Beyond the fear of fines

In any human motivation – or business, for that matter – there is a carrot and a stick. What will I get if I do, and what will happen if I don’t?

When it comes to environmental compliance, the carrots are fairly long-term and intangible, and many companies only consider the non-compliance stick of legal penalties and fines. This is where problems occur.

Painful financial consequences are generally only connected to major disasters, black swan events so rare that most companies will never face them. For example, in 2010, BP settled the Deepwater Horizon criminal case with over US$20 billion and forked out another $40 billion in clean-up costs. But this was a once-in-a-lifetime event that killed 11 people and put 210 million litres of oil in the Gulf of Mexico. Similarly, Australian mining giant BHP Bilton spent $30 billion on clean-up efforts after its Samarco dam tailings collapsed in Brazil, causing environmental devastation and loss of life. 

But most instances of environmental non-compliance don’t end in disaster, death or note-worthy penalties. They are generally far lower-level, such as a missed resource consent renewal or slipping above acceptable pollution levels. If legal and financial repercussions for these breaches are minor or non-existent, should organisations be worried at all? The short answer is ‘yes’. The damage caused by non-compliance can be far more widespread and insidious. 

Protestors, customer boycotts and loss of consents and permissions can wreak havoc on project budgets and timelines, along with your overarching organisational reputation. Protecting your social license to operate should be at the forefront of your compliance efforts. The impacts of doing otherwise can be swift and brutal. Projects are shut down, customers go elsewhere, and investors pull funding. 

When a power line owned by Pacific Gas and Electric Company (PG&E) snapped, it led to one of California’s deadliest and most destructive wildfires. It was just one of 11 fires linked to company code violations. The resulting scrutiny and backlash damaged its reputation so severely that PG&E filed for bankruptcy. One local brewery produced a F*ck PGE Ale. When facing liquidation, the company estimated it owed as much as $30 billion.

Nestlé had long faced criticism over its water bottling practices, especially in areas of drought. The final straw was in California’s San Bernardino National Forest, where Nestlé had been piping water from the national forest with a permit that had expired in 1988. Where there were legitimate permits, investigations found multiple violations. Public backlash and organised campaigns eventually sent Nestlé off, tail between legs. It sold its North American bottled water brands in 2021. 

In 2013, Woodside Petroleum’s proposed Browse LNG project was shelved after multinational joint venture partners pulled their support. It came after a five-year campaign from indigenous, community and environmental groups.

Perhaps the most common risk of non-compliance also comes with the most insidious and widespread impacts – disruption. If a project or organisation breaches environmental law, resource consent conditions or social license to operate, it can all but derail operations. Budgets are blown and timelines are stretched out, undermining profit, reputation and stakeholder goodwill.  

These impacts may be felt even in the absence of a serious incident. Accidents – even minor ones – can be wildly disruptive. It’s why this year, the World Economic Forum said, “Nature is no longer a corporate social responsibility issue, but a core and strategic risk management issue.”

Consider also MMG’s mine expansion project in Tasmania. It has had to stop work after legal threats from conservationists. The company claimed it could begin preparing for the works while the consent application was assessed. Legal advisors think otherwise and that MMG “flouted the provisions of federal environment law” by continuing work. 

Earlier in 2024, bulldozers sat dormant at Lee Point after the housing developer was accused of clearing land illegally. This is just one of three hold-ups facing the multi-million-dollar development after alleged environmental breaches.    

Loss of business opportunities and investment

In 2020, Rio Tinto faced widespread condemnation for blasting ancient Juukan Gorge rock shelters in search of iron ore. This act of non-compliance with cultural and environmental protections saw top executives resign and investors and financers pull out. Monks Investment Trust, run by Baillie Gifford, sold its £20m stake in Rio Tinto. An indigenous land council also pulled the support of their A$650 million investment portfolio. 

This high-profile case illustrates a broader point: Environmental compliance – or lack thereof – has become foundational to investors’ decision-making. A study showed that 78% of investors want to see a focus on ESG activity, even at the expense of short-term profits – and excellent compliance records make it simpler to deliver ESG goals. It can also show a genuine will, which can be crucial, with 76% of investors thinking that ESG reporting is selective and manipulated.

It’s also true that your investors, partners and clients will consider you a riskier prospect if your organisation is regularly in breach of regulations.

Increasing focus on compliance shows your organisation cares about minimising commercial risk, while meeting compliance standards is seen as an indicator of operational excellence. Indeed, excellent compliance can be a commercial advantage.

“Investors consider these companies as generally less risky, better positioned for the long term, and possibly better prepared for uncertainty.” – Vincent Triesschijn, Director of Sustainable Investing, ABN AMRO.

It’s probably no surprise that when a mutual fund sells shares from polluting companies, its Sharpe Ratio goes up. 

Insurance is as mundane as it is essential to organisations – a safety net protecting your people and financial stability, which can constitute a significant ongoing expense. If an organisation is found seriously or regularly to be non-compliant, its risk profile goes up, along with its premiums.

For example, following an ‘incident’ involving a lead azide press at Orica’s La Portada plant in Chile, the company reported an increase in insurance costs, which affected its financial performance. 

Considering only the risk of fines and legal penalties from noncompliance exposes organisations to more far-reaching damage. Reputational damage, disruption and loss of stakeholder trust can send the organisation reeling and seriously undermine long-term viability. Fines can be covered by insurance or reshuffling debt, but it can take years to recover from operational chaos, a tarnished public image and lost business opportunities. This myopic view also makes it more difficult to build a business case for investing in good environmental compliance and reporting.

Organisations that take a proactive approach to environmental compliance see it not as a regulatory obligation but as vital to business sustainability. And that’s because they’re considering sticks that matter.