GENERAL SECTION

Environmental Portfolio Management:
Dealing with Stigmatized Properties

Environmental management has matured to a point where most companies know which properties have a high potential for costly environmental issues and which have low potential. Many companies manage these environmentally “stigmatized” properties by avoidance. The stigmatized properties are under invested and under utilized to minimize financial risks to return. This avoidance strategy, however, confuses management of perceived environmental risk with management of business risk and may lead the company toward less than optimal decisions.

IMPROVING THE MANAGEMENT OF IMPAIRED PROPERTIES

Typical management of environmentally impaired properties often lacks a formal decision making process. The decisions are intuitive and based on undocumented assumptions and other criteria. Optimal management utilizes a disciplined approach with verifiable assumptions, analyses, and projections. For example, managers may assume that a property is unsellable without an environmental indemnification and that environmental indemnification will increase the risk that a potential cleanup may be triggered. A well-constructed indemnification, however, may actually minimize the company’s risk by limiting indemnification triggers.

The following approach may be taken to improve the portfolio management of environmentally impaired properties:

• For each property, summarize what is known about the properties, such as reasons for any suspected impairment, current value, potential unimpaired value, ongoing environmental expenses, and potential remediation costs and strategy. Identify those properties with an environmental stigma, but no real impairment for immediate marketability.
• Identify relevant corporate capital investment plans. With appropriate creativity, such plans have potential for removing suspected property impairments and adding productivity.
• Prioritize the list by ranking properties with the greatest potential return on investment for environmental dollars spent. Properties with an ongoing remediation system should be evaluated to verify the remediation system is progressing to an identified end point and reducing the potential future costs. If not, determine actions to discontinue or improve the remediation system and accelerate toward termination.
• Compare the return on investment for environmental improvements with the return from other potential uses of funds. If the investment in environmental improvement is not the best use of funds, alternative sources of environmental funding such as brownfield programs should be explored. Otherwise, the money is better invested elsewhere.
• Stigmatized properties and any associated remediation systems should be treated like an integral but poor performing business unit. Increase productivity through use and control costs. The laboratory fees for investigations and monitoring, energy costs, waste disposal costs, and contractor costs all can be bundled for multiple facilities to obtain competitive bids from vendors.

CONCLUSION

By recognizing the distinction of risks between potential environmental costs and business investment, companies can improve the management of environmentally impaired properties. A sound business approach to managing environmentally impaired properties can reduce overall business risk.

The Payne Firm has assisted companies in reviewing and managing their portfolio of environmentally impaired properties and providing remediation assistance to improve financial performance. For more information please contact Michael Saul or Michael Woodruff at 513.489.2255 or via e-mail at mts@paynefirm.com or mlw@paynefirm.com, respectively. This and other Environmental Edge topics are available on our website at www.paynefirm.com.