May 2, 2019

The changing face of environmental regulation: a challenge for multi-national business

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 multi-national organisations the consequences of not being prepared locally and the impact of an environmental incident can be severe.

 German Translation 

In this article Neil Beresford and Daniel Kassing of global law firm Clyde & Co provide an overview of the latest regulatory changes across leading regional markets in Europe, Asia and South America. They explain how traditional risk management techniques may also leave companies exposed to financial and reputational risk.

Europe

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 which significantly affects the conservation status of habitats or species
  • Damage which significantly adversely affects the ecological, chemical and/or quantitative status and/or ecological potential of water
  • Land contamination which 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 the 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 the 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 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 compensatary 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 date of writing, eight member states have implemented or proposed general financial provision. Ireland and Spain have been at the forefront.

Ireland

In 2015, the Irish Environmental Protection Agency (EPA) published extensive Guidance on Financial Provision for Environmental Liabilities.1 The guidance applies to more than 700 operators undertaking licensed activities. It sets out the EPA’s general approach to financial provisions, the process for putting a financial provision in place and the types of financial provision which are considered appropriate.

Financial provision must extend to the full cost of responding to incidents during the lifetime of the facility and decommissioning when the facility is eventually closed. To calculate the required provision the license holder must commission an Environmental Liabilities Risk Assessment and a Closure, Restoration & Aftercare Management Plan.

The EPA’s approval must be sought for all costings. Without approved financial provision in place, companies may not be granted the relevant authorisation to operate a facility.

Spain

In Spain the rules on financial provision were significantly tightened in 2017.2

From 31 October 2018, so-called ‘Priority One’ sites were required to be protected by compulsory financial provision. Such sites include locations where hazardous ‘Seveso’ chemicals are handled, hazardous waste is treated or largescale combustion activities take place.

From 31 October 2019, compulsory financial provision will be extended to so-called ‘Priority Two’ sites. Such sites include oil and gas refineries, facilities for the refining of petroleum or crude oil, coking plants, large iron and steel plants, large ferrous metal foundries, chemical facilities for the manufacture of salts (such as ammonium chloride, potassium carbonate (potash), sodium carbonate (soda), perborates and argentic nitrate), medicine production facilities, explosives manufacturing facilities, and large landfills.

‘Priority Three’ activities will be regulated in due course.

Affected operators must perform an Environmental Risk Assessment. If they satisfy published criteria they must take out financial provision consisting of insurance, a financial guarantee or a technical reserve held in a fund of public sector-backed financial investments. The amount guaranteed shall be strictly ring-fenced to cover the operator’s environmental liabilities, with separate provision being made for defence expenses, ELD liabilities and other related exposures.

Failure to arrange financial security may result in a fine of up to EUR 2m and the withdrawal or suspension of an operator’s licence for up to two years.

Greater European harmonisation?

In 2014, the European Environment Agency (EEA) commenced a Multi-Annual Work Programme, structured around the four strategic areas of: informing policy implementation (SA1), assessing systemic challenges (SA2), knowledge co-creation, sharing and use (SA3) and EEA management (SA4). Among the programme’s stated aims are to promote the more frequent and consistent use of the ELD and to consider mandating financial provision across the European Union.

Pending reform, environmental regulation in the European Union will remain a patchwork of national laws.

Asia

Across Asia, environmental law and regulation are undergoing profound reform. In this section we consider two leading examples: China and South Korea.

China

In China, the principle of “polluter pays” has been enshrined in law since the 1980s. As part of a recent “war on pollution”, however, the Environmental Protection Law was amended in 2014 to provide a significantly enhanced framework for pollution prevention and control. The framework includes extensive penalties for polluters, often imposed on a daily basis, and personal liability attaching to directors and officers. It also creates a new regime of public interest lawsuits.

Since the enactment of the EPA, numerous specific pieces of legislation have been brought into effect, including:

  • The Law on Prevention and Control of Atmospheric Pollution
  • The Environmental Impact Assessment Law
  • The Law on Prevention and Control of Environmental Pollution Caused by Solid Waste
  • The Marine Environmental Protection Law
  • The Law on Prevention and Control of Water Pollution
  • The Law on Prevention of Environmental Noise Pollution
  • The Law on Prevention and Control of Radioactive Pollution

Regulatory regime

Among the most radical aspects of China’s new regulatory regime is the mechanism for enforcing breaches of environmental law. In 2017, a vigorous enforcement campaign was launched. At the date of writing, almost 40,000 companies and 10,000 directors have been prosecuted for breaches of environmental law.

The central authority is the Ministry of Environmental Protection, which has responsibility for establishing the basic environmental protection system, imposing and coordinating national pollution targets, and supervising the prevention and control of pollution.

Local governments have their own Environmental Protection Agencies (EPAs) which work under the Minister’s supervision. Local EPAs are responsible for conducting on-site inspections and they have extensive powers of enforcement. They may impose fines aggregating on a daily basis, seize facilities and equipment, restrict operation, suspend production, impose control-targets, and order the detention of directors and officers.

The work of local EPAs is supervised by central government inspectors, who make regular visits to ensure that national environmental policy is being consistently and effectively imposed.

Local EPAs are also subject to the scrutiny of private citizens and NGOs, which may use the Administrative Review Law to compel local EPAs to enforce environmental rules.

Last but not least, public security bureaux have the power to enforce Chinese criminal law, which contains a wide range of environmental offences. Such offences include the impairment of environmental protection, the dereliction of environmental administration and the illegal importation or dumping of waste.

Civil liability for environmental harm

The Chinese Tort Liability Law imposes strict liability upon polluters, subject to the limited defences of force majeure, contributory negligence and a right of contribution from third parties. In cases of environmental harm the burden of proving causation is reversed, so that the polluter is required to prove that the pollution did not cause the alleged damage.

Chinese law also allows established environmental organisations, such as the China Environmental Protection Federation and Friends of Nature, to bring civil actions against polluters in the public interest.

Compulsory insurance regime

Consistent with the national policy to tighten environmental regulation, on 7 May 2018, the Chinese legislature enacted the Compulsory Environmental Pollution Liability Insurance Regulation.

The regulation applies to the operators of high-risk activities, such as those involved in the processing of hazardous waste, tailing reservoirs, petroleum products, coal mining, metal ores, chemical raw materials, chemical products and other industries defined by the government as representing a major environmental risk.

Operators in those sectors are required to insure against the risks of personal injury, third party property damage, ecological damage and possible clean-up costs. Policy wordings are strictly controlled. They must cover both sudden and accidental, and gradually occurring pollution, with coverage to be written on a losses occurring basis with a 3-year notification period. They must contain terms requiring the adoption of emergency investigation and remedial measures.

The compulsory insurance regime is designed not only to transfer risk, but also to transfer responsibility for risk management. Rates and premiums are standardised according to government-published criteria, and no underwriter may refuse to issue a policy without reasonable cause. Before issuing a policy, and at least once a year, underwriters are required to audit the insured premises. Underwriters must assess the environmental risk, help the insured to develop risk assessment systems and advise on the remediation of impairments.

Future developments

The rate of change of environmental law in China shows no sign of abatement. Future legislative projects include a Draft Law for the Prevention and Control of Soil Pollution, and a Reform Plan for the Ecological Environmental Damage Compensation System. Specialised environmental courts will also be created to hear civil cases involving environmental damage.

South Korea

Improved environmental regulation is a key priority of the Moon Jae-In government in South Korea. A policy agenda introduced in July 2017 vowed to promote a society free from pollution, with improved air quality and a sustainable land environment.

South Korea already has an extensive regime of environmental regulation. The environmental rights of citizens are contained in the Korean Constitution and there is a detailed framework of laws applicable to specific high-risk sectors, such as chemicals and waste. Penalties are strict and can include aggravated penalties of up to ten times the polluter’s financial gain.

In 2014, a no-fault civil liability regime was introduced whereby, as in China, the polluter bears the burden of proving that the pollution did not cause the alleged damage.

Also in 2014, a compulsory insurance regime was brought into effect. Compulsory insurance applies to high-risk facilities: those which emit chemical or organic pollutants, handle hazardous chemicals, emit noise or vibration, or affect the marine environment. Policies must cover both sudden and accidental, and gradually occurring pollution, but they may exclude costs arising from regular business operations and the costs of cleaning the insured’s own land.

Environmental regulation in South Korea is expected to tighten further still in the coming years.

South America

For many years, South American environmental law has been characterised by extensive regulation and inconsistent enforcement. Mexico is a good example, with four federal agencies plus various state and municipal agencies all tasked with the enforcement of environmental law. Each agency has a rigorous and complex inspection regime and the power to impose heavy administrative sanctions. There is, however, little coordination and businesses are often pulled in several directions to satisfy the requirements of their regulators.

Many jurisdictions contain advanced group action laws, and in recent years both the frequency and severity of environmental claims has increased across the region.

As in other parts of the world, compulsory insurance is now growing in importance. In Mexico, for example, all businesses involved in the extraction, treatment, storage and sale of hydrocarbons, including petrol stations, must now carry third party environmental liability cover. Businesses must require their contractors, subcontractors, suppliers or service providers to maintain similar insurance. Policies may only be issued by authorised insurers and policy wordings must be registered and approved by the relevant regulator. As in China, insurers are expected to undertake environmental risk management activities: their reports and audits must be delivered to the regulator within 30 days.

Conclusions

Around the world, 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, while states in Asia and South America are enacting new compulsory insurance regimes.

Although the style and subject of regulation conforms to a broad pattern, significant differences exist between jurisdictions. Content and implementation differ widely. Even within Europe 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, multi-national environmental programmes are an attractive solution. They offer a minimum standard of international coverage combined with local policies which reflect the requirements of national laws.

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

1 https://www.epa.ie/pubs/advice/licensee/financiaprovisionsreport.pdf
2 Order APM/1040/2017