Linking Environmental Compliance and ESG: Understanding the NECIs

In the world of environmental protection and sustainable business practices, it’s crucial to connect traditional compliance initiatives with the broader conversation surrounding environmental, social, and governance (ESG) factors. Compliance with environmental laws forms a foundation for any credible ESG program and is a minimum requirement to showcase progress. With increasing calls for transparency and public concern for sustainability, organizations cannot claim advancement on ESG performance without fulfilling basic regulatory and compliance obligations. 

When looking at the enhanced scrutiny of corporate responsibility and performance, companies operating in the United States need to be aware that the Environmental Protection Agency (EPA) is expanding its current climate change focus beyond voluntary programs and regulations and placing a broader emphasis on enforcement – with consideration of social impacts. We see further evidence of this prioritization as revised National Enforcement Compliance Initiatives (NECIs) roll out – adding climate change as one of its top six priorities over the next three years. 

What are NECIs?

The NECIs are built off massive amounts of compliance data and thousands of hours of input from federal and state agency experts, and are informed by comments from industry, NGOs, and the broader public. Every three years, the NECIs are updated based on this input, identifying the six most pressing environmental protection areas the agency believes it needs to address from an enforcement and compliance perspective.

Companies working to improve their performance and reputation must understand the relevance of NECIs to the ESG landscape. The NECIs are a key part of EPA’s enforcement playbook – they make the agency’s top priorities clear. 

Climate Change, PFAS, Overarching EJ Focus 

In its most recent proposal, the administration outlined its NECI plan for 2024-2027, which includes keeping four of the current areas: 

• reducing excess emissions of harmful pollutants;
• reducing risks of accidental releases at chemical and industrial facilities;
• reducing significant non-compliance in permitted water discharges; and
• reducing non-compliance with drinking water standards.

EPA plans to move two back to its core program (i.e., less intense focus): 

• stopping aftermarket defeat devices for vehicles and engines, and
• reducing hazardous air emissions from hazardous waste facilities.

The agency identifies two new focus areas as replacements: mitigating climate change and addressing PFAS contamination – both of which will also have a specific environmental justice element relevant to many companies. The proposal states: “promoting environmental justice…is a core element of all enforcement and compliance work” and that EPA is incorporating environmental justice (EJ) considerations in every existing and new NECI. Through this lens, EJ is undeniably intertwined with a company’s EHS program regarding environmental permitting, community impacts, and compliance. In fact, many companies have started looking at EJ as another core compliance area, along with air, water, and waste. EPA compliance is more directly a component of the “S” in “ESG” than ever.

Having discussed National Environmental Compliance Initiatives (NECIs) generally, and the proposed updates for 2024-2027, let’s take a closer look at what they mean for corporate ESG programs. How do the NECIs impact ESG evaluations and commitments?

Climate NECI

Climate change is typically a core ESG commitment and corporate leaders must pay attention. They must understand how the new climate change NECI will impact their companies and investment funds. To do this, it’s essential to look at the scope and potential impact of the proposed language:

Mitigating Climate Change. A potential climate NECI would seek to combat climate change through a focus on reducing non-compliance with the illegal import, production, use, and sale of hydrofluorocarbons [HFCs]… excess emissions from sources within certain industrial sectors, including municipal solid waste landfills and oil and natural gas production facilities; as well as non-compliance with other requirements such as mobile source, fuels, and methane regulations. Climate change poses substantial risk to public health and safety, water resources, agriculture, infrastructure, and ecosystems. Addressing climate change using EPA’s available compliance and enforcement tools is critical to EPA’s mission of protecting human health and the environment, particularly protecting populations that may be especially vulnerable to the effects of climate change, including those in overburdened, underserved, and economically distressed communities.

HFCs are highlighted, but excess emissions from sources in specific industrial sectors, and non-compliance with other requirements such as mobile sources, fuels, and methane regulations are specifically mentioned as well. 

This new NECI signals that non-compliance linked to the administration’s climate change initiative could be fair game for enforcement scrutiny. If you’re one of the 2,000 or so entities reporting to EPA’s greenhouse gas reporting program, and your data submission is incorrect or suspected to be false, that could prompt an enforcement action – including a criminal fraud investigation. And once the SEC finalizes its climate disclosure rulemaking, that will open up a bevy of submissions to scrutiny for accuracy. When the government commits itself to pursuing a “whole of government approach” to tackling climate change, it casts a very wide net. Understanding the implications of the new climate NECI is imperative for all sustainability leaders and will be critical in ESG evaluations and data controls/validation.

PFAS NECI

The proposed addition of addressing PFAS contamination to the NECI list comes as no surprise as EPA implements its PFAS Strategic Roadmap. This approach focuses on research, restriction, and remediation efforts to mitigate and address the potentially significant liability and staggering cleanup costs associated with PFAS pollution, which are estimated in the billions of dollars. The proposed NECI [in part] states:

A PFAS NECI initially would focus on identifying the extent of PFAS exposures that pose a threat to human health and the environment and pursuing responsible parties for those exposures … EPA intends to focus enforcement efforts on PFAS manufacturers whose actions result in the release of significant amounts of PFAS into the environment, and on federal facilities that may be a significant source of PFAS contamination.

The proposed NECI specifies that PFAS manufacturers are at the top of the list for enforcement scrutiny. Looking through a compliance and ESG lens, this approach underscores the importance of addressing PFAS concerns within a company’s operations and supply chains. Taking steps to proactively identify and mitigate the PFAS risks will be (and in reality, already are) critical for companies to avoid targeted enforcement connected to this NECI. Failure to do so will not only open a company up to potential legal and financial liability as new regulatory frameworks unfold but will also damage corporate reputation, expose the company to third party claims, and undermine the credibility of corporate ESG programs and related goals.

The Environmental Justice Overlay

Viewed in the context of the overarching EJ considerations outlined in the NECIs, it’s critical not to forget that these listed priorities will receive even greater enforcement scrutiny when non-compliance impacts disadvantaged communities. The whole of government approach to climate and the agency-wide approach to PFAS prioritize environmental justice and the protection of disadvantaged communities. As such, sustainability leaders must broadly consider all potential EJ impacts that stem from their operations as part of an effective, credible ESG program built on an environmental compliance baseline.

How the NECIs Impact ESG Performance and Disclosures

The credibility of a company’s reputation and the ESG data they rely on, use and report are foundational. In one company’s recent sustainability report, they made following statement:

“Our global Environment, Occupational Health and Safety Philosophy, endorsed by our President & CEO drives us towards continuous environment health and safety (EH&S) improvement, as measured by our leading environmental and safety indicators and implemented through our EH&S management approach. We are committed to complying with environmental laws and regulations and to protecting natural resources.”

A closer look at this company found it had a single facility with over 300 water discharge violations and was in significant non-compliance in its water operations for 19 of the last 20 quarters. This company squarely has a target on its back for violating one of the agency’s NECIs, putting it at significant risk for reputational damage, agency enforcement action and third party (NGO) lawsuits. It also undermines their ESG strategy and related performance measures, and calls into question public statements about the company’s sustainability initiatives. At the very least, it’s not a good look: at the worst, it sets the company up for lawsuits.

As legal mandates for ESG disclosures increase, so do the risks and the importance of accurate reporting and using validated environmental data. It is critical to remember that legal mandates are not limited to national laws and regulations, but also include contractual requirements between suppliers/vendors and their customers. Even further, ESG disclosures can impact loan covenants, ESG ratings and commitments to investors. Certainly not last, as we highlighted in the first two parts of this series, EPA’s emphasis on environmental justice contexts of environmental compliance cast this risk in a far different light.

How Companies Can Incorporate the NECIs into an ESG Strategy

Although the NECIs are compliance-focused, they should not be addressed on a singular basis. Environmental compliance remains an important element of ESG – and arguably one of the longest-standing. Here are a few tips on how to best ensure compliance – NECI and otherwise – doesn’t get lost in what may feel like higher priority ESG activities:

• Understand how the NECIs may impact your company, suppliers, and investments. This requires deep understanding of company operations, manufacturing processes, products/raw materials purchased from suppliers and your own relationships with your customer – and the regulatory agencies. Investors and ESG ratings organizations may also express concern about your company’s compliance status – although they may not voice such concerns directly.
• Pressure test operations. You need to closely assess operations to see where they are subject to the NECIs, and if the company you’re evaluating (whether your own or someone else’s) is meeting its legal EHS obligations as a minimum. If you are a company in non-compliance with environmental regulations, particularly those involving a NECI, engage with your EHS leadership team to fix problems expeditiously. The government is much more accommodating to organizations that take on deficiencies, cooperate with regulators, and address non-compliance.
• Consider investors/raters. Investors face something of a different situation. ESG ratings may or may not adequately consider EHS compliance performance, so additional due diligence may be necessary. In recent years, new information technology services have made this easier, faster and cost effective – at least in the US. Investors and ESG ratings looking at a company that is not meeting EHS compliance expectations may take the opportunity to lean in, ask why, and request a plan to address them.
• Keep the environmental justice context in mind. Much about environmental compliance management is old hat, meaning it sometimes doesn’t get the attention it deserves. However, the new NECIs look at environmental compliance through environmental justice and local community impact lenses, which changes the risk landscape – and potential liability. Given the current visibility ESG has in executive and board conversations, you may get more attention and action by highlighting environmental compliance in those ESG conversations.
• Ensure that your sustainability and EHS teams work together and communicate effectively. Laying out a rosy picture in a sustainability report that doesn’t align with environmental performance is one of the quickest ways to lose credibility and diminish the good work that is being done across an organization. Silos are good for storing commodities but not for managing risk. Effective communication between sustainability and EHS teams is essential to maintain credibility and ensure the organization’s sustainability efforts are accurately represented. As more regulators check ESG data consistency by comparing legally-mandated reports with voluntary ESG/sustainability reports, risks related to inconsistent reporting are increasingly significant.

Conclusion

The proposed new NECI plan changes the environmental compliance game by putting social impacts (i.e., environmental justice) front and center. Ultimately, what the government, business partners, stakeholders and general public think about a company’s sustainability performance will be informed to a large extent by its environmental record, compliance practices and how the company discloses that information. The first step is understanding the critical concerns of environmental regulators (e.g., the NECIs), the second is ensuring strict compliance with them, and the last is transparently communicating the company’s sustainability performance, highlighting its fundamental commitment to obeying environmental laws within the broader context of a well-considered ESG strategy.