By Doug Bryden, Travers Smith
Environmental issues have always been a key operational/facility-level consideration for any major business. However, they have increasingly become a “board level” issue as awareness of the risks in this area grows and regulatory controls become more governance-focused.
Environmental issues have always been a key operational/facility-level consideration for any major business. However, they have increasingly become a “board level” issue as awareness of the risks in this area grows and regulatory controls become more governance-focused. For organisations with operations in the UK and/or the EU, this is at least in part a consequence of two longstanding trends that have recently accelerated. On the one hand, there is a regulatory drive towards corporate transparency (at a group-wide level) in reporting both environmental breaches and ongoing performance. On the other hand, tougher enforcement – including but not limited to larger fines – and greater scope for corporate group cross-contamination of environmental liabilities and increased litigation mean that the consequences of breaches and underperformance are increasingly being registered at the shareholder and decision-maker level.
With many in the UK wondering if domestic-focused environmental regulations might in future be rolled back in light of Brexit (although little is likely to happen in the short term, and the longer-term approach remains very much an unknown), these trends towards transparency and stricter enforcement could take on an added importance.
The brave new world of self-reporting
Over recent years there has been a significant move in both EU and UK environment, safety products and corporate legislation towards mandatory corporate reporting of breaches.
For example, an increasing range of statutory obligations now exist under EU environmental product law requiring operators to self-report to a regulator and its supply chain where a breach of law is identified (or, potentially, even where one is merely suspected).
Self-reporting is by no means a new legislative tool and has understandably been a central requirement of various areas of law for many years. However, self-reporting obligations are now being introduced for more “technical” legal non-compliances, rather than being reserved for only major accidents, confirmed safety risks or material pollution incidents.
A good example of a “low threshold” self-reporting obligation is contained in the EU’s Restriction of Hazardous Substances (RoHS) Directive. The RoHS requires manufacturers, among others, to take corrective measures (including recall or withdrawal where appropriate) and immediately inform the relevant competent authority where they have “reason to believe” their product has breached the regime’s limits on the use of certain substances. Under the UK’s RoHS implementing legislation, it is effectively a strict liability criminal offence to fail to do so.
Similar “corrective measures” and “reporting” obligations to those contained in the RoHS are being rolled out across a range of consumer product regimes as part of an EU drive to harmonise laws under the EU’s New Legislative Framework. Of course, given Brexit, the extent to which these extend to UK law in the future remains to be seen, but given they are in many cases "market access" obligations, UK industry may have little choice but to comply.
Regardless of such statutory obligations to self-report a breach, there are often other drivers as to why disclosure may be advisable. For instance, it may encourage a more lenient treatment by regulators than would otherwise have been the case if they had independently discovered the breach. Where a regulator is considering enforcement action, self-reporting, acceptance of responsibility and correcting an issue are often strong factors in reducing seriousness or reflecting mitigation (this is clearly stated, for example, in the UK’s current environmental enforcement and sentencing guidance). Self-reporting also reflects a positive approach to corporate governance, may help avoid unpleasant surprises in a merger and acquisition context, and helps manage the risk of criminal proceedings against directors (ie, self-reporting of the company may guard against allegation of director consent, connivance and/or neglect).
Navigating these new obligations and drivers is leading to increasingly complex strategic decision-making for businesses that have discovered a potential environmental breach. In-house and private practice environmental counsel are increasingly being asked to advise on how best to manage what are often competing strategic outcomes.
The growth in performance-based reporting
In parallel to the drive towards self-reporting of breaches, we have seen a proliferation of statutory audit and disclosure obligations, particularly in the UK. Indeed so many different environmental reporting mechanisms have come into effect in recent years – including reporting emissions through the Carbon Reduction Commitment, energy efficiency under the Energy Savings Opportunity Scheme (itself based on EU legislation), mandatory Greenhouse Gas (GHG) Reporting for UK quoted companies, and various Companies Act 2006 environmental reporting obligations – that the UK government is currently consulting on a reformed and consolidated regime. Whatever emerges can be expected to be more streamlined and administratively simpler, but is very unlikely to be any less onerous in terms of the amount and type of environmental information to be disclosed.
This drive towards transparency is not limited to environmental matters. In Theresa May’s campaign launch speech, the new UK prime minister specifically highlighted the need for changes to corporate governance, including increased corporate transparency and a tougher stance on "irresponsible behaviour in big business". This follows legislation in areas such as: modern slavery (a legal development championed in the UK by May, as home secretary) and bribery; the soon-to-be-introduced corporate accounting obligations; and recent requirements that unlisted UK companies have to identify individuals with a significant interest in their shares through the PSC Register.
Not only will companies who under-perform in an environmental sense have to manage the fallout of bad publicity and brand erosion posed by these reporting and disclosure obligations, real legal risks will also arise as more information is placed in the public domain.
Is the corporate veil being eroded?
Recent case law both in the UK and elsewhere (as well as a number of statutory regimes which treat corporate groupings on an aggregated and “joint and several” basis) increasingly point towards a general erosion in the concept of the corporate veil.
In the UK, the Court of Appeal’s decision in Chandler v Cape found grounds for a UK-based parent company to have a direct duty of care to employees of an overseas subsidiary suffering from asbestos-related disease. To give a more recent example, in late 2015 parent company CAV Aerospace was fined £600,000 for corporate manslaughter after a stockpile of metal billets fell at the site of its subsidiary, CAV Cambridge – one of whose employees was fatally crushed. One of the aggravating factors in the CAV case was the parent company’s continued failures “to respond to repeated warnings about the dangers”. The court held that the parent company had a duty to take a more proactive approach in addressing the risk.
Both of these cases were very fact-specific, with a relatively high degree of direct operational involvement by the parent in each instance. Nevertheless, they present a stark warning that parent companies may no longer be as isolated from a subsidiary’s failings as is so often assumed to be the case.
The increasing bite of fines
Further, it is noticeable that the level of fines for environmental offenses is also starting to increase in the EU an d the UK – although it is still some way short of the levels seen in the US.
For example, recent UK sentencing guidelines on environmental, health and safety offences, combined with a toughening of regulators’ enforcement powers, are resulting in a sea change to the UK courts’ approach to penalties across several regulated areas. Those guidelines state that the resources of a “linked” organisation can be taken into account when setting a fine, where it is demonstrated to the court that such resources are “available and can properly be taken into account”. Future case law is sure to test the boundaries of this broad and rather ambiguous statement, but it is now clear that courts will be taking a more holistic look at corporate groups when determining the amount of a fine.
Indeed the courts themselves have already indicated that the time has come for larger organisations to take action to improve their policies and practices in relation to a range of environmental and safety issues. Although there has been a steady decline in the number of cases being prosecuted in recent years in the UK – which can be attributed to a number of factors, not least more limited regulatory budgets and an increase in alternative sanction options – significantly higher fines (quantified to inflict "a real economic impact" on offenders) are now becoming more common in the UK.
In January 2016, a decision made against Thames Water, and sentenced under the new environmental sentencing guidelines, resulted in a record-breaking £1 million fine for polluting a canal in Hertfordshire. Although Thames Water had shown improvements in compliance following repeated sewage waste discharges into the canal, the court held that the company had failed to proactively manage such improvements and monitor their effectiveness. The fine was intended to “bring home the appropriate message to the directors and shareholders of the company” about environmental reforms and compliance. If companies do not make improvements, the presiding judge explained, "the sentences passed upon them for environmental offences will be sufficiently severe to have a significant impact on their finances".
Moreover, £1 million will almost certainly not be the high water mark in this area. In a prior case, also concerning Thames Water, the Court of Appeal considered the UK environmental sentencing guidelines in upholding a fine of £250,000. The court noted that the guidelines do not prescribe a fixed range of fines for "very large organisations", meaning that fines of "up to 100 per cent of a company’s pre-tax net profit would be appropriate in the very worst cases". The Court of Appeal added that this could result in fines "in excess of £100 million".
New guidelines were also recently introduced for health and safety offences, and will ensure a similarly rapid transition to higher penalties for safety, corporate manslaughter and food safety and hygiene offences. They apply to all health and safety offences sentenced after 1 February 2016, regardless of when the offence took place. Fines may now exceed £10 million for serious offences and £20 million for corporate manslaughter offences for larger companies. Indications of rising fines in these areas are already emerging.
A growth in environmental litigation
One trend that is perhaps in the more nascent stages (at least outside the US) is an increase in large-scale litigation linked to environmental matters. This may well accelerate as more information about a company’s environmental performance and group structures comes into the public domain, under the trends towards increased transparency discussed above. In parallel, an increased awareness of the impacts of issues, such as air emissions on human health, may see an increase in court activity. Make no mistake – NGOs and other stakeholders will be scrutinising information disclosed by the larger corporates closely and looking to bring pressure on those organisations not achieving high environmental standards. The courts are one way in which they may seek to do so.
Set out above is a broad, sweeping discussion of general trends in environmental risk and enforcement. But the trends are themselves just that – broad and sweeping. Previously, the regulators have occasionally been accused of having a bark that was worse than their bite. Now, their approach seems to be “you bark, we’ll bite”.
Increased transparency obligations, coupled with consumers and stakeholders growing ability and desire to access such information, means that a company’s reputation and brand management (together with their long-term litigation risk management) will increasingly influence decision-making around environment and supply chain management. Moreover, the fines and other liabilities that could flow from this information disclosure are on the rise and increasingly capable of being felt at the group-wide level.
It is critical that organisations adapt quickly to avoid discovering the possible consequences of this the hard way. In-house and private practice environmental counsel have an increasingly important role to play in alerting them to, and helping them manage, these new risks.