Triple Bottom Line Risk Management_9 ppt

Figure 15.2 shows thattwo risk issues pit lake outlet and waste seepage release were the two riskiestevents and accounted for approximately 96 percent of the total project risk for theIS

The outcome of this approach was indeed conservative, but the advantage wasthat the regulators accepted the method and the results it produced with minimaldebate.

Modeling Results

ISR Insurance Component The results of modeling for the ISR insurance

com-ponent produced a sum equivalent to the annual insurance premiums that would bepaid to realistically cover the occurrence of sudden events Figure 15.2 shows thattwo risk issues (pit lake outlet and waste seepage release) were the two riskiestevents and accounted for approximately 96 percent of the total project risk for theISR insurance events The combined occurrence cost of these events was thereforethe risk cost However, as insurance for sudden and accidental environmentalevents was widely available, the risk cost was not used directly in the derivation

of the capitalization sum Instead, discussions with WGC’s broker identified anannual premium offered by the insurance industry, and this was used to calculatethe ISR insurance component

Even though the risk quotient for the catastrophic tailings release event laybelow the risk cut-off, as Figure 15.2 shows this event dominated the exposureprofile From a technical standpoint, this event could be excluded, but it was re-tained for political reasons The outcome of the discussions with the insurance in-dustry was that ISR insurance to cover $12 million for catastrophic tailings releasewas around $45,000 per year (but for the same premium up to $50 million could

be purchased) This level of cover would be more than adequate for the riskiestevents

The estimated net present value of an annual ISR premium of $45,000 peryear, discounted over the 50 years that the potential for a tailings release event wasassumed to exist, was $960,000

Gradual Risk Component Figure 15.3 shows the key information used to derive

the gradual risk component of the capitalization sum Figure 15.3 shows that theriskiest issues (waste collection pond quality and waste rock bypass) contribute toalmost 94 percent of the total project risk for all the issues

The calculated risk cost for the events shows a moderate degree of uncertaintywhere the estimate varies from $2.997 million (optimistic, CL50%) to $5.281 mil-lion (pessimistic, CL95%) The planning (CL80%) estimate of the risk cost is $3.977million The exposure profile chart of Figure 15.3 shows that the calculated riskcost would also be able to cover the occurrence of all individual issues lowerdown the risk profile

On the basis of the modeling results, the gradual risk component of the talization sum was set at $3.977 million

capi-Public Liability Insurance Component The public liability insurance

compo-nent of the capitalization sum was equivalent to the annual insurance premiums

All Costs Expressed as $

that would be paid to realistically cover third-party claims No specific issueswere identified that would require public liability insurance However, it was rec-ognized that the trust would be managing land and would encourage public access.

It was therefore assumed that the trust would require a standard public liabilitycover and that the capitalization sum would need to provide for that insurance.Third-party, or public liability, insurance to cover property damage and injurywas widely available at the time Annual premiums of around $5,000 were typi-cally required for policies with $5 million of cover The net present value amountrequired to provide these premiums in perpetuity was estimated to be $127,000

Postclosure Base Costs The estimated annual base costs to cover land

manage-ment, monitoring, and remedial action averaged around $20,000 The net presentvalue of this annual expenditure in perpetuity totaled $549,000

Summary

Table 15.3 shows a consolidated summary of the capitalization sum to be vestedwith the trust at the time of its establishment at closure The total sum of $5.613million would allow the trust to undertake its land management and maintenanceresponsibilities in perpetuity

Implementation and Risk Reduction / 243

Table 15.3 Capitalization Sum Components ($ × 1,000)

Public Liability Insurance (premiums) 127 5,000

When the bond proposal was put to the regulators, the bond strategy and quantumwere accepted without challenge The capitalization bond became one of the mat-ters appealed to the Environment Court by objectors to the extended project, and

so the strategy and quantum subsequently underwent legal and technical nation within the court situation At the hearing, the regulators supported adoption

exami-of WGC’s proposal without change Opponents to the project exami-offered no contrarytechnical or other evidence that justified making significant modifications toWGC’s proposal In his decision, the judge chose to round the quantum up to $6million, and WGC posted a capitalization bond of this amount

The extended project consent conditions allowed for the bond (and tion sum) to be reviewed annually These reviews will account for any changes tothe operation that might influence the risk assessment inputs and outputs, infla-tion, plus any other issues that could affect the bond amount The review processprovides WGC with the opportunity to look at and reduce its postclosure risk pro-file It is hoped that, over time, this focus will enable the very reasonable capital-ization sum to be further reduced.

The WGC had a regulatory obligation to estimate and provide a postclosure surance to indemnify the people of New Zealand against the cost of mitigating po-tential environment impairment arising from its rehabilitated mine site at any time

as-in the future

Application of the RISQUE method has led to development of a postclosure surance strategy and determination of an adequate and realistic value to the satis-faction of the regulators

as-An agreed definition of “perpetuity” was crucial to development of the cessful assurance strategy Using the concept of the time value of money, the riskanalyst demonstrated that perpetuity could be defined in financial terms, a solutionimmediately accepted by WGC and the regulators

C ORPORATE R EPORTING AND

I NSURANCE : R ESOURCE

P ROCESSING , U NITED S TATES

This case study examines:

• Application of the RISQUE method to achieve compliance with corporate porting regulations and guidelines

re-• Balance sheet recovery of contingent liability

• Using sound risk management processes to improve the bottom line

• Development of insurance strategies

U.S Corporate Reporting: Staff Accounting Bulletin 92

Regulatory pressure is increasing for public corporations to disclose potential tingent liabilities through the corporate reporting process Contingent liabilitiesare losses that can be anticipated to arise if particular events occur

con-The aim of corporate reporting of contingent liability is to protect the interests

of current and potential shareholders by informing them of potential liabilities thatcould have a material effect on corporate assets and operations and to maintainfairness in the marketplace In addition to disclosure of the dollar value of contin-gent liability, the regulators require discussion of uncertainties affecting estimatesand how management has handled, and proposes to handle, these liabilities anduncertainties

Reporting Requirements Legislation has been in place since June 1993, with

re-lease of the U.S Securities and Exchange Commission (SEC) Staff AccountingBulletin 92 (SAB 92), which requires disclosure of environmental and product

245

liabilities In 1994 the SEC signaled its intention to enforce SAB 92 and to targetseveral types of corporation thought to have significant environmental liabilities.The organizations targeted were operating in oil and gas, pulp and paper, chemi-cals, and property and casualty insurance companies.

SAB 92 is the SEC interpretation of existing securities and accounting tions and is a “full-disclosure” concept SAB 92 requires a financial report con-taining comprehensive disclosure of:

regula-• Actual assets and liabilities

• Potential liabilities: present and future

• Potential recoveries: present and future

• Secondary and derivative liabilities and assets

• Footnotes that present detail on methods used to derive the sums disclosed

• Narrative discussion, in Management’s Discussion and Analysis (MD&A), ofthe uncertainties associated with events and potential and proposed solutionsSAB 92 has several specific requirements in relation to the disclosure ofcontingent environmental and product liabilities It requires separate disclosure

of a potential liability and a related potential recovery It is not acceptable simply

to disclose the net liability SAB 92 requires discussion of uncertainty, cally, the uncertainties affecting the precision of the estimates and the uncer-tainty associated with a corporation’s legal responsibilities regarding theliabilities Finally, SAB 92 requires substantial discussion both of the balancesheet impacts of potential environmental events and of management of the po-tential liabilities

specifi-SAB 92 requires that corporations that are publicly traded in the United Statesmust disclose environmental liabilities that are “reasonably possible to occur.”They also must include in the financial statements those liabilities that are “rea-sonably probable” to occur and have a “material” effect on the assets and profits

of the corporation in question

Impacts of Changes All corporations that are publicly traded in the United States

are affected by SAB 92 The ruling not only includes U.S.-based companies istered on U.S exchanges but also non-U.S corporations trading registered issues

reg-on U.S exchanges, and nreg-on-U.S corporatireg-ons trading American Depository ceipts (ADRs) in the United States SAB 92 therefore has far-reaching impacts onmany corporations beyond the boundaries of the United States

Re-The impacts of SAB 92 are also likely to extend, indirectly, to corporationsaround the world, because regulators in a growing number of countries are show-ing an increasing interest in introducing similar corporate reporting regulations Inaddition, in some countries corporate professional organizations are proactivelyintroducing voluntary corporate reporting procedures

Prior to SAB 92, it was acceptable for corporations to disclose only those bilities that they knew about and that were current A typical statement would have

lia-been: “We know of no contingent liabilities that are material.” An important pact of SAB 92 is a shift in the burden of discovery Now corporations can claim

im-“no material effect” only if they can state: “We have identified and measured all

of our contingent liabilities that are reasonably likely to occur, and have mined that none are material, outside of those disclosed here.”

deter-As a consequence of SAB 92, corporations must take positive action to ate their operations (e.g., through environmental audits), quantify the liabilities(and their uncertainties), and then make a determination as to materiality.Table 16.1 summarizes the impact of the introduction and enforcement of SAB

evalu-92 on the characteristics of corporate reporting

The potential consequences of noncompliance with SAB 92 are:

• Increased scrutiny and investigation

• Notices of noncompliance and violation

• Fines for violations of reporting regulations

• Suspension of trading

• Market effects from news of SEC scrutiny or enforcement actions

The following case study was originally based on a confidential assessment ofthird-party exposure to environmental impairment The events and liabilities pre-sented here are not the actual results of the assessment; the results have been mod-ified to reflect the risk profiles of typical, large industrial corporations The name

of the corporation is confidential; therefore, the generic “The Company” is usedherein to refer to the corporation

Case Study Introduction

The Company had substantial financial interests in approximately 10 operatingcompanies at over 30 sites located around the world, in the United States,

Background / 247 Table 16.1 Impact of SAB 92

Highly variable reporting practices Relatively uniform reporting practices Disclosure of few, if any, contingent liabilities All material liabilities are reported

Tendency to report minimum values Reporting of minimum values is generally not

allowed Reporting of net value (liability minus recovery) Net value reporting is not allowed

No explicit treatment of uncertainty Explicit treatment of uncertainty is required Little or no MD&A Extensive footnotes and MD&A are required

in the financial statements Disclosure had little or no effect on the balance Disclosure can potentially have a major effect

Australia, Indonesia, Taiwan, and New Zealand The Company was engaged inmining, mineral processing, and manufacturing.

The Company’s corporate risk manager needed to gain a quick, comprehensiveunderstanding of The Company’s environmental and third-party liability with re-spect to substantial sudden and gradual environmental events This informationwas required to restructure the corporate environmental and third-party liabilityinsurance strategy Prior to this assessment, the corporate risk manager had noway of assessing whether the current insurance cover was adequate

The Company was also required (under SAB 92) to report corporate mental and contingent liability on the balance sheet The Company had been aleader in applying new technology to enable it to better manage the environmentand its business

Panel Process

The Company selected an expert panel to identify the key environmental events ateach site that could lead to substantial environmental remediation and/or third-party claims The panel members worked together for one week at the com-mencement of the project During that time they reviewed the availableinformation, became aware of the project aims, understood the project methodol-ogy, and established the appropriate roles and responsibilities of panel members.After the first week the panel members worked individually on preparation of in-formation in a predetermined format The role of the risk analyst was to coordinatepanel contributions, ensure consistency of approach, and perform subsequent riskanalysis

The expert panel consisted of the business manager, a mining industry ronmental specialist, a manufacturing industry environmental specialist, and cor-porate legal counsel Where additional information was needed for specific events,individual panel members consulted with Company operations personnel Thepanel members were generally familiar with many of The Company sites In caseswhere the panel members had little or no firsthand knowledge of particular sites,the panel experts compared what they knew of The Company site activities andconditions with their experience of similar activities carried out in similar envi-ronments elsewhere in the world

envi-The available information on site conditions varied in quality and siveness from site to site Information for some sites consisted of detailed envi-ronmental audit reports and backup data For other sites, a selection of technicalreports, such as engineering reports, groundwater studies, and environmental in-cident reports, were available In a few cases, the only information available was

comprehen-a brief project summcomprehen-ary comprehen-and bcomprehen-ackground photogrcomprehen-aphs drcomprehen-awn from published comprehen-nual reports

an-Nature of Risk Events

The panel identified 235 key events that were entered into the risk register Eachevent was classified as either a sudden or gradual occurrence to assist with thelater determination of an insurance strategy Sudden risk events were considered

by panel members to be accidents, generally involving low probability and highconsequences (i.e., tanker collision, fire, or explosion) Gradual risk events arerepresentative of the more classic cases of pollution and usually had relativelyhigh likelihoods of occurring Typical gradual risk events were leakage from anunderground storage tank and seepage of leachate from a hazardous waste dump

to the groundwater

The panel members estimated the annual frequency of each event, medianand high estimates of occurrence cost, and estimates of the most cost-effective management steps that could be taken to prevent the event from furtheroccurring

Panel Conclusions

The risk events identified by the expert panel included issues such as:

• Stormwater discharges to surface water

• Wastewater discharges to surface water and sewer

• Soil and groundwater contamination from aboveground and undergroundstorage tanks (ASTs and USTs); landfill leachates; stockpiles; tailings seep-age; drum disposal; waste disposal; PCB releases; chemical, oil, and solventspills

• Pollution from air emissions of heavy metals, particulates, oxides of nitrogenand sulfur, methane, carbon dioxide

• Transport and off-site disposal of wastes

• Noise

• Fuel and chemical transport accidents

• Asbestos handling

• Degradation of sites of cultural or heritage significance

• Chlorine and fluoride emissions

• Refinery waste storage

• Cooling water discharges

• Mine water discharges

• Tailings dam failure

• Acid rock drainage (ARD)

• Concentrate spillage during transport

Risk Identification / 249

The types of remediation requirements that were considered by the panelincluded:

• Documentation of the nature and occurrence of the event

• Hydrogeological and hydrological assessment

• Groundwater recovery and treatment

• Development of alternative water supplies

• Public relations and community consultation

• Leak detection and soil remediation (both in situ remediation and dig anddispose)

• Water and wastewater treatment works design, installation, and operation

• Monitoring, upgrading of facility and equipment

• Installation of containment structures

• Drainage improvement

• Response plan preparation and implementation

• Vegetation and soil rehabilitation

• Spill clean-up

• Alternative waste management and disposal

• Dredging (or excavation) and disposal of contaminated sediments

Risk Management Criteria

During the project, the panel members defined several criteria that assisted withinterpretation of the modeling results and provided guidance in developing riskmanagement strategies The criteria were:

• A risk quotient of $20,000 per year was used as the cut-off threshold betweenthe riskiest events and those that posed a low risk

• Risk event occurrence costs of $500,000 and less were considered manageableunder operational contingencies and therefore did not require specific manage-ment action

• Sudden risk events were considered separately from gradual risk events andwere assumed to be insurable

• All gradual events with an annual likelihood of occurrence of less than 0.5 wereconsidered to be risk events (i.e., there was a possibility that the event wouldnot occur in future) and therefore would be potentially insurable

• Similarly, all gradual events with an annual likelihood of occurrence of 0.5 orgreater were assumed to occur and were therefore assumed not to be insurabledue to their high likelihood of occurrence

R ISK A NALYSIS

Risk Modeling

The main features of the risk model that were specific to this project were:

• The costs of consequences of each risk event were divided into two categories,third party and environmental impairment

• Third-party consequences included costs of claims by third parties for humanhealth damage, stock and fishery loss, regulatory penalties, property damage,consequential loss, and some environmental damage

• Environmental impairment consequences included the cost of remediation andreasonable works to prevent, or restrict the impact of, further occurrences

• The risk quotient was calculated using a conservative estimate of the bined cost of all consequences at a conservative confidence level (CL 80 per-cent)

com-• The events were ranked by risk and risk profiles were generated, which showedboth the event risk quotient and the financial exposure to each event

Separate risk profiles generated by the model were:

• Sudden events (third party and environmental impairment)

• Insurable gradual events (third party and environmental impairment)

• Uninsurable gradual events

Sudden Events

A total of 66 sudden events was identified by the panel Figure 16.1 shows the riskquotient and exposure profile of all sudden risk events ranked from highest to low-est risk The profile shows that a relatively small number of risk events have riskquotients that are effectively identifiable on the profile

A total of 20 events have risk quotients above the risk cut-off criteria set by thepanel ($20,000 per year); the other 46 events have comparatively minor to negli-gible risk quotients Of the 20 riskiest events, 10 have risk quotients above

$200,000 per year

The exposure profile of Figure 16.1 shows the 10 or 12 highest-risk events sent, on average, approximately $2 million of exposure at the planning confidencelevel This compares with an exposure of approximately $3 million for the next 20risk events with material exposure

pre-For the 12 highest risk events, the representative pessimistic estimate of sure is approximately $4.5 million compared with $7 million for the next 20 mostrisky events

expo-Risk Analysis / 251

The exposure profile of Figure 16.1 also shows that there is considerable certainty in the estimates of the potential exposure to sudden risk events This isillustrated by the large range in value between the optimistic and pessimistic costs,the pessimistic estimate often being two to three times greater than the estimatedoptimistic cost.

un-Figure 16.2 is a cumulative risk profile that shows the cumulative exposure andthe cumulative percent risk for risk-ranked events This figure shows that the mostrisky 12 events are responsible for approximately 93 percent of the total risk pre-sented by all sudden risk events

Insurable Gradual Events

Panel members identified a total of 73 insurable gradual events Figure 16.3 showsthe risk quotient and exposure profile of all insurable gradual risk events with theevents ranked from highest to lowest risk The risk quotient profile shows that therisk posed by the insurable gradual events is substantially greater than that posed

by the sudden events

The profile shows that 50 risk events, approximately two-thirds of identified surable, gradual risk events, have risk quotients that are greater than the $20,000

in-Figure 16.1 Sudden event exposure profile showing the occurrence cost of events ranked in order of decreasing risk quotient.

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000