Battle lines drawn over mandatory security for ELD

The European Commission is forging ahead with its proposed revision of the Environmental Liability Directive (ELD) to give the regime more teeth. The revision could see the introduction of mandatory financial security to pay for cleanups and enforce the ‘polluter pays’ principle (PPP) once and for all.

As part of the review, a call for evidence was conducted towards the end of last year followed by an open public consultation until 4 August, and a targeted consultation with stakeholders in June.

The next step is an ELD stakeholder meeting on 22 November in Brussels. Then a study will be delivered to the EC next April to help prepare the revised directive.

But the European risk management and insurance sectors do not believe that a revision of the directive is needed at this stage. 

Ferma believes the focus should instead be on working out how to raise awareness of the regime among the SME community and trying to make environmental liability insurance coverage more available and affordable.

It strongly argues against the introduction of mandatory financial security for environmental liability because it thinks this will take focus away from preventing and managing environmental risk and thus defeat the object.

Ferma president Dirk Wegener summed up the federation’s position neatly in interview with Commercial Risk Europe. “The ELD does not need to be updated. We are not in favour of the EC pursuing a line of action that will require companies to take out mandatory financial security, which often means a mandatory insurance scheme. This will discourage firms taking the necessary prevention measures and possibly disincentivise the pursuit of enterprise risk management. We don’t think that kind of an update will be helpful,” he said. 

Wegener added: “The problem with the current ELD it that it has not really come to life. The level of applicability across the EU is very diverse, which makes it difficult for cross-border operations. We would be more in favour of having the EC focus on a level playing field across Europe.”

Revision

So why does the EC think that the ELD needs revising at all? Well, the European Court of Auditors (ECA) strongly laid out the reasons for a revision in a report published in July 2021.

It stated that the ‘polluter pays’ principle is simply not working. “While the principle is generally reflected in the EU’s environmental policies, its coverage remains incomplete and it is applied unevenly across sectors and member states. As a result, public money – instead of polluters’ – is sometimes used to fund cleanup actions,” the auditors pointed out.

The ECA reported that nearly three million sites in the EU are potentially contaminated, primarily by industrial activity and waste treatment and disposal. Six in ten bodies of surface water, such as rivers and lakes, are not in good chemical and ecological condition. Air pollution, a major health risk in the EU, also damages vegetation and ecosystems.

The auditors said that all of this entails significant costs for EU citizens. “The ‘polluter pays’ principle holds polluters responsible for their pollution and the environmental damage they cause. It is polluters, and not taxpayers, who are supposed to cover the associated costs,” stated the ECA.

One of its biggest concerns – particularly at a time of stretched budgets – is that very often, site contamination happened so long ago that polluters no longer exist, cannot be identified, or cannot be made liable.

It pointed out that this ‘orphan pollution’ is one of the reasons why the EU has had to finance remediation projects that should have been paid for by polluters. “What is worse, EU public money has also been used contrary to the ‘polluter pays’ principle, for instance when authorities in member states have failed to enforce environmental legislation and make polluters pay,” stated the ECA.

This is where the thorny matter of mandatory financial security and insurance comes into play.

“The auditors underline that, where businesses do not have sufficient financial security (e.g. insurance policy covering environmental liability), there is a risk that environmental cleanup costs will end up being borne by taxpayers. To date, only seven member states (the Czech Republic, Ireland, Spain, Italy, Poland, Portugal and Slovakia) require financial security to be given for some or all environmental liabilities. But at EU level, such guarantees are not mandatory, which in practice means that taxpayers are forced to step in and pay for cleanup costs when a company that has caused environmental damage becomes insolvent,” the ECA pointed out, strongly hinting that the EC ought to make financial security mandatory across the EU.

These comments were followed by a report produced by an expert advisory group the EC is using to help draft its ELD revision. It also noted the potential need for mandatory financial security, partly because of a supposed lack of adequate insurance cover across Europe.

“A study prepared for the European Parliament concluded that the problem of insolvency can be addressed through mandatory financial security. For example, Portugal imposes mandatory financial security for all environmentally risky activities identified in the ELD. Portugal accepts a wide range of financial security instruments, including insurance policies, bank guarantees, environmental funds and own funds. Portugal did not report any cases of insolvency that prevented the application of environmental liability,” the report states. 

“As part of the 2017-2020 Multi Annual Work Programme, the Commission funded a study (Making the Environmental Liability Directive More Fit for Purpose) on the availability of and demand for insurance policies in member states. It found that insurance policies for ELD liabilities, the most popular instrument for financial security, were not widely available across the EU, and did not exist in some member states. It also found that availability did not necessarily correspond to demand, and that there were countries where availability was high, but demand was low. However, the study also showed that in member states where financial security for ELD liabilities was mandatory, the obligation drove the development of insurance market,” notes the report.

The report adds that as part of  its 2021-2024 work programme, the EC plans to encourage member states that have not introduced mandatory financial security for ELD liabilities “to consider extending existing mandatory financial security requirements […] to include requirements for liabilities under the ELD”, and “to consider imposition of secondary liability on other persons such as directors and officers and parent companies”.

Problems

Ferma’s comments on the consultation made it crystal clear that it believes this would be the wrong direction to take.

“Based on Ferma’s discussions with its members on the ELD, we would like to highlight the following problems, according to the professional risk management community. There is a lack of awareness and therefore room for improvement in awareness-raising. We found that among SMEs in most markets, and even larger companies in certain markets, there is an overall lack of awareness of ELD. Related to that lack of awareness, we have also received feedback from our members that essentially says it’s too soon to make any meaningful conclusions or evaluation of the ELD because it is still – relatively – recent history and there is a lack of data/awareness,” it said. 

“We have also heard from our members that there are indeed differences in approach to ELD cross-border. This has prevented, for example, companies finding insurance coverage cross-border,” added Ferma. 

“While we do agree with the finding contained in the European Parliament’s report that insurance takeup in some (many) markets is still relatively low and that this is due to a lack of awareness, we are of the strong view that making insurance mandatory is not an appropriate solution. Quite aside from the fact that mandatory insurances do not always appropriately adapt to the specific risk coverage needs of clients, and that they can effectively act as a tax, mandatory insurance in the area of environmental protection may disincentivise proper and robust risk management,” continued the federation.

“Through our conversations with our members regarding ELD, specifically the point about insurance, we hear the following: In general, for large companies there are no real problems with finding insurance coverage. In certain markets (such as Germany) we know that corporates are able to purchase this insurance as part of general liability policy. However, for SMEs, insurance coverage is a problem, as is the affordability. This is likely to be linked to lack of awareness in this population. Cross-border coverage is a problem for multinational corporations. This could be linked to the known problem of variability of implementation of ELD in the EU. Instead of mandatory financial security, Ferma is very much in favour of companies using robust risk management,” it concluded. 

Effective measures

Insurance Europe, which represents the European insurance sector, is in full agreement.

“Insurance Europe recommends that the focus should primarily be placed on ensuring that effective measures are being taken throughout the EU to prevent and mitigate any potential environmental accidents. In particular, the whole body of European environmental law must be fully implemented at national level and provisions should be introduced for competent authorities to oversee and, if necessary, ensure compliance,” stated the federation in response to the ELD consultation.

“Mandatory financial security requirements would interfere with the development of a market for ELD insurance in the few markets where it has not yet fully matured. It would not serve as a solution to the low uptake of insurance cover because it would not solve the lack of reported incidents, sub-optimal enforcement and slower developments in emerging markets. Furthermore, sufficient insurance is available in most markets, even though most member states do not have mandatory financial security in place,” continued Insurance Europe.

It will be interesting to see how this discussion pans out during the stakeholder meeting in Brussels next month.

The ECA report gave some pretty clear evidence suggesting that the ELD as it stands is not fit for purpose and needs a rethink. And pressure appears to be building for mandatory financial security on a pan-European basis. So it seems that Ferma and Insurance Europe will have to work together to present a strong and united case against its introduction, to win the day.