The Do’s and Don’ts of “Being Prudent”

By JIM DIPESO, REP Policy Director

AN HISTORICAL DOCUMENT: This article first appeared in the C.E.P (Conservative Environmental Policy) Quarterly, fall 2006, Vol 2, #3

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Little mistakes can add up to major problems, as described colorfully in the old poem relating that “for want of a nail … the kingdom was lost.”

In BP’s case, for want of a “pig,” pipelines and a reputation were lost on Alaska’s North Slope last summer, along with millions of dollars in lost production and pipeline repairs. BP’s prized image as a forward-looking, “beyond petroleum” corporation building the 21st century energy economy suffered a blow when the company was forced to partially close North Slope oil production in order to fix corroding oil transit pipelines. Inspections ordered by the federal government following a pipeline spill last spring showed that pipeline damage had built up undetected because BP managers made a judgment call that running corrosion detection “pigs” through a transit line was unnecessary.

As it turned out, that judgment call was not prudent. A lot of BP’s judgment calls were not prudent. BP’s failure to “pig” transit lines for more than 15 years resulted in huge sludge buildups. Whistleblowers let the cat out of the bag about dozens of leaky pipelines. Gas leaks. Compressor shutdowns. Damage far more extensive than initially reported. A little more prudence might have saved BP a great deal of money and embarrassment.

Prudence, which is the art of caution, foresight, and avoiding unnecessary risks in caring for resources, was described as the highest ranking of all virtues by Edmund Burke, the British statesman who was the intellectual founder of modern conservatism. In the context of modern business, prudence dictates that corporate executives reduce risks to bottom line, market share, and company image by minimizing harm to the environment that their activities may cause. In turn, prudent environmental management is a sign of good management overall, delivering greater value to shareholders.

Dominion Power, a utility that serves Virginia and North Carolina, is taking just such an approach to managing its coal-fired power plants. Rather than spend time and money on lawyers to fight air quality standards, the company over the next decade will install pollution abatement equipment that will reduce emissions of sulfur dioxide (SOX) and nitrogen oxides (NOX) 80 percent and 74 percent, respectively, from 2000 levels. SOX and NOX condense in the atmosphere to form fine sulfate and nitrate particles that epidemiological studies suggest are linked to respiratory illness, heart disease, and premature death.

In addition, the equipment will cut mercury emissions, a neurotoxin that impairs the developing nervous systems of children in the womb, by 86 percent from 2000 levels. The utility also supported Virginia regulations that go beyond federal standards by requiring large mercury emitters, including Dominion, to comply by achieving actual mercury emissions reductions rather than by buying mercury emissions allowances, and to comply by 2015, three years ahead of the federal deadline.

The investments result from a 2003 legal settlement of a case that the Environmental Protection Agency filed against Dominion and other utilities over compliance with the Clean Air Act’s provisions governing upgrades at old, coal-fired power plants. Dominion chose to settle rather than fight the cases in court.

Dominion made a business judgment that corporate capital would be better used on operational improvements than protracted litigation. By thus achieving regulatory certainty, company executives can plan capital spending with reduced risk that the funds will be misallocated.

Prudent environmental management accomplishes more than avoiding harm, however. It can result in benefits, such as lower costs, higher profits, product improvement, and improved company image.

Pollution is waste and waste equals lost profit, an adage that the 3M Company has lived by for more than three decades. 3M’s “Pollution Prevention Pays” program has avoided emission of more than 1 million tons of pollutants and saved the company more than $1 billion. Between 1990 and 2000, for example, 3M reduced emissions of volatile organic compounds, which are ingredients in smog formation, by 93 percent. Since 1975, 3M has implemented more than 6,000 pollution prevention projects, ranging from simple operational changes to reduce packaging waste to reformulation of product chemistry in order to reduce air emissions.

More corporate executives are coming to the insight that occurred to 3M’s executives in the 1970s. A study released recently by Siemens, a global energy and engineering technology corporation, found that many business leaders are incorporating “green” practices and building technologies into their strategies for growth. The study found that the majority of respondents believe that their companies will adopt green practices in the next three years. Nearly 60 percent believe that green building will lower company energy costs, one of the key drivers that has perked up business interest in environmentally sound technologies.

Good environmental management correlates well with good financial performance, according to a 2004 report prepared by Innovest, an investment advisory firm that focuses on risk management as a performance indicator, and by the Environment Agency, a public agency in the United Kingdom:

“The research findings in this report appear to directly counter a widespread misconception that paying close attention to an environmental governance strategy and environmental performance is at best a waste of time for investors, and at worst actively harmful to financial returns. In fact, the opposite is true. Improving environmental performance is an opportunity for business and creates competitive advantage.”

For example, Baxter International has stood out in the health care industry for using strong environmental performance as a strategy to reduce liabilities and create greater value for shareholders. Between 2000 and 2002, waste reduction, water conservation, and energy efficiency saved the company nearly $200 million, the report noted. The company has reduced risk exposure by cutting emissions of toxic air pollutants by 99 percent since 1988. Baxter has joined the Chicago Climate Exchange, where member companies voluntarily sign contracts to reduce greenhouse gas emissions. The exchange is a test bed where companies can plan for the likelihood of carbon emissions caps by finding the most effective ways of reducing heat-trapping emissions.

In the oil and gas sector, the study found that companies with high environmental performance standards tend to do better financially than companies with lower standards. In share price growth, for example, the top performers outdid the lower performers by 17.3 percent in the five years between 1997 and 2002. Among the oil and gas sector’s top environmental performers during that period — BP.

BP would no doubt like to refurbish its image as a responsible oil company. If BP can improve its pipeline management, recover its stride, and re-affirm its identity as a careful business that is planning to prosper in a new economy of diversified energy choices, then BP someday may stand for something else — “being prudent.”

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