And accountants who think the environment can be safely left to the politicians are in for a rude awakening. Environmental questions now have serious revenue and/or balance-sheet implications, an indication of this is the increase in environmental consultancies. The Big Four are also eyeing up the environment as a consultancy opportunity with KPMG leading the pack.
The environment first popped up on the business agenda more than a decade ago with the Environmental Protection Act. But since then, there has been a steady drip of new rules and regulations from either parliament or Brussels.
The problem for accountants is that a lot of environmental laws have crept in without a big fanfare. ‘Environmental legislation is being enacted quietly and, while not by stealth, almost without anyone noticing,’ says Marcel Steward, head of environmental services at Marsh, the risk and insurance advisers.
James Stacey, assistant director of transaction services at KPMG, agrees.
He says: ‘I recently worked with a number of small electronics manufacturers who didn’t know of the EU’s waste electrical and electronic equipment directive.
Depending on the final wording of this directive, these companies could be paying to recycle their old products from 2004. The cost could be between 1% and 3% of turnover.
It’s hardly surprising that accountants are unaware of much of this legislation.
It would be possible to fill Accountancy Age several times over with a complete listing of all the rules and potential new laws – all of which could generate revenue expenditure of capital spending or create contingent liabilities.
Take the case of a company occupying an old industrial site. Perhaps the site was contaminated in the past by previous industrial processes but the problem doesn’t seem to be active. That doesn’t mean they won’t be a danger in the future.
Then bear in mind that local authorities are now using recent legislation to force companies to clean up contaminated land and, hey presto, a new liability has just appeared in the balance sheet.
Just because a company has been operating for years without problems, doesn’t mean it won’t have to tighten its performance in the future. That could mean unforeseen capital expenditure to upset business plans.
Companies that don’t sit on dirty land or run hazardous processes may think they’re in the clear, but, as Will Butterworth, a principal consultant at RPS environmental consultancy says, the scope of what is meant by ‘environment’ is broadening.
Environmental concerns include health and safety, food hygiene, fire risks, planning issues, building management, and noise. Legislation is the main driver, but more companies are concerned about the impact of bad publicity on their shareholder value.
The ramifications environmental issues have on shareholder value come to the fore when a company is planning to sell or acquire an asset as, increasingly, buyers are insisting on environmental due diligence before making a purchase.
KPMG’s Stacey argues there are four environmental factors which could affect a company’s valuation. Firstly, some companies will benefit from environmental issues – such as firms making wind turbines – while others may see sales decline.
Next comes capital or revenue implications of environmental legislation – including end-of-life directives for cars. Then there are customer factors as clients place environmental responsibilities on their suppliers.
Finally, there is the cost of the operational disruption of putting right environmental problems. ‘The lost production from shutting a factory site for a clean-up could be more than the cost of the clean-up itself,’ says Stacey.
Besides valuation, there are risk factors such as contingent liabilities.
It is important to link all these factors back to the accounts, says Stacey. ‘If you’re a buyer, they will highlight what is right and wrong with the deal and put you in a stronger negotiating position.’ Also banks and other investors are becoming more twitchy about lending money for acquisitions which don’t come with an clean environmental bill of health.
There are good reasons for sellers to be upfront about environmental liabilities. If liabilities are disclosed by the vendor they pass to the buyer.
The Earth Summit showed people want more done to protect the environment. That means more rules and controls, each with a bill attached. The challenge for accountants is to keep a tight handle on costs so going green doesn’t mean slipping into the red.
- Peter Bartram is a freelance journalist.