Sustainalytics’ ESG Risk Ratings issue – Emissions, Effluents and Waste – focuses on the management of emissions and releases from a company’s own operations to air, water and land, excluding greenhouse gas emissions. Depending on the subindustry, emphasis is put on one or several of these waste streams.
The Growing importance of Emissions, Effluents and Waste
While issues of environmental pollution have been materially important to companies for decades, there are several factors driving the long-term trend to continually strengthen environmental regulations and enforcement. First, there is growing societal awareness of environmental issues, which can lead to increased legal and reputational risks for major polluters. There is also a growing body of scientific knowledge on the long-term environmental and human impacts of certain synthetic chemicals. Over time, both these factors typically translate into new or strengthened regulations, increased monitoring and mandated remediation efforts.
Over time, both these factors typically translate into new or strengthened regulations, increased monitoring and mandated remediation efforts. Companies can be held accountable not just for environmental violations, but also for legacy pollution issues such as groundwater or land contamination. For example, several US States have won lawsuits against oil refining companies for their use of the gasoline additive methyl tert-butyl ether (MTBE) throughout the 1970s to 1990s. MTBE was found to contaminate groundwater, requiring the monitoring, remediation, and in some cases closure of wells. Courts have issued rulings resulting in the order of hundreds of millions per state for large refiners. Increasing enforcement action is a general trend globally, and countries continue to strengthen regulations and support legal structures accordingly, such as India’s National Green Tribunal, created in 2010.
Assessing the Unmanaged Risk of the Emissions, Effluents, and Waste by Industry
Sustainalytics’ ESG Risk Ratings consider Emissions, Effluents and Waste a material issue for 2600 companies in our comprehensive universe, spanning 30 industries. As shown below, the extractive industries, which includes mining and oil and gas, followed closely by steel have the highest unmanaged risk related to this issue.
Exhibit 1: Unmanaged Risk by Industry
Source: Sustainalytics data, April 2021
As societal standards related to pollution continue to increase, we expect that pollution issues will continue to increase in materiality. The US EPA regularly reports greater enforcement action each year, and similar trends are common in other countries. Greater enforcement, combined with a general trend towards stronger and broader regulations, means environmental pollution is increasingly likely to be penalized. For this reason, as well as a more environmentally conscious global population, this issue will become even more important for companies to address.