When is a fish worth £800?

Does your firm face serious (costly and reputation-harming) oil pollution risk, and can that risk be quantified in financial terms?: it's not just about tankers crashing or oil platforms exploding.  Many firms store enough oil on their sites to be at significant financial risk.

Companies that store oil for heating, process use, or vehicle fuel are subject to strict regulations to prevent pollution incidents from poor storage.  According to the EnvironmentAgency, on average an oil spill (which might occur due to aging equipment or poor choice of equipment or errors in filling or draining the tank) costs a business £30K in fines, clean up costs and lost operational time.  This figure doesn't appear to include the cost of buying more oil to make up for the amount spilled.

The relevant regulations that firms need to comply with in England are the Oil Storage Regulations and the Control of Major Accident Hazards containment policy; there are equivalent regulations for Scotland and Northern Ireland.

200 Litre oil drum.  If you have a volume of oil storage equivalent
to more than one of these in England you must follow the oil storage regs

Small firms aren't necessarily exempt.  Any firm with at least 200 litres of oil being stored needs to comply.  That's just slightly less than the volume of a typical domestic wheelie bin.  And it's the volume of a conventional oil drum.

The Environment Agency provides quite a lot of advice for free on their website.

Spills happen all the time; they are not a rare problem.  Oil is the most common type of waste pollution in the UK.  The Environement Agency says it records over 5K incidents annually.    Few people know that oil pollution is a criminal rather than a civil offense in the UK.  Recent research in Europe  by The European Space Agency has found that just over a third of oil reaching the oceans came from land-based spills rather than ships or oil platforms, so it makes sense that spills on land are treated so seriously.

Recently the UK's largest producer of malt was fined £20,000 and made to pay £6475 in costs and were ordered to make improvements costing £11K to prevent a recurrence after oil leaked from a faulty storage bund  into a nearby river, killing 47 fish.  That's a cost to the business of about £800 per fish they killed.  That's one way to put a value on environmental assets.  Of course it doesn't make sense in terms of the cost of a fish, but the long term damage to ecosystems in the river will mean many more fish (and other animals and plants) will be affected.  Moreover there may be farm animals downstream drinking this water, and companies drawing it off for process use, and eventually maybe a water company that will recycle and purify it into mains water.

One seriously expensive fish!

Eventually, the firm is reported to have spent £106,304 on clean-up andmaintenance.  The event polluted 4 km of river.

These penalties are perhaps not so surprising at a time when water resources are increasingly under pressure, resulting in hosepipe bans and increased metering, as well as the threat of rising prices: over the  years 2002-07 UK water charges rose 32% (http://www.earth-policy.org/plan_b_updates/2007/update64), considerably faster than inflation.

What can you do about this risk?

Manyspecialist oil storage firms can offer help in bringing your oil storage up to required standards

Julia Lawrence Sustainable Business Management can help you evaluate the risk to your firm and compare the risks, costs and benefits of oil alternatives that would suit your organisation's needs.

Don’t wait for the markets to save the planet

A current theme in management writing is that companies’ green behaviour leads to greater success.  Green business guru Andrew Winston has recently blogged about the way Dow and The Nature Conservancy are trying to show the “business logic” of protecting the environment.  And some of that logic is right – reductions in materials use, lower energy consumption, and a green reputation can sometimes bring long term, economic benefits that greatly outweigh their costs.  Yet companies still overexploit the seas, pollute the air, and dump waste.  Why?

Companies are not fooled.  Green behaviours that have value to society – public goods like clean air, stable climate, and healthy ecosystems – do not always benefit the company enough to offset the investment made.  Some companies will do it anyway, because of ethical beliefs, or a strategic view that they’ll benefit later.  But many green practices are not worth what they cost the company – at least not to that company.

One proposed solution is to solve this through markets, for example through carbon taxes, or the pricing of “ecosystem services”.  This is a very good idea.  However it involves a lot of negotiation and international agreement to be effective.  Even then, we know that some firms will make the “wrong” decision, particularly in failing to pursue the long term gains from efficiency that current investments could make.  Long term gains are uncertain, and often require a lot of effort to assess them.

It should be no surprise, then, that recent studies in areas such as behavioural economics have shown that purely rational decisions are not the whole story.  Decision-makers use many criteria that lead to apparently irrational outcomes.  And these apparently irrational rules of thumb are actually used far more consistently than the mathematically pure economic models that MBAs are taught.

Why focus solely on a fragile case - that saving the commons is in businesses' self-interest - when the argument doesn’t match people’s decision-making processes anyway?  The evidence base suggests that an important additional approach would be to harness the things that really drive many decisions – and the most promising in my view is the “social contract”.

A social contract is simply a commitment made to others, which has the effect of making the planned outcome more likely to happen, and often encouraging others to make similar commitments.  Weight Watchers uses this very tool, helping people lose and keep off weight by making their goals and progress public.  Companies are led by people who are just as susceptible to this as the rest of us.  If a CEO meets her counterpart at a conference, and hears them say they’re going to reduce their firm’s carbon footprint by 10%, she may well feel that she ought to say something similar – not because it’s economically advisable, but because her peer is doing it.  Once she has made the commitment – particularly if it is done through the media – it will be hard for the company to back down, even with a change of management, and certainly with her in place.

Such commitments are rare and typically small.  At the same time as Sir Terry Leahy told Davos that he would build zero carbon stores in the Czech Republic and Thailand, he also urged governments to put market mechanisms in place.  The belief that markets will solve the problem is still dominant – but there is still a chance that social contracts will catch on.