Environmental Enforcement Program: Why You May be Vulneable and Why You Should Guard Against Prosecution Through an Environmental Audit" (1991) 16 Columbia J.Env.L. 227 at 241. 185G.Krovatin,"Criminal Environmental Investigations: Caution Flags for Corporate Managers" (1991) 12 Cardozo L.Rev. 1291. 61 (a) Corporate liability If prosecuted for an environmental violation, a due diligence defence, also known as a defence of reasonable care, is available to corporations; that is, to be acquitted they need to show that they have been duly diligent, that they have done everything reasonable to prevent the offence. A mistaken set of facts, if true, would render the act or omission innocent186. Due diligence must be exercised by the directing mind and will of the corporation187. The onus is on the defendants to establish the defence of due diligence upon a balance of probability. The Supreme Court of Canada has held that the accused must establish on a balance of probabilities that reasonable care was exercised, after carefully considering what steps should be taken to avoid the incident188. It is not an easy test. It is not sufficient to hire careful people and train them carefully. Provisions must be made depending on the circumstances to avoid environmental incidents. A proper system must be in place189. The court will look to see if there is a general standard of care to the business activity and if the accused respected that standard. The second stage of the test is to see if there are special circumstances which might necessitate a different level to standard practice190. Different risks and circumstances will influence the necessary standard of care. Greater precautions are required if the risk and possibility of 6R. v. Sault Ste Marie, supra, note 89. 'Ibid. iWholesale Travel Group Inc. v. R., supra, note 167. '/?. v. Gulf of Georgia Towing Co. (1979) 10 B.C.L.R. 134. >R. v. Gonder (1981)62 C.C.C. (2d) 326 at 331 (Yuk.Terr.Ct.). 62 harm are high; the more likely the risk is to occur, the higher the standard of care191. The degree of reasonable care to be exercised is dependent upon the circumstances of the case192. This is to expected; most people expect greater precautions from a corporation handling toxic wastes, PCB's, or radioactive material than from a fisher or a farmer. The minimum standard of care is often compared with the custom of the trade193 or common practice. To do less than competitors or colleagues is an indication of lack of due diligence. This does not mean that the custom of the trade or common practice is not negligent194 but simply that it is a minimum. The appropriate standard may be higher than that. In R. v. Northwood Pulp and Timber Ltd.195, the standard was stated as that of a "reasonable professional possessing the expertise suitable to the activity in issue". In the United States, environmental audits have been successfully used to prove that corporate management knew of environmental violations and did not act appropriately196. Therefore, when commissioning an audit, the company should be prepared to act upon the findings. If not, the corporation is in the process of documenting its environmental failings. These could be used to build a case against the corporation or mR.v.Gonder, ibid.; R. v. Placer Developments Ltd. supra, note 88; R. v. MacMillan Bloedel (Alberni)Ltd. (1979), 47 C.C.C.(2d) 118 (B.C.C.A.); R. v. Panarctic Oils Ltd., [1983] N.W.T.R. 47, 12 C.E.L.R. 29 (Terr. Ct.). i92R. v. Canada Tungsten Mining Corporation (1916) W.W.D.11104, (N.W.T.S.C.). mR. v. Consumer's Distributing Co. Ltd. (1980) 57 C.C.C.(2d) 317; Koerber v. Kitchener Waterloo Hospital (1987) 62 O.R. (2d) 613; J.G.Fleming, The Law of Torts, 7* ed. (Agincourt: Carswell,1987) at 109-110; ""J.G.Fleming, ibid. 195(June 22, 1992) Prince George 51502 (B.C. Prov. Ct.) at 13. ,96U.S. v. Ashland Oil, 705 F. Supp. 270 (W.D. Pa. 1989). 63 as evidence in a court of law. The basic legal point is simple at present: a company should not have an environmental auditing program unless it is prepared to fix the problems discovered. (b) Liability of officers, directors and agents Officers and directors are generally protected behind the "corporate veil" according to the doctrine in Salmon v. Salmon and Co.191 which established that a corporation is a separate legal entity which may own property, carry on business, possess rights and incur liabilities. According to this doctrine, officers, directors and agents would not generally be held accountable for their actions but are protected by the "corporate veil", if there was violation of an environmental law. The corporation and not the individual is held responsible for the deed. Thus, if convicted of an environmental offence, the corporation would pay the fine or penalty in question; for many corporations this just becomes a cost of doing business like paying taxes, the accountant, etc. Yet, incorporation should not protect the guilty. Courts and legislatures are reaching behind the corporate veil to impose environmental responsibility as: The device of incorporation does not protect people who commit offences. A company can only act through human beings, and a human being who commits an offence on account of or the benefit of a company will be responsible for that offence himself, just as any employee committing an offence for a human employer is liable198. This notion has been strengthened by statutory law. In order to render officers, directors and agents accountable of their actions, environmental legislation such as the 197[1897] A.C.22(H.L.). 198G. Williams, Textbook of Criminal Law (London: Stevens & Sons, 1978) at 946. 64 Canadian Environmental Protection Act199 is written in such a way as to render officers, directors and agents of the corporation liable for an environmental offence. Section 122 of the Act states: Where a corporation commits an offence under this Act, any officer, director or agent of the corporation who directed, authorized, assented to, acquiesced in or participated in the commission of the offence is a party to and guilty of the offence, and is liable to the punishment provided for the offence, whether the corporation has been prosecuted or convicted. Similar worded provisions are contained in the Transportation of Dangerous Goods Act200, and the Fisheries Act201 as well as in various pieces of provincial legislation. For example, in British Columbia, section 34(10), of the Waste Management Act102 provides for prosecution of directors and officers as well as employees and agents who have authorized, permitted or acquiesced in offences under the Act. An officer or director of the company can be prosecuted, regardless of whether the company is prosecuted or convicted of the offence. Officers and directors who want to protect themselves from civil or criminal prosecution have to ensure that the corporation is complying with environmental legislation. It is therefore an incentive for officers and directors to take environmental legislation seriously as they can be personally affected if there are environmental violations. 199S.C. 1988, c. 22; R.C.S. 1985, c. 16 (4th Supp.) [hereafter CEPA]. ^ . S . C . 1985, c.T-19, as amended, s . l l . mR.S.C. 1985, c. T-14, as amended, 78.2[re-enacted S.C.1991, c. 1, s.24]. ^S.B.C. 1982, c. 41, as amended. 65 Also, subsection 124(1) of CEP A203 states: In any prosecution of an offence under this Act it is sufficient proof of an offence to establish that it was committed by an employee or agent of the accused, whether or not the employee or agent is identified or prosecuted for the offence. Therefore, the employee may not necessarily be prosecuted but the officer or director could be for an offence committed by an employee in the normal course of employment. Officers and directors who want to protect their employees must also take precautions. So while regulators in Canada have traditionally tended to work with corporations and use the carrot approach, they certainly have the possibility of using a "big stick" against officers, directors or employees if they are so inclined. Recently they have begun to change their tactics to render officers and directors more accountable. Is there a reason why officers and directors should be held accountable for the offences committed by the company? Lord Denning put in a very eloquent manner in Bolton Engineering v. T J Graham204: A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind or will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such. ^Supra, note 199. ^[WSe] 3 All ER 624 at 63. 66 To treat the environment seriously means that it should be treated seriously by corporations and the courts. In 1980, then Chief Justice Stuart of the Yukon Territorial Court addressed the question of sanctions upon corporate officials. He stated that: It is an effective means of transmitting a sanction directly to persons responsible for criminal activity. This personal liability is necessarily attendant to voluntary involvement in a corporate enterprise and to the use of a corporate scheme to pursue personal objectives. Further, it is the most effective method of ensuring that persons with the power to shape corporate policy are deterred from either active or passive acquiescence in the development of corporate policies precipitating violations. There must be a high degree of care imposed upon corporate officials to ensure corporate compliance with the law205. This method has more of a deterrent effect than only holding the corporation responsible. The R. v. Bata Industries Ltd.706 case has spurred some officers and directors to make certain that their corporations have a due diligence program. The Court held that the burden of proving due diligence rested with the defendant. In Bata, the president and vice-president were convicted and sentenced for failing to take all reasonable care to prevent a discharge of chemicals. The chief executive officer was also personally charged but he was able to demonstrate that he had been environmentally responsible for a person in his position. The knowledge and degree of notice was a key factor in the judgement. Ormston Prov. J. ruled that Mr. Bata, the chief executive officer was entitled to assume that his on-site executives would address the environmental situation. Judge Ormiston found that the company did not establish that it exercised due diligence. The company had not established the necessary system to prevent the offence. Bata Industries ™R. v. United Keno Hill Mines Ltd., supra, note 96. ^Supra, note 23. 67 were lacking in comparison with those of a neighbouring corporation generating similar wastes. The Court identified the factors to be taken into account when considering if individual directors have exercised the requisite degree of due diligence: 1. The board of directors should establish a pollution prevention system This includes supervision, inspection and control; 2. The system must be sufficient to ensure compliance with environmental laws given the terms and practices of the industry. Company officers should be required to report back periodically to the board on th the operation of the system; 3. Reports to the board in a timely manner should be required on any substantial non-compliance; 4. Directors are responsible for reviewing and acting upon environmental compliance reports but are justified in placing reasonable reliance on reports provided to them by corporate officers, consultants, counsel or other informed parties; 5. Directors should substantiate that officers are promptly addressing environmental concerns brought to their attention by government agencies or other concerned parties including shareholders; 6. Directors should be aware of the standards of their industry and other industries which deal with similar environmental pollutants or risks. 7. Directors should immediately and personally react when they are aware that the system has failed. The Company was fined $120,000 and the two directors were fined $12,000 each. 68 Seeing three colleagues being personally charged for an environmental offence had a very sobering effect on the business community and they were seen to pay attention207. Some companies are taking due diligence and environmental compliance more seriously as they see a potential for their officers and directors to be held responsible. It is not just a cost of doing business anymore, like paying for a permit. The Court placed the company on probation and ordered it to: •pay half the fine to the local waste management board in to help in toxic waste reduction; • publish the facts leading to conviction and the penalties on the front page of the Bata newsletter; • publish and recommend to all Bata's worldwide companies the toxic waste storage standards in Ontario; • place a caution on the title to the land involved to warn future purchases; • make environmental issues a mandatory item at directors' meetings over the next two years; • not reimburse the two convicted directors. In the United States, the courts have stated that directors and officers can not rely on traditional corporate principles, which prevent individual liability absent a conclusion that an individual engaged in procedural irregularities, thus justifying "piercing the corporate veil", or that an individual had an active involvement or direct supervision in the events leading to the alleged harm. The liability standard under CERCLA is whether 'J.Lorinc, supra, note 12. 69 the individual could have prevented or significantly abated the hazardous waste discharge. Three factors are to be taken into consideration: •the director's or officer's responsibility for the corporations health, safety and waste disposal matters; •the director's or officer's authority to control the company's waste handling practices; and •the director's or officer's authority, and efforts actually made, to prevent unlawful disposal208. Delegation of responsibility to subordinates is evidence of responsibility for the overall operation209. Similarly in Canada, the reasoning in Sault Ste Marie and Bata seem to put forward the importance of control. How much control is required will depend upon an assessment of the person's position with respect to the activity at the point where pollution occurs. Therefore the test is whether the individual could have prevented or significantly abated the discharge210. Corporations wishing to reduce the environmental liabilities of their directors, officers and agents must be aware of their environmental risk and take the necessary steps. (c)Corporations and disclosure of environmental information Violations of environmental duties may be discovered during an audit and there ^"Michigan Natural Resources Commission v. Arco Industries Corp. (1989) 615 P.2d 730. ™State of Wisconsin v. Rollfink (1991) 469 N.W. 2d 398. 2l0Sault Ste. Marie, supra, note 89; Bata, supra, note 23. 70 is no guarantee that an environmental audit will not result in enforcement211. But, it should be remembered that Environment Canada212 and EPA213 want to promote environmental auditing. It used to be that in the absence of wrongful intent, it was unlikely that the information generated from the audit would result in liability to a corporation or its employees which would lead to the imposition of significant penalties214. It is not certain that this would still be the case. Every company has information that it wishes to keep out of the hands of competitors. The federal Access to Information Act215 recognizes that "trade secrets" must be withheld from the public. It is the same for information that could reasonably be expected to result in material financial loss or gain to the party. But the Act has a provision216 that permits the disclosure of confidential information, other than trade secrets. This would be in issues where it would be in the public interest as it relates to public health, public safety or protection of the environment, if disclosure clearly outweighs the financial prejudice. In the United States, EPA has the right to request trade secrets from a company as well as an audit or parts of it whenever necessary for an enforcement action and when 211See Canadian Environmental Protection Act: Enforcement and Compliance Policy, supra, note 5; Environmental Auditing Policy Statement, supra, note 62. 2,2Canadian Environmental Protection Act: Enforcement and Compliance Policy, supra, note 5. 2,3Environmental Auditing Policy Statement, supra, note 62. 214L.Cahill, ed. & R.W.Kane, supra, note 46 at m-12. 21577w? Access to Information Act, R.C.S.1985, c. A-l. 2,<Tbid. Section 20(6). 71 pertinent to a criminal investigation217. Once in EPA files, the information must be available to the public except for information protected as a trade secret218. Competitors and other members of the public could seek access to these under the Freedom of Information Act219. Regulations promulgated by EPA spell out the necessary procedures to be followed if the company wishes to preserve the confidentiality of any business information submitted220. There is no absolute guarantee of confidentiality. When the courts determine if information is entitled to be protected as confidential business information they usually consider the following: l)whether the information was generated by the person seeking protection; 2)the extent to which the information is known outside the company; 3)the measures taken to guard the secrecy of the information; 4)the value of the information to the business and its competitors; 5)the amount of effort or expense involved in developing the information; and 6) the ease or difficulty of others on legitimately duplicating or acquiring the information independently221. Also, environmental laws such as CEP A222 and NEPA223 impose reporting and 217Van Cleve, supra, note 6 at 1223. 218U.S.C. 552, ELR Stat. 410115. 2,1bid. 220R.M.Hall, Jr. & D.R. Case, supra, note 49 at 5-4. ^'Ibid. at 5-3. ^Supra, note 199. 72 recordkeeping activities. Failing to report, submitting false information and/ or destroying records carry significant penalties for corporations and individuals. (d)Prosecution and litigation privileges Corporations being prosecuted have some privileges available to protect themselves against disclosure of environmental audits: the attorney-client privilege, the work-product rule and possibly the privilege of self-evaluative analysis, (e) Attorney-client privilege If the firm becomes involved in litigation, very little can be done to avoid disclosure of environmental audit information224 though there may be some protection afforded through attorney-client privilege. To qualify for this protection, four elements must be met: 1) confidentiality; 2) attorney-client relationship; 3)legal advice; 4)absence of waiver. It has been traditionally accepted that communications with one's lawyer are confidential. This was reconfirmed by the Supreme Court of Canada in Solosky v. The Queen (1979)225, where Dickson J. stated: the right to communicate in confidence with one's legal adviser is a 223U.S.C.§§ 4321-4347 (1982 & Supp. V 1987). ^D.J. Henz, "Safeguarding Confidential Business Information Part 1: Environmental Audits and Litigation" (1984) Pollution Eng. Jan., 30. 22S(1979) 50 C.C.C. (2d) 495 at 510; [1980]1 S.C.R. 821 at 839. 73 fundamental civil and legal right, founded upon the unique relationship of solicitor and client. The advice sought must be "legal" advice. The requirement as found in Minter v. Pries?26, states: The relationship of solicitor and client being once established, it is not a necessary conclusion that whatever conversation ensued was protected from disclosure. The conversation to secure this privilege must be as such as, within a very wide and generous ambit of interpretation, must be fairly referable to the relationship, but outside the boundary the mere fact that a person speaking is a solicitor, and the person to whom he speaks is his client, affords no protection. Dickson, J.227 reaffirmed the principle of privilege for solicitor-client communications as framed in Wigmore228: Where legal advice of any kind is sought from a professional legal adviser in his capacity as such, the communications relating to purpose made in confidence by the are at his instance permanently protected from disclosure by himself or by legal adviser, except the protection be waived. Not every audit is done in preparation of litigation. While this has been argued, Judge Wald of the D.C. Circuit of Appeals clarified that this is not the case: To argue that every audit is potentially the subject of litigation is to go too far. While abstractly true, the mere possibility is hardly tangible enough to support so broad a claim of privilege. We need not decide here whether litigation need be consciously contemplated by the attorney: the documentation must at least have been prepared with a specific claim supported by concrete facts which would likely lead to litigation in ^ [ ^ O ] A.C. 558 at 568. wSolosky v. The Queen, supra, note 224 at 507. 2XS Wigmore, Evidence (McNaughton revision) (1961), para.2292. mind... 74 In general, it seems that the best course of action for a company is to: •commit to a legitimate environmental auditing problem just as they commit to regular financial audits; and •plan, staff, and implement that program, ever-mindful of the need to take reasonable steps to maximize confidentiality and minimize the risk of liability230. Compliance with laws is an important first step, but it is only the first step in the management effort of environmental management. B.From compliance to management audits: the proactive mode The transition to sustainable development presents every organization with both challenges and opportunities, whether the workplace in question is a government department or a small business operating from an individual's siting room. Sustainable development demands the continual pursuit of environmental excellence in management practices. Among the opportunities are the benefits of savings that are often to be made from environmental efficiency... Maurice F.Strong Secretary General U.N. Conference on Environment & Development231 Some corporations have adopted new or more environmentally friendly ways of doing business because they are convinced that it is a more efficient, effective as well as ^Coastal States Gas Corp. v. Dept of Energy (1980) 617 F. 854 at 865. 230L.B.Cahill & R.W.Kane, supra, note 46 at III-3. ^Workplace Guide, Practical Action for the Environment (Ottawa: Harmony Foundation of Canada, 1991). 75 responsible way of doing business. Since the 1980's corporations are comprehending that compliance with existing regulations is an insufficient response232. Compliance is no protection in the wake of a major plant accident or oil spill. Liability and public opprobrium may follow regardless of compliance to environmental legislation233. It is to be noted that, very often, companies have information that the lawmakers do not have. Therefore to limit their duties to the law is not necessarily responsible234. The importance of the notions of environmental responsibility and ethics are increasingly articulated in the 90's. Environmental audits are an emerging corporate tool; they are the most frequently used of all "green" management tools235. The key factors in an environmental auditing program are top management support, an audit team leader independent of production responsibilities, a structured program with written audit procedures, a system for reporting audit findings to senior management, and a corrective action program. 1.Integration of environmental issues in the corporation Traditionally, environmental regulation has been perceived as a challenge to business because it inherently requires investments on pollution control or waste treatment which, other things equal, would most probably not be made. This investment is often considered "unproductive" use of capital as it fails to generate a return ^A.C.Howatson, Toward Proactive Environmental Management. Lesson from the Corporate Experience (Ottawa: The Conference Board of Canada, 1990) at vii. ^Ibid. ^C.D.Stone, "Beyond the Transactional Audit" (1992) 12 Cardozo L. Rev. 1337. ^Cairncross, supra, note 20 at 19. 76 comparable to that on investments in production technology, marketing, or product development as a few examples236. It is becoming obvious for many executives that they will have to reduce and recycle the amounts of solid, liquid, even gaseous wastes they produce and bear the cost for doing so237. In reality, finding new ways of doing things can be cost savers for the corporation, especially when it incorporates conservation and / or recycling238. In some cases, corporations outpace the actions of the communities of which they are a part239. The business community wants governments to give a clear incentive to set and meet realistic environmental goals while recognizing the strength of both business and government. Business sees nothing inherently wrong with rewarding good behaviour and punishing the bad240. Five imperatives have been identified for companies wanting to achieve high performance environmental management: 1. Define commitment and posture The company must evaluate and define the company's environmental, health and safety management posture, including the commitment and objectives of senior management. The company's environmental, health and safety baseline must be established. 2.Measure performance The company must develop new systems for measuring environmental progress against company goals and the requirements of key stakeholders. ^P.Carson & J.Moulden, supra, note 39 at 30. ^^.Skorpen, "Environment Images in Corporate America" (1991) J.Bus.Ethics 687. 23*M.Metcalf, Environmental Affairs Manager, Canadian Airlines International, personal conversation, September 30, 1993. ^ i d . ^ .R .Ba l l , supra, note 149 at 50-51. 77 3.Recognize what's wrong The company must understand where the traditional environmental, health and safety initiatives fall and build on those for the next decade and beyond. 4.Build a strategy The company must build a long-term strategy based on understanding stakeholder environmental needs. 5. Integrate The company must integrate and ingrain environmental, health and safety management into the critical business processes241. 2.The challenge to business Some in business and industry continue to be guided by an out moded philosophy. For a long time, industry took for granted two basic assumptions: one was that resources for industrial development and production would always be available somewhere on the globe and enable industrial growth to proceed without constraints; the other was that the earth could absorb the byproducts of industrial societies indefinitely without undergoing fundamental changes. These assumptions no longer hold - if in fact they ever did. S.Woolard,Jr., Chairman and CEO, Dupont242 The move toward the new environmental agenda is a major political and social development. Recent experience teaches that it is cheaper and less troublesome for companies to think about environmental problems before they happen. In short, prevention is good business243. There are now examples of corporate successes, of corporations benefiting economically because they are responding to a deeply felt concern ^'J.L.Greeno & S.N.Robinson, supra, note 13 at 229. ^.Smart , ed., supra, note 144 at 197. ^M.L.Manewitz, "Beyond Compliance: A Corporate Perspective" (1992) 12 Cardozo L. Rev. 1343. 78 about the future244. The environment can be seen as an opportunity rather than something distasteful one has to deal with. The Body Shop and Ben & Jerry's are just two well publicised success stories where economic and environmental interests are intertwined245. Both have sales in the millions and are growing246. Not surprisingly, some in industry are not necessarily concerned with environmental issues; they take criticism lightly or react defensively by offering scientific defense of past actions. They do not seek to understand and respond to the criticism and problems like they probably do in other issues247. The environment has become an emotional and "touchy" subject for some. Emotions tend to cloud the decision making process rendering it less rational. Those in an industry where pollution is a problem would be well-advised to clean up in advance of and better than the competitors. More and more firms realize that it is easier to design to stay ahead of somewhat unpredictable environmental regulations than to play a constant catch-up game. The legacy of lengthy and debilitating lawsuits is not an enviable one for any retired business leader248. (a)Enviromnental issues and business Business resistance to environmental regulation and environmentalists has been fierce at times. Firms charged under environmental statutes have spent much time and money fighting in court as well as lobbying for environmental legislation that is in their ^L.R.Brown, supra, note 176 at 185. ^Ibid. ^Ibid. at 186. 247B.Smart, ed., supra, note 144 at 2. 248N.R.Ball, supra note 149 at 50-51. 79 favour. Many corporations have failed to respond effectively to environmental issues and to the efforts of environmental groups249. Some have ignored the significance of environmental problems250. Corporations accustomed to internalizing profits while externalizing costs, by passing on the expense of environmental degradation are not eager for change251. There is a perception in the general population that industry, other than farming, is not doing a very good job of protecting the environment. More people perceive all the industries (other than farming) as doing a poor job of protecting the environment rather than doing a good job. When asked whether or not they think that industry is doing a good job or a bad job of protecting the environment, the overwhelming response is negative. Few people feel that the automobile, logging, nuclear energy, mining, pulp & paper, oil, or steel industries are doing a good job of protecting the environment252. The public is often sceptical about the environmental intentions of big business and corporations. Some corporations have even resorted recently to intimidating opponents with such tactics as Strategic Lawsuits Against Public Participation or SLAPPs. These have arrived to Canada from the United States where it is estimated that thousands of Americans are sued every year for petitioning governments for redress of grievances. Firms such as MacMillan Bloedel and Fletcher Challenge have sued ^W.Stanbury, supra, note 132 at 152. 250Ibid. ^'L.R.Brown, supra, note 176 at 182. Gallup Canada Inc., "The Gallup Report", May 31, 1990. 80 environmental groups such as the Carmanah Forestry Society, and the Galiano Conservancy Association253. In general, the relationship between business and environmentalists has been difficult, though there is evidence that it is beginning to change. Yet, some corporations are listening to the preoccupations of customers. As environmental issues are consistently on the list of public concerns in the opinion sampling polls254, combined with environmental legislation, it will be increasingly difficult for them to be ignored in the boardrooms. Polluting costs have risen greatly in the past few years; clean-up costs can be massive. A "sullied" reputation due to environmental problems makes it more difficult to obtain permits for expansion, raises insurance rates, and makes it harder to attract competent staff255. This is of concern to two stakeholders, the investor and the employee, as it has an important effect on the bottom line as well as employee moral. Businesses are being encouraged and/ or forced to be responsive to customers. In the case of environmental issues, a Gallup poll in the United States showed that over 90% of Americans are willing to make an effort to buy products from environmentally responsible companies; some 88% were willing to pay more toward that end256. In ^K-Goldberg, "SLAPPs Surge North: Canadian Activists Under Attack" (1992/1993)no.25 The New Catalyst, 1. ^ D . Johnston, supra, note 3 at 74. ^R.N.Sanyal &J.S.Neves, "The Valdez Principles: Implications for Corporate Social Responsibility" (1991) 10 J.Bus. Ethics 883. ^M.McCloskey, "Customers as Environmentalists" in W.M.Hofftnan.R.Frederick & E.S.Petry, Jr., eds., Business, Ethics and the Environment (N.Y.: Quorum Books, 1990). 81 Canada, 80% of the public is willing to pay 10% more for environmentally benign products257. In the current business equation, changing consumer habits may be the single most important variable258. There are changes taking place in the corporate world with some corporations trying to satisfy the demands of the environmentalists. "Corporate polluters rank somewhere between drunk drivers and sexual assaulters in the public's mind " says Tom d'Aquino, president of the Business Council on National Issues (BCNI), a very powerful corporate lobby group. "No business can sustain this kind of image indefinitely without suffering in the marketplace. Cleaning up the environment is the single most important imperative facing ...economic leaders. The heaviest responsibility is really on us"259. If the BCNI says the environment is a priority and means it, this is important in Canada. The BCNI was born in 1976, a council composed of one hundred and fifty of the most powerful executives in the country. The BCNI sees itself as the " senior voice of business in Canada"260. Still, for some corporations responding to environmental issues is a social responsibility. ^'M. McCoy-Thompson, "Environmental Seal of Approval" (1990) World Watch, July/Aug. 23*P.Carson & J.Moulden, supra, note 39 at 6. 25*D.Israelson, supra, note 127 at 248. ^.McQuaig, Behind Closed Doors (Markham,Ont.: Viking,1987) at 185-187. 82 C.The emerging role of business: business as socially responsible Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their shareholders as possible. Milton Friedman261 I maintain that business must change its priorities. We are not in business to make maximum profit for our shareholders. We are in business for only one reason - to serve society. Profit is our reward for doing well. If business does not serve society, society will not tolerate our profits or even our existence. Kenneth Dayton262 Which of the two preceding and very different views of the corporation should or does dominate corporate governance? While some embrace the ideas of effectiveness and efficiency as inevitable good business practices, it is a different matter as to the need for social responsibility. There is a reoccurring debate within corporate law scholarship regarding corporate social responsibility, rooted in competing conceptions of the corporation. One views the corporation as a vehicle for increasing the wealth of its shareholders while the other sees it as a social and economic institution which should serve the public good263. This debate is not new. In Capitalism and Freedom, Milton Friedman264 seems to imply that companies ought to eliminate social responsibility from business. Is this appropriate in today's society? Or is Kenneth Dayton's vision more ^Capitalism and Freedom (Chicago: The University of Chicago Press, 1962). 7e2J.W.Anderson, Jr., Corporate Social Responsibility (New York: Quorum Books, 1989) at 3. ^J.Nesteruk, "The Ethical Significance of Corporate Law" (1991) 10 J.Bus. Ethics 723. ^Supra, note 194.. 83 appropriate in this day and age? It is futile to argue that a business has only one responsibility265. Economic performance is the basis, but power must always be balanced with responsibilities. It is evident that organizations such as corporations have much power in today's society266. The dilemma facing business as to its social responsibility is complex,as the concept of social responsibility is evolving as society evolves. In the 1970's, the relationship between business and society was perceived as a social contract between the two groups. The major obligation of business was to provide the economic goods and services that society needed, such as job opportunities, an improved standard of living, and a higher gross national product (GNP). Other social values seem to be taking prominence and some stakeholders feel that business has an obligation to correct or help correct some of our present problems. For many, the business world is not and cannot be a separate universe of values and goals distinct from society; businesses are activities of society as a whole267. To describe the social role of business as solely an economic role is too reductionist. Business is a very important part of the social system. It is not possible to isolate the economic elements of major decisions from their social consequences. Some propose that the "rules of the game" of society have changed and that it is up to the corporation to "P.Drucker, Post-Capitalist Society (N.Y.: Harper Business, 1993) at 101. '•Ibid. "R.Evans "Business Ethics and Changes in Society" (1991) 10 J. Bus. Ethics 871. 84 meet "the new demands of society"268. For some, corporate social responsibility is irrelevant or nonexistent because it would be against its interest of profit-making269. The executive is considered the steward of other people's resources while the corporate Boards of directors are seen as the mechanism that looks out for the interests of the shareholders 270. Yet some would argue that most boards are not organized to provide genuine accountability, that is, a strong independent board capable of setting performance standards and removing management not living up to its responsibility. It is true that shareholders elect directors, but the insiders of the corporation, particularly the CEO, have an important impact on the nomination process and effectively determine who sits on the board271. The flow of information to outside directors and the agenda for board meetings are controlled by inside directors272. Also corporate officers and directors do not necessarily have an important stake in their corporation. A survey of 481 of the Standard and Poor's 500 showed that the combined holdings for these officers and directors was only 5.1%rn. The importance of social responsibility has grown with the increasing interaction ^C.Morris, "Moral Constraints, Prisoners Dilemmas and the Social Responsibility of Corporations" in P.Werhane & K.D'Andrade, eds., Profit and Responsibility (New York: Edwin Mellen Press, 1985) at 111. 269Nonetheless, if corporations do not make a profit, they will cease to exist. 2WB.J.Reilly & MJ.Kyj, "Economics and Ethics" (1990) 9 J.Bus. Ethics 691. "'V.Brudney, "The Independent Director: Heavenly City or PotemMn Village?" (1982) 95 Harvard L. Rev. 597. ^ i d . ^P.L.Rechner, "Corporate Governance: Fact or Fiction?" (1989) Bus. Horizons July-August 11. 85 between business and society as a whole274. More and more, "the large corporation in particular must recognize that it operates in a social-political arena where its existence can only be legitimized by ensuring that its economic performance and social behaviour is perceived as being sensitive to the needs of the community"275. The physical environment of society is to a certain extent created and definitely influenced by business276. At the same time, many feel that business has not and is not dealing adequately with the social problems of the day277. As to environmental concerns, corporations need to enhance their performance for the customer/ public to have confidence in their dealings as the perceived performances of various industries definitely need improvement. The demand for social responsibility on the part of organizations will not go away278. Business likewise seems to a feel the need to become a better corporate citizen. For example, in 1988, the Business Roundtable (a U.S. association in which CEO's from 200 major corporations focus and act on public issues) released a study279 pointing out the need to self-police itself and educate itself on how to be a better ethical corporate mJ.W.Anderson, Jr., supra, note 262 at ix. ^J.D.Fleck & LA Litvak, eds., Business Can Succeed: Understanding the Political Environment (Toronto: Gage Publishing, 1984) at 6. "'J.W.Anderson.Jr., supra, note 262 at ix. 27TIbid. at 6. ^P.Dracker, supra, note 265 at 102. rr*Tb& Business Roundtable, Corporate Ethics: A Prime Business Asset (New York: The Business Roundtable, 1988) 86 citizen. It points out that there is no conflict between ethical practices and acceptable profits but its primary purpose is to improve ethics in corporate actions. It needs to close a credibility gap that has developed in the last three decades in order to play a significant role in the environment debate280. It seems appropriate to examine what is actually happening in the corporate milieu and how business people see themselves and boards of directors in the 1990's and for the future. l.The stakeholder theory: a greater responsibility for corporations A new trend is now becoming apparent. There is evidence that a new ideology is emerging in the corporate world. It is now becoming the norm to have representatives who stand for the conscience of the business on boards of directors281. Wang & Dewhirst surveyed 2,361 directors in 291 of the largest publicly held corporations in the Southeast States to examine the stakeholder theory in boards of directors' orientation. Being responsive to the stakeholder is advocated as a key business strategy for successful corporations282. The stakeholder theory, poses the view that organizations are social institutions which have responsibilities over and above their fiduciary responsibility to shareholders283 . The stakeholder is "any individual or group who can affect or is affected by the achievement of the organization's objectives". The firm's objectives are to identify the key stakeholders, balance and manage the conflicting interests thereof, and 280Deloitte Touche Tomatsu International, Institute for Sustainable Development & SustainAbility, supra, note 28 at 40. ^'R.N.Sanyal & J.S.Neves, supra, note 255. 282S.Covey, Principle-Centred Leadership, Quality Learning Services, U.S.Chamber of Commerce, Washington.D.C, Nov. 2, 1993. ^J.Wang & H.D.Dewhirst, supra, note 27. 87 enhance corporate social performance. The role of the outside directors on the board is to represent and protect a broad range of stakeholders. The study indicated that directors attached great importance to the expectations of the stakeholder. Boards of directors no longer believe that the shareholder is their only constituent. The stakeholders identified in order of importance were customers and government, stockholders, employees, and society. Contrary to what the authors expected, they did not find any difference between inside and outside directors. Inside directors also felt a need to take into consideration the expectations of the stakeholder. This can be very pertinent, especially in large corporations with many shareholders, as most stakeholders do not have a vote in the election of the board of directors. Stakeholders such as employees or customers may not be free or may not have the necessary information to go elsewhere. Environmental issues, because of their economic, social and ethical importance have an important place in many corporations. Environmental auditing is a key tool in the overall environmental management strategy. 2.Codes of conduct At this time, environmental audits, even when they are done, do not have to be published and there are no recognized standards that have to be met. If they had to be published and prepared in a standardized fashion, environmental audits would greatly enhance the accessibility of environmental information to ordinary people. A standardized reporting format which is widely accepted and applied to all industries across the board would be very useful. Codes of conduct for corporations aid in the diffusion and standardization of environmental information. 88 In the United States, studies have shown that 75% of the firms have codes of conduct. The most common items mentioned in the codes of ethics are conflict of interest provisions, political contributions, use of insider information, illegal payments, bribery and kickbacks, improper relationships, proprietary information, use of corporate assets, gifts and favours, and unrecorded funds or transactions. These have an internal focus to protect the organization284. At this time, it seems that to address environmental issues is a way of protecting the corporation and reducing liabilities. The situation as to codes of conducts is a bit different in Canada. Lefebvre & Singh 285surveyed four hundred and sixty-one top 500 corporations in Canada to study their codes of ethics. They received 107 documents; of these they judged that only seventy-five were codes of ethics. Seventeen (7.6%) of the responding companies indicated that they were in the process of developing an ethical policy statement while 88 (39.1%) replied that they did not have an established code. Thirteen (5.8%) were unwilling to provide the researchers with their documents. It is noteworthy that the greatest number of responses came from the oil and natural gas industry. The analysis showed that the codes most frequently address issues dealing with conduct on behalf of the firm; they most often treat questions of acceptance of bribes, kickbacks, relations with customers/suppliers, relations with the government, etc. Only 6.7% of the codes discuss environmental affairs. Many companies still need to develop their own codes of ethics and address environmental concerns.. As the liabilities increase, they will be part ^Ibid. ^M.Lefebvre & J.B.Singh, "The Content of Canadian Codes of Ethics' (1992) 11 J.Bus. Ethics 799. 89 of the parcel of protecting the corporation. Ideally, boards of directors will instigate the integration of environmental values into the general code of ethics of their corporations. To have an environmentally ethical corporation, the values must permeate the whole fibre of the company. "Openness and ethics go together and actions are unethical if they will not stand scrutiny. Openness in arriving at decisions reflects the same logic. It gives those with an interest in a particular decision the chance to make their views known and opens to argument the basis on which the decision is finally taken286". While external Codes like the Valdez Principles are a good starting point to put pressure on recalcitrant companies, every effort should be made to integrate these values in all parts of the organization. Business executives do not view their macro-environment in the same way as their micro-environment, that is the entire economy versus the firm or corporation. Their idea of the macro-environment is much more idealistic; that is the way things should be. This outlook gets translated into ideological convictions. Eventually many business executives do consider the dominant values of society as their own. Environmental auditing is a worthwhile activity for the corporation. It is advantageous for those wishing to reduce their environmental liabilities. Once this is under control, going to a more proactive and environmentally friendly way of management is even more beneficial. Market forces are such that it is inevitable that environmental auditing will become a compulsory practice for many corporations even ^A.Cadbury, "Ethical Managers Make Their Own Rules" (1987) Harvard Bus. Rev. Sept., 69. 90 if not legislated. At this time, Canadian industry is looking at a possible cleanup bill of $20-billion287. Auditing is a necessary part of the process to determine how the cleanup will be done. Society needs to know what is out there in order to be able to make rational decisions; knowledge is a key factor in the strategic planning process. As a society we know that we want and need a cleaner environment. Canadians have not been an overly litigious society up to now, certainly compared to our neighbours to the south. The Charter of Rights and Freedoms combined with the strong views on the environment could change that if business and the government don't get their act together. The environmental decision making process needs to be taken seriously or the public will likely force the hands of government and business288. Public support for stringent environmental regulation is near an all-time high289. Successful corporations will find the integration of environmental concerns to their strategic management to their benefit and to their stakeholders. ^J.Lorinc, supra, note 12. 288G.B.Doern, supra, note 181 at 12. 289M.S.Greve & F.L.Smith, Jr., supra, note 175. 91 Chapter 5 Environmental auditing in the 90's: mandatory versus voluntary As there are numerous advantages to environmental audits, one may ponder whether they should be mandatory and, if so, at what level they should be legislated. There is a diversity of environmental audits. It may be worthwhile for some to be mandatory and not others, as they do not all have the same effect and/ or results. The primary purpose of any environmental program or legislation is to achieve actual improvements in our environment. Likewise, in the case of environmental auditing, the ultimate goal in changing corporate behaviour is a better environment. One does not legislate mandatory environmental audits unless there are definite advantages to such a step. The present environmental/ pollution control system is criticized by many as being inefficient. One does not need to add more "rules" if they do not produce the "desired" results. A.The regulation of environmental auditing Environment Canada was the first level of Government to demonstrate an interest in environmental auditing in its Canadian Environmental Protection Act: Enforcement and Compliance Policy290. It did not make environmental audits mandatory and this is not surprising. At that time, the United States already had some experience with environmental auditing. The EPA had decided to promote environmental auditing, but not to make them mandatory291. Since then, the European Community has proposed to make their eco-auditing scheme mandatory but has since backed down to fierce ^Supra, note 5. ^'Supra, note 62. 92 opposition292. Businesses argued that they should be given a chance to show that voluntary action by industry can provide protection for the environment. They felt that there was the potential of being swamped by environmental regulation. More specifically, sectors such as the chemical industry were concerned about how its "responsible care" and quality management programmes, as well as some of their integrated approaches to health, safety and environmental management would fit in a mandatory programme293. In Canada, just a couple of years before the adoption of the CEPA policy, a national survey had demonstrated that environmental audits were pretty much still an unknown entity. "Control" of such legislation would not have been feasible. It would have been very cumbersome for the Canadian government to foster such a program in the workplace, especially at a time when there were no adopted standards. If environmental audits were mandatory, this would necessarily require the creation of a bureaucracy to perform the verification, which would obviously be expensive if the verification were to be done in a meaningful manner. On the other hand, if they were done superficially and inexpensively, this could be counter-productive. Corporations would not value environmental audits as an effective planning tool. "No national plan, no federal agency, can orchestrate protection of what [Americans] value about their communities; redefining the process and standards... is ultimately a matter for local action"294. Many feel that public participation and input 292Ends Report 206, supra, note 71. ^Ibid. at 20. 294W.K.Reilly, Jr. "A View Toward the Nineties" in P.Borelli, ed., Crossroads (Washington, D.C.: Island Press, 1988) at 93. 93 is important, that the grassroots have a role in environmental protection295. Environmental audits are "grassroots" tools. If they were mandatory at the Environment Canada level, they would continue in the line of bureaucratic centralization. There should be a clarification of the constitutional division of powers in environmental affairs so that the process can be more efficient. Environmental Departments need a clear mandate to work effectively. Voluntary environmental audits encourage flexibility with the result that environmental decisions may be carried out more efficiently and cheaply. This is done with the aim of minimizing costs of environmental degradation. Such a program needs to be part of the broader environmental strategy. There is also a need for some prescriptive legislation and an enforcement program. This is certainly demonstrated by countries having very prescriptive legislation yet no enforcement. For example, Mexico's environmental laws are comparable and in some cases stricter than U.S. ones. Yet, there is very little enforcement and compliance is lax296. Standards are in the process of being developed and environmental audits are better known as demonstrated by the popular literature and in select case law297. B.The driving forces There are types of audits whose use will be heavily influenced by the business community regardless of whether they are mandatory. Up to now, in Canada, ^Ministry of Environment, Lands and Parks, Province of British Columbia, Environmental Action Plan for British Columbia (Victoria, B.C.: Ministry of Environment, Lands and Parks, 1992). ^H.F.French, "Reconciling Trade and the Environment* in L.R.Brown et.al. State of the World (N.Y.: Norton, 1993) at 167. 297The more widely known and widely reported Bata case in Ontario, supra, note 23. 94 environmental audits have been largely driven by industry trying reduce its environmental liabilities. If regulatory agencies continue to increase the penalties for those industries not complying, making it more expensive not to comply than to comply, compliance environmental audits will continue to increases in usage. Corporations ignoring their environmental liabilities are soliciting trouble as demonstrated by the latest trends illustrated by the Batam and Varnicoloi299 cases. Personal liabilities for officers and directors have created a new awareness of environmental issues. It has brought home the notion that "what you don't know may hurt you". The present system of "command and control" had resulted in the establishment of environmental standards that were routinely ignored with little resulting consequences. There is some indication that this will not be tolerated as it was in the past. Compliance, permit, issues, waste minimization, acquisition/ divesture, site, operations and associate audits all have a role to play operationally. If audit programs are compliance oriented, environmental managers are not positioned for the 2lrt century. I will address specifically acquisition/ divesture, compliance, waste minimization and management audits with their particularities. l.Acquisition/divesture audits Most knowledgeable corporations in Canada will not acquire or become tenants of land which may either have had any commercial use or had landfill deposited upon it, without at least commissioning a preliminary environmental audit. Provincial laws ^Supra, note 23. ^Supra, note 119. 95 such as the Waste Management Acf° of British Columbia, section 22(1) put the onus and cost of clean-up on the polluter but, also on the person who owns or occupies the land on which the (polluting) substance is located on or was located immediately on before it escaped or was spilled or dumped. An innocent purchaser or tenant of land polluted by a previous owner or user may be ordered to clean up the polluted land. Such laws practically render environmental audits compulsory for purchasers unless they do not need financial backing. Banks will not lend the necessary capital if there has been no environmental audit. There would be no great gain in rendering these types of audits mandatory. The benefits for regulators would not be substantial enough as the industry, combined with laws requiring polluters and/ or owners and tenants to clean up contaminated sites, have effectively made it a way of doing business. 2.Compliance audits There does not seem to be very many advantages to mandatory compliance audits other than documenting a corporation's failure or success in complying to the present legislation, therefore documenting for the investigators. There is a need for basic documentation, but that should not be a goal in itself. Auditing should not be a double check on the status of compliance and implementation of systems to avoid problems. Compliance audits will review minutiae, but what will generate the most results is a review of programs and operations. 3. Waste minimization audits Management of municipal solid wastes is an important environmental challenge. 'Supra, note 202. 96 Public concern was heightened as the infamous garbage barge from Islop County, New York was seen going around the world in search of a dumping ground. The Hagersville fire in Ontario certainly brought home the notion that landfill sites are not a viable solution in the long run. On average, the Canadian family consumes approximately one tonne of packaging per family per year301. Provincial regulators could enact legislation requiring large waste generators to produce a waste audit and waste reduction plan. In the United States, the Rhode Island Recycling Ac?02 requires generators of commercial solid waste employing more than 500 people to submit a source reduction and recycling plan to the Department of Environmental Management. Such an act could be a viable alternative for provincial environment departments and should be mandatory . 4.Management environmental audits Management environmental audits should not be mandatory at this time in their evolution. If environmental audits became mandatory, they would probably be conducted as narrowly as the law allows, out of concern that enforcement actions may result from the audit. The environmental audit should be a management tool facilitating problem solving. The strategic planning process should concentrate on the next-generation environmental management techniques, trying to detect the greenest technologies that use the earth's resources as frugally as possible. People in the industry are well placed to develop these techniques. Audits should be viewed as a management tool. Still, provincial regulators could require corporations employing more than a certain number ^'Canadian Council of Ministers of Environment, National Packaging Protocol, March, 1990. ^Regulations for Reduction and Recycling of Commercial and Non-Municipal Residential Solid Waste (Rhode Island) July 28, 1988. 97 of people to submit environmental management plans to the provincial environment departments. Alternatively, the environmental plans could be kept at the workplace and reviewed during a regular inspection. This would effectively force corporations to consider environmental problems and solutions while letting corporations, those closest to the problems, come up with creative processes. Corporations should be given some flexibility, yet society should not be made to bear the costs of polluters. The water, air, and land of Canada are public goods. Up to now they have often been considered "free goods", overused and abused. Polluters must be required to bear the environmental costs of their activity; this will lead to economic efficiency and to "cleaner" economic activities. There is a need for incentives for polluters to do more than comply with prescribed limits. There is a necessity to reduce or eliminate pollution. Fees that vary directly with the amount of discharge will encourage industry to "audit" their processes and seek out new and cheaper technologies. For example, 3m and General Motors are looking at ways to reflect, in internal pricing, which raw materials cause the greatest pollution problems303. This could very difficultly be done from outside the corporation. As we approach the 21" century, facing tremendous environmental challenges, forward looking corporations put their energy on pollution avoidance rather than concentrating on the end-of-the pipe solutions as a priority in their environmental management strategies. Mandatory audits will not stimulate new ideas nor nurture technological creativity. For these reasons management environmental audits should not be mandatory. ^Ibid. 98 Chapter 6 Conclusion The diversity of users and types of environmental audits is quite large, considering its short history, approximately twenty years. The petrochemical industry led the way but low risk industry sectors such as food processing and manufacturing have discovered the benefits of environmental auditing. The United States was the first promoter of environmental audits, but Canada and other countries have followed their lead. The types of audits vary with the objectives of the users, but they are varied: compliance, permit, issues, waste minimization, acquisition/ divesture, site, operations, associate, eco and management audits. The driving forces behind the increase in environmental auditing have come from many sectors of society including regulators, public, judiciary, environmental groups as well as business. Environmental auditing is beneficial to the corporations, the public and the government as it increases the reliability and usefulness of relevant environmental information. For the corporation, it is the cornerstone of environmental management. Environmental auditing is a necessary step for corporations to do their share in environmental protection, not leaving everything to the governments. An important goal is cost-effective environmental protection. Corporations have a unique knowledge of processes and they must do their part as well. Environmental auditing is the cornerstone of environmental management. It is essential for corporations to examine their environmental liabilities. Some corporations are responding to environmental issues in a more proactive and socially responsive way. They are responding to the concerns of their stakeholders. Environmental auditing is beneficial to governments as it increases 99 environmental protection without increasing public costs. The public is concerned about the natural environment and wants corporations to take it into consideration when making business decisions. Concern over the environment is a global trend. Environmental values have changed in the last twenty years as the population realizes the effects of industrialization to the environment. Canadians favour government intervention in controlling business and initiating adaptation to changing technology or expectations. The public is demanding more transparency from corporations and there is the beginning of a "right" to know what is happening in their backyards. An effective mechanism to render corporations more accountable is more reporting and disclosure of information on the products corporations use and the waste they produce than. Right-to-know laws giving local residents information about the level of pollution and potentially hazardous chemicals used by local companies and public environmental audits will empower citizen and facilitate their participation in environmental protection decision making. Government response to environmental problems has traditionally been "command and control" style of legislation. The complexities of today's problems and the need for more efficient mechanisms are encouraging governments to seek new ways of doing things. Encouraging voluntary environmental audits as well as incentives to environmental enforcement seems to be a strategy of choice. Mandatory environmental audits would increase government bureaucracy but with questionable benefits. The overall picture is important, not just piecemeal legislation. "Command and control" legislation has an important role but there is a need for more sophisticated measures to address the 100 complexities of today's environment. As environmental liabilities increase, securities regulators in Canada will demand comprehensive disclosure and accounting for environmental impacts, risks and costs in their annual reports. Eventually environmental audits will be as common as the financial audit. Some corporations have found that the cost of one remedial action can pay for an entire environmental program. Avoiding the legal fees in an enforcement proceeding or criminal case can also pay for a program, at the same time as avoiding negative publicity. The ultimate goal is to find solutions to the environmental problems. Pressure on corporations to extend audits will continue to come from outsiders to the corporation. Retailers wanting to buy greenly, eco-labelling schemes, investors specialising in green equities, charities such as World Wide Fund for Nature will continue the demand for environmental audits. 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