Environmental Risk from an Industry Perspective:
Protecting the licence to operate
Neil Gunningham considers how companies perceive and respond to environmental risk through the notion of a business’s ‘licence to operate’.
 Environmental risk can be approached from many angles. For present purposes, I want to focus on risk from the perspective of business enterprises. In particular I want to ask: how do companies perceive environmental risk, how to they respond to it and why? In our book, Shades of Green, Bob Kagan, Dorothy Thornton and I argue that to explain how companies respond to environmental risk, it is useful to view business enterprises as simultaneously motivated and constrained by a multifaceted ‘licence to operate’.
Traditionally, the notion of a business’s ‘licence to operate’ referred only to the company’s legal obligations. For example, in order to operate legally, a pulp mill manufacturer had to obtain a land-use and a construction permit before building a new facility, introduce particular pollution control technology, and once operating the facility, it had to maintain certain process and performance standards (for example, concerning hazardous waste disposal and workplace safety). Together, these regulatory obligations and permits might be referred to as a facility’s legal or regulatory licence.
Today, however, the concept of ‘licence to operate’ must include ‘economic reality’ requirements such as the need to maximize shareholder return on investment (or at least to provide a reasonable rate of return). Of course, the terms of this economic licence of what is an adequate rate of return on investment or level of profitability are not written down in detail like a regulatory permit. Moreover, they may vary over time, ‘tightening’ and ‘loosening’ with market conditions and each firm’s economic performance.
In addition, the ‘licence to operate’ concept has been extended to include the demands of social actors. Neighbours may complain about odour, local and international environmental groups may demand the use of less hazardous bleaching chemicals, and both groups may threaten a variety of informal sanctions if industry fails to respond. An extremely serious violation of community expectations such as a death-dealing explosion in a mill or a chlorine leak that results in severe threats to human health or to severe ecological damage can trigger political demands to close the plant down.
The regulatory, economic and social licences are monitored and enforced by a variety of stakeholders, who commonly seek leverage by exploiting a variety of licence terms. Environmental groups not only enforce the terms of the social licence directly (eg, through shaming and adverse publicity) but also seek to influence the terms of the economic licence (eg, generating consumer boycotts of environmentally damaging products) and of the regulatory licence (eg, through citizen suits or political pressure for regulatory initiatives). Thus the interaction of the different types of licence provisions extend the reach and impact of the social licence by directly empowering social activists or by giving them access to information that they can use to pressure target enterprises. Conversely, a company that fails to respond appropriately to social licence obligations risks a tightening of its regulatory licence when frustrated community activists turn for help to politicians and regulators.
In terms of how firms interpret their environmental risk, our in-depth study of 14 pulp manufacturing mills in the US, Canada, Australia, and New Zealand, reveals that tightening regulatory and social licences have dramatically improved environmental performance in all the enterprises we studied, pushing most ‘beyond compliance’ in varying degrees. Yet firms’ ‘economic licences’ have limited the extent of ‘beyond compliance’ measures. We conclude that regulatory risk – intensifying regulatory standards, are still very important in driving large and rapid improvements in environmental performance – and most companies either build in a ‘margin of safety’ or go substantially beyond compliance in order to minimize the risk of an adverse regulatory reaction. And community and environmental activists can sometimes push companies to take further environmental action, even when it is not required by regulation, because of their capacity to threaten ‘reputation risk’.
Moreover, skilful corporate officials not infrequently reduce risk by reshaping some licence terms. They can, for example, provide information to and negotiate with regulators or environmental activists, engage in community outreach and education, and/or by scanning for technologies and procedures that simultaneously cut costs and improve the firm’s environmental performance.
But we also found that terms of each strand of the ‘licence to operate,’ are often are unclear. Different corporate managers may interpret similar regulatory, economic, or social demands differently. But how far should an enterprise go in reducing environmental risk, particularly when risk reducing measures are costly and seemingly unprofitable? This we found, depends very much on how an enterprise perceives those risks and on ‘environmental management style’.
Those whom we termed ‘true believers’ saw considerable ‘win-win’ opportunities in environmental investment. As one of our respondents put it: ‘We feel if we are vigilant, push for continuous improvement we can stay competitive … [We ask] how can we reduce chemical usage, minimize energy use, and improve things like housekeeping efficiencies?’ And for them, minimizing environmental risk meant building good community relations. As the environment manager told us: ‘It’s very important how the community sees the plant – how they are thinking is our licence to operate.’
In contrast, those we termed ‘reluctant compliers’ saw little virtue in environmental spending, or in building positive relationships with the local community. Any such spending was viewed as ‘money down the rat hole’ and best avoided unless the regulator was threatening strong and imminent enforcement action. Even firms confronting very similar external pressures, interpreted those pressures very differently.
Overall then, environmental risk involves multiple and interacting licence terms. Differences in social licence demands often appeared to be particularly powerful in influencing different environmental outcomes and this, coupled with the risk of regulatory enforcement most commonly drove environmental behaviour. But how a company responded to environmental risks also depended on management’s varying perceptions of the scope for ‘win-win outcomes’ and their perception of the importance of mitigating risk to their reputation. The latter, in particular, suggests that from a public policy perspective, empowering the social licence (for example by providing the community with access to information or the right to bring legal action) may be a particularly powerful point of leverage. For large, highly visible corporations, ‘reputation risk’ is becoming increasingly difficult to ignore.
Neil Gunningham, Director of National Research Centre for Occupational Health and Safety Regulation, Australian National University. ^
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