Analysis

From black to green: Auditors building regulatory bridges in chemical and oil industries

Highlights

  • The times are changing and public opinion no longer accepts pollution by large companies in the chemical and oil industries.
  • More rules is not the solution. Auditors can go beyond the current regulations in their standard setting and recommendations to bridge the regulatory gap.
  • Auditors should advocate for better data and information integration as key for regulatory policy.
  • Audit and enforcement is one strategy, but auditors should also be ambassadors for accountability and societal dialogue by the industry (‘triple A’-involvement) and inspectorates.

Environmental regulations are not always adequate in preventing and addressing the environmental impact of large companies in the oil and chemical sectors. What can both internal and external public sector auditors do to encourage these companies to go “greener” and fill this regulatory gap? This was the topic of the first session of the OECD Auditors Alliance IdeaLab.

Introduction

In a recent audit on the effectiveness of the government’s environmental enforcement in the oil and chemical sectors (Seveso companies), the Netherlands Court of Audit concluded that there is a compliance gap between the current regulations and desired company behaviour. Public opinion is changing fast, and so does the ambition of businesses. Recent court rulings have also asked for a faster transition of the oil industry from black to green. Environmental regulations have not kept pace with the changing demands needed to revert further unwanted climate transition, as suggested by the IPCC report.  This “regulatory gap”  also threatens to reduce the value and impact of audits and inspections, particularly when auditors rely heavily on existing regulations for criteria and guideposts. How can auditors help to bridge this regulatory gap and contribute to the faster transition of the industry from black to green?

The audit results

The Netherlands Court of Audit first looked into the available enforcement data and found considerable data flaws and gaps. Without good data, combatting environmental crime is ‘fumbling in the dark’ and cannot be effective. Analysis of the available data showed that most companies were compliant. Only a small percentage of the companies was responsible for the majority of violations and criminal cases, see figure 1.

Figure 1: Ratio between offending and compliant companies (Source: Netherlands Court of Audit, 2021, Enforcing in the Dark)

Benchmarking over time showed that enforcement measures had inadequate results on these frequent offenders. Both the industry and inspectorates agreed with the NCA that the current regulatory tools were inadequate to address this recidivism. The NCA also recommended that information on environmental inspections and violations should be made public, so citizens are informed whether company locations in their vicinity are either “green”, “grey”, or “black”.

Going beyond current regulations

In the interactive discussion, IdeaLab participants explored how auditors can effectively do their work when there are regulatory gaps, such as going beyond current regulations when setting criteria and formulating recommendations.

This point was underscored by Florentin Blanc, senior policy analyst at the OECD’s Regulatory Policy Division. More rules is not the solution. Better data and information integration is. He pointed out that 100% compliance is unrealistic, but that highlighting the good performers can be a very effective strategy. Auditors who want to go beyond current regulation can find good criteria in the 2018 OECD Regulatory and Inspection Toolkit.

The value of public reporting

Martin Dees, strategic advisor at the Netherlands Court of Audit, stated that accountability through public reporting is another powerful tool to help our industries to go “greener”. The proposed extension of the EU Corporate Sustainability Directive is an opportunity. Not only does the directive extend the scope to all listed companies, but it also introduces the requirement of audit (assurance) by a statutory auditor. This is a good example of the value of integrated reporting, with equal status of sustainability information and financial information. This puts auditors in the position of ambassadors and advisors (‘triple A’-involvement), facilitating better accountability. Public sector auditors should jump on this train by embracing integrated reporting as well.

Conclusion

Public sector auditors can play a pivotal role when it comes to bridging the regulatory gap in enforcement of environmental policies. Not by sticking to the current regulations, but by going beyond. Working together with stakeholders, including the industry, to set new standards and increase public accountability can build the required bridges and allow companies to go from “black” to “green”.

About the experts

Johan van Wilsem is a strategist-researcher at the Netherlands Court of Audit. There, he led the audit on the enforcement of environmental regulations among Dutch Seveso company locations. He had previously worked as head of a research department at the Ministry of Justice and Security and as an associate professor of criminology at Leiden University.

Ina de Haan has 20 years of experience in performance audit with the Netherlands Court of Audit (NCA). After working at the OECD in 2019/2020 she returned to the NCA and now works as senior policy advisor on international affairs and capacity building.

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