The changing shape of environmental regulation – a challenge for multinational businesses

Environmental regulation is changing at an exponential rate. Around the world there has been a significant strengthening of regulation, consisting not only of tighter new rules but also more rigorous, consistent enforcement. For multinational organisations, the consequences of not being prepared locally and the impact of an environmental incidents can be severe. Traditional risk management techniques may leave companies exposed to financial and reputational risk.

Within the European Union, environmental regulation comprises a mixture of EU and domestic laws. The EU Environmental Liability Directive (ELD) took effect across Europe in 2009. Its purpose is to establish a framework of environmental liability based upon the ‘polluter pays’ principle. Liability under the ELD has little in common with standard civil liability rules. It does not give private parties a right to claim compensation. Instead, it puts environmental protection in the hands of competent national authorities.

There are three categories of environmental damage under the ELD:

• Damage that significantly affects the conservation status of habitats or species
• Damage that significantly adversely affects the ecological, chemical and/or quantitative status and/or ecological potential of water
• Land contamination that creates a significant risk to human health as a result of substances, preparations, organisms or micro-organisms being introduced.

The ELD provides for two liability regimes. Under the first, operators of activities posing a higher environmental risk may be held liable in the event of damage to protected species and natural habitats, water damage and land damage. There is no requirement of fault or negligence, and relatively few defences are available. The second regime applies to operators of other activities and imposes obligations in the event of fault or negligence.

The ELD gives power to prevent and remediate environmental damage at the operator’s cost. The remediation of water, protected species and natural habitats is achieved by physically reinstating the environment to its baseline condition. Such reinstatement may take the form of replacing damaged resources, acquiring or creating new natural components, or taking complementary measures on a different site. In order to remediate land damage, measures can be taken to ensure that the relevant contaminants are removed, controlled, contained or diminished so that the contaminated land no longer poses a significant risk to human health.

The ELD requires member states to encourage the development of financial provision, with the aim that operators should use financial products to guarantee their environmental responsibilities.

Inconsistent enforcement

Enforcement of the ELD has, however, proven to be inconsistent. Rates of enforcement in the east of Europe far exceed rates of enforcement in the west. Most western states rely upon an extensive patchwork of national environmental protection laws. In France, for example, the scope of the ELD is limited to cases of ‘serious’ environmental harm. In 2016, the French Civil Code was amended to impose strict liability on any person causing environmental damage. Claims may be brought by affected persons, governments or certified environmental associations, and the court has the power to impose a wide variety of compensatory and remedial measures.

Different approaches to financial provision

Nor have member states adopted a consistent approach towards financial provision in order to guarantee the obligations of operators under the ELD. At the time of writing, eight member states have implemented or proposed general financial provision. Ireland and Spain have been at the forefront.

Greater European harmonisation?

In 2014, the European Environment Agency (EEA) commenced a Multi-Annual Work Programme, structured around four strategic areas. These are: informing policy implementation; assessing systemic challenges; knowledge co-creation, sharing and use; and EEA management. Among the programme’s stated aims are to promote more frequent and consistent use of the ELD and to consider mandating financial provision across the European Union.

Conclusions

Globally, environmental regulation is tightening at an unprecedented rate. Governments committed to a clean and safe environment are passing increasingly strict laws on the prevention and control of pollution, underpinned by strict “polluter pays” compensation regimes.

In Europe there is an increasing emphasis on mandatory financial provision for environmental harm. The ELD has yet to succeed in harmonising the patchwork of national laws and regulations, and it remains to be seen whether the Multi-Annual Work Programme will result in closer alignment.

For businesses with environmental exposures in multiple jurisdictions, multinational environmental programmes are an attractive solution. They offer a minimum standard of international coverage, combined with local policies that reflect the requirements of national laws.

Whether or not a multinational environmental programme is taken out, it is essential for risk managers, brokers and insurers alike to remain aware of developments in this fast-moving area.

Contributed by Neil Beresford, partner, Clyde & Co, London and Dr Daniel Kassing, partner, Duesseldorf