With growing attention on Environmental, Social and Governance initiatives and escalating penalties for non-compliance with environmental laws,[1] it is all the more important for companies to ensure compliance with environmental regulatory requirements. One way your company can satisfy stakeholders while appropriately managing risks of potential enforcement is to conduct a regular Environmental Compliance Audit ("ECA".) In this article we discuss the key features of ECAs and their rising importance in managing your company's environmental compliance and risk.
1. What are ECAs and why are they important?
ECAs assess compliance with environmental legal requirements.[2] This differs from other environmental assessments such as Phase I and Phase II studies, which are generally more focused on evaluating the presence of contamination above regulatory standards (and which are typically conducted for pre-purchase due diligence or for the purposes of applying for regulatory instruments). ECAs can also include occupational health and safety ("OHS") aspects as well. OHS audits focus on assessing compliance with applicable health and safety legislation and identifying risks to health and safety inside the workplace.
ECAs are internal evaluations carried out by qualified employees or third party consultants, with the goal of identifying compliance gaps, weaknesses in management systems and liability risk exposure.[3] The findings and recommendations from ECAs are documented in an internal written report (the "ECA Report".)
The importance of ECAs is quite simple: it is far more advantageous for companies to identify and remedy compliance gaps themselves than it is for such gaps to first be identified as a consequence of an incident, or by regulators, which can lead to penalties and other enforcement measures. Moreover, in the event of a prosecution or other enforcement action, an ECA Report can be used to support a due diligence defence, or during sentencing to demonstrate the company's attention to environmental risks and good faith efforts to ensure environmental compliance.
2. Are ECAs obligatory or voluntary?
Generally speaking, ECAs are not required by law. That is, there is currently no law in Canada that requires companies to conduct ECAs against all applicable environmental laws. However, there are a number of regulations that require audits to be conducted on certain aspects of specific industrial activities.[4]
ECAs may also be a requirement of a company's environmental management system. Where this is the case, they are often scheduled every few years so that management and shareholders have an understanding of regulatory compliance risks, and to provide an opportunity for the company to remedy any compliance gaps.
3. What standards should be used in an ECA?
Companies can choose between a range of standards to assess the results of their ECAs, and to guide the implementation of recommendations. Adhering to a particular set of standards can assist companies with measuring their level of compliance and the rate at which they are addressing compliance gaps, year over year. Standards can also help in determining how to prioritize the order in which any compliance gaps (and associated risks) identified in the ECA Report should be remedied.
The most commonly used standards in Canada are CSA Z773-17 and ISO 14001 (the latter of which is an international standard that sets out requirements for environmental management systems). Companies can also develop their own internal standards depending on their capacity and the purposes of their ECA.
4. What should you do with the ECA findings?
As discussed above, the results of an ECA will be contained in an ECA Report, which will include the auditor's findings and recommendations. Once a company receives an ECA Report, it should decide how to remedy any compliance gaps and action any recommendations, and the order in which this will be done.
ECA Reports will often differentiate between instances of non-compliance with strict regulatory requirements (which may attract enforcement actions by regulators) and non-compliance with best practices (which may not attract enforcement actions). ECA Reports may also differentiate between instances of clear non-compliance, and instances of potential non-compliance which require further assessment and/or monitoring. Ultimately, companies will want to prioritize all findings and recommendations in the ECA Report in order to determine which items will be actioned, how they will be actioned, and when.
5. How do lawyers assist with ECAs?
As a general rule, it is prudent to have an environmental lawyer oversee an ECA at all stages: from planning and scoping, to conducting the ECA and producing the draft ECA Report, to following up on the results of the ECA and determining action items and priorities. Involving a lawyer from the outset of the ECA process will help your company scope the ECA to ensure compliance with up-to-date laws, but also to ensure that the ECA is cost effective by only covering those regulatory requirements applicable in the circumstances.
Regardless of whether the ECA Report is for internal or external purposes, having a lawyer oversee the ECA also allows your company to benefit from legal privilege. For example, the legal advice received in respect of the findings of the ECA would not have to be disclosed in the future, as long as such privilege is properly protected.
Next steps
In today's market, companies with industrial facilities are expected to be conducting ECAs. Companies that do not regularly conduct ECAs have fewer opportunities to catch instances of non-compliance and are therefore far more exposed to the risk of stakeholder scrutiny and regulatory enforcement than companies who conduct ECAs regularly.
Our Environmental Law Practice Group has extensive experience with all stages of the ECA process, from scoping the ECA to prioritizing and assisting with the measures necessary to address the findings set out in the ECA Report. If you have any questions or need advice regarding your ECA, feel free to contact any member of our Environmental Litigation Group for assistance.
[1] See, for example, the following notable fines issued for environmental offences within the last five years: $3.5 million issued to Prairie Mines & Royalty ULC in 2017, $3.5 million issued to Irving Pulp & Paper Limited in 2018, $2.7 million issued to Husky Oil Operations Limited in 2019, $196.5 million issued to Volkswagen Aktiengesellschaft in 2020, and $60 million issued to Teck Coal limited in 2021.
[2] The scope of ECAs can be broad enough to include all environmental legal requirements applicable to a company or facility.
[3] In certain circumstances, ECAs can be ordered by and/or carried out by government agencies. However, the focus of this article is on ECAs that are undertaken voluntarily.
[4] See, for example, the Reduction in the Release of Volatile Organic Compounds Regulations (Petroleum Sector) (SOR/2020-231), s. 42-44; the Benzene in Gasoline Regulations (SOR/97-493), s. 22; the Benzene in Gasoline Regulations (SOR/97-493), s. 26; and the Renewable Fuels Regulations (SOR/2010-189), s. 28.