As Environmentalism Evolves, So Do Business Opportunities

Of all the disappointments of the 1990s for investors and for believers in the cause, the failure of environmental industry to live up to expectations has to rank pretty high.

Cleanup jobs have been fewer than anticipated. The U.A. Environmental Protection Agency will see its budget cut by roughly 15% this year--and be thankful that political reaction saved it from a 33% cut.

Small environmental companies have struggled and many are now selling out. But the stock market is indifferent: Most environmental stocks sell at less than 50% of their highs over the last five years.

Environmentalists are bitter, charging in one recent book--”Losing Ground” by Mark Dowie-- that “compromise and capitulation have pushed a promising political movement to the brink of irrelevance.”

Distress is surprising given that the Clinton administration, led by Vice President Al Gore, loudly supports the environment. But industry executives complain of more talk than action and say that weak enforcement has held back the cleanup business.

But wait; something else is happening. Big companies are increasing their presence in environmental business, acquiring or forming joint ventures with small firms.

Fluor Corp. recently bought a controlling interest in Groundwater Technology, a Norwood, Mass., environmental services firm; Dow Chemical merged its environmental business with that of Radian Corp., an Austin, Texas, company; and Tyco International, a diversified manufacturer of fire-protection sprinklers, bought Earth Technology Corp., a Long Beach company that specializes in cleaning up military bases.

What does the big money see? Opportunity, now that environmental regulation has taken a turn to common sense. New EPA rules say that contaminated property can be made usable without being made pure--a refinery site can be cleaned up to be a parking lot and shopping center without the owner having to pay to make it clean enough for a nursery school.

That’s a big change. “The business now is driven by economics, not regulation,” says Diane Creel, chairwoman of Earth Technology.

“Economics” means less lawyer-driven environmentalism. It’s an open scandal that $8 billion of the $12 billion spent on the Superfund program went to litigation costs, not to actual cleanup of America’s most polluted sites.

Similarly in recent years--especially during the recession--business found environmental cleanup to be a postponable expense. Faced with regulatory censure, companies calculated whether their lawyers would be cheaper than the costs of cleaning up. “Stall, litigate, study was the strategy,” says one chief executive.

The federal government also finds the environment a postponable priority. Defense Department funds earmarked for cleaning up military bases are being diverted to pay for the U.S. mission in Bosnia. Previously, such funds were used for the mission in Haiti.

The effect on small waste-reclamation companies has been devastating. Many are now out of business or have been merged into other companies.

But that’s only to say that the environmental industry is in transition, not decline. This is a young business, dating only a few decades to Rachel Carson’s 1962 book, “Silent Spring,” which warned of the effects of DDT and other pesticides on plant and animal life. Congress passed the first Clean Air Act in 1963.

Yet in that short time, environmental law and consciousness have come a long way. One reason there is less cleanup work is that businesses have cut down on the amount of waste they produce.

“Once waste products became a potential liability, companies changed practices to make less waste. It was simple economics,” says Grant Ferrier, editor of the San Diego-based Environmental Business Journal.

With broad laws firmly on the books, regulation is becoming more specific. The Securities and Exchange Commission now demands that companies list polluted properties as liabilities and tell shareholders the potential costs of reclamation.

“So now there is an economic reason for a company to clean up a property and turn it into a usable asset,” says John Rasile, vice president of environmental services at Fluor.

There are also big jobs in progress--the government’s nuclear fuel and weapons sites, such as those at Fernald, Ohio, and Hanford, Wash., that need dismantling.

And foreign markets are opening up, with needs for basic waste-water treatment as well as massive cleanup jobs in Asia, Latin America and Eastern Europe.

Large projects promise years of work for the major engineering companies, Bechtel and Fluor, Parsons Corp. and Jacobs Engineering. But they demand that environmental companies get big enough in capital and personnel to handle such work.

That’s yet another reason for consolidation in the industry. International Technology Corp., a sizable environmental engineering company at $425 million in sales last year, has two investment banking firms looking for merger or acquisition partners.

“We want to combine our skills with those of another company or two for the long term,” says Robert Sheh, president of Torrance-based IT.

“Customers want their environmental contractors to have global operations and sufficient capital to shoulder large indemnity bonds or to help with project financing,” says investment banker Paul Zofnass, president of New York’s Environmental Financial Consulting Group.

Ultimately, this will be an industry of 10 large firms, says Creel, who sold Earth Technology at $250 million in sales.

“And there will always be 50 to 100 specialized subcontractors,” adds Joseph De Franco, president of Separation and Recovery Systems, an Irvine-based water treatment company that specializes in keeping harbors clean.

Fact is, a lot is happening in the industry even as the stocks of environmental companies remain below Wall Street’s radar screen. And far from “irrelevant” politically, the environment--meaning sensible programs to maintain clean air and water and natural resources--enjoys broad political support.

As with so much in today’s economy, when you look behind gloomy appearances in environmental industry, you find a different reality altogether.