Complying with a rapidly changing global landscape of environmental laws and regulations is becoming increasingly difficult and time-consuming, especially for multinationals, which are required to track and ensure compliance with those changes in multiple markets. But taking an organized, systematic approach to managing this form of risk can pay off along multiple dimensions, especially as your company moves beyond strict legal compliance to a true focus on sustainability.

The Impact of Globalization

Because of the global nature of today’s commerce and supply chains, a vast number of companies have to be concerned with compliance in more than one country – sometimes even in countries where they lack a physical presence. The problem of legal compliance is compounded by the fact that the environmental regulatory framework governing company practices comprises local, national and supranational laws, all of which are subject to frequent change.

Beyond the obvious need for legal compliance, many companies face growing pressure from activists and customers to move to the next stage of corporate environmental awareness and practices – sustainability.

The U.S. Department of Commerce (DOC) defines sustainable manufacturing as “the creation of manufactured products that use processes that minimize negative environmental impacts, conserve energy and natural resources, are safe for employees, com¬munities and consumers, and are economically sound.” Obviously, there is a lot of room for interpretation within this definition, and, indeed, sustainability will likely mean different things to different companies. But it’s clear that under any interpretation that can be said to capture the spirit of the DOC definition, the drive to sustainability won’t be easy. And as environmental awareness and responsibility become more and more deeply ingrained in the global zeitgeist, having sustainable practices may well move beyond an operational goal to a requirement, at least in some markets. In other words, what’s considered a sustainable practice today may become a matter of compliance tomorrow.

An Approach to Environmental Risk Management

Given the growing abundance of all levels of environmental regulations globally, the best hope for compliance is a strategy that is systematic and comprises for both local and broader risk-management components. A first step is to seek out expert advice from law firms or consultants who have experience with, and are knowledgeable about, the environmental regulations and standards governing the countries in which your company operates. Those individuals can be retained to audit company facilities for compliance, audit suppliers in far-flung locales and provide input regarding potential compliance issues relating to acquisitions of foreign operations.

A second component is to engage suppliers that prioritize environmental risk management. Because supply chains today are often global in nature, it is important for companies to ensure that their own suppliers are in compliance with their countries’ environmental regulations. Ensuring that your upstream suppliers are “clean,” from a compliance perspective, helps reduce the risk of running into (mostly preventable) compliance issues downstream from your own manufacturing or distribution facilities.

Third, companies should adhere to accepted standards for environmental management. While global environmental regulations differ in the details, many have fundamental similarities around which a number of widely accepted voluntary practices have developed. Adopting such a set of standards and practices (termed an environmental management system, or EMS) will provide the company with a framework and an approach that makes global compliance – and eventually, sustainability – much easier to manage.

For example, ISO 14000 is a family of standards addressing various aspects of environmental management. It includes ISO 14001, currently the world’s dominant EMS. Another EMS, the EU Eco-Management and Audit Scheme (EMAS), is widely used by European companies. At the very least, the use of a robust EMS should lead to improved environmental performance, and better and more consistent legal compliance.

Finally, a good environmental risk management strategy should incorporate environmental insurance. In fact, carrying such insurance is mandatory in some countries.

While there are several insurance options for multinationals to structure a global environmental insurance program, perhaps the best is what is known as a controlled master program, or CMP. A CMP combines multiple primary local policies issued in countries where a company has compliance exposure with an excess global master policy issued in the country where the company is headquartered. The local policies help with local compliance, while the global master policy serves as a backstop, filling in coverage that a local policy may lack.

For ease of implementation and management of a CMP, it is important to work with an insurer that has worldwide expertise and capabilities, including a global claims department, so that any claims can be managed efficiently and effectively.

From Compliance to Sustainability

As compliance becomes more manageable, sustainability will likely become a more realistic goal. And because companies with a focus on sustainability benefit on many fronts, including better public perception and enhanced cost savings—as toxic substances and other hazardous wastes are removed from manufacturing processes—it is a goal that a growing number of companies believe is worth striving to achieve.

For more information about multinational program design, training, or solutions, please visit www.aig.com/multinational.