ELD: Mandatory financial security and extended liability still raising concerns
European risk managers are concerned about the latest recommendations on the implementation of the Environmental Liability Directive (ELD) adopted in a European Parliament report on 26 October 2017, while welcoming the decision not to revise the Directive. The most significant issues are possible mandatory financial security and potential extensions of exposure.
FERMA will continue to argue that these measures could prove counterproductive in terms of reducing the risks to the environment. while putting an unnecessary burden on industry. It says there is a healthy and growing market for environmental impairment insurance (EIL) which provides incentives for operators to mitigate the risks of pollution while preserving their ability to make the investments necessary to do so.
A three-year work programme is now in place to improve implementation of the Directive, which has been described as overall “very patchy.” This Multi-Annual Work Programme for 2017 – 2020 follows a comprehensive review of the ELD by the European Commission starting in 2012, which formed the basis of the report now adopted by the Parliament.
The review concluded that the ELD had resulted in adoption of consistent, legal principles for environmental protection, including biodiversity, across member states, but there was a lack of evidence to assess whether national laws were achieving these objectives. The Commission, therefore, concluded there was no evidence to support a legal revision.
Mandatory financial security again
Mandatory financial security, which could be achieved with bonds, letters of credit, financial provisions or most likely insurance schemes, however, continues to have supporters in the European Parliament. Their view is that every business in the EU must be able to demonstrate its capacity to respond to an environmental damage, especially in case of insolvency.
FERMA participated in a public hearing on 11 April 2017 on the review of the ELD. It welcomed the decision not to revise the Directive, but argued that mandatory financial security or an industry fund at EU level would not give incentives to reduce and mitigate environmental incidents. On the contrary, it was likely to reduce the capacity of businesses to invest in prevention and risk management. Preserving these investment capacities benefitted the environment.
FERMA’s work with its Finnish member FinnRima on the Talvivaara mining company has also shown that a compulsory scheme would not necessarily provide sufficient cover for a major disaster caused by an operator which becomes insolvent.
During the 5th ELD stakeholder workshop in Brussels in October 2017, FERMA pointed out to the Commission that no estimate of the number of insolvency cases connected with an environmental damage in the EU was available, nor was there any estimate of the financial capacities of the insurance and banking sectors that would be required to provide the potential mandatory securities.
A second area of concern for FERMA in the review of the ELD relates to the possible extension of the strict liability regime for all operators. When applied, an organisation would be deemed liable for the activity at the source of the damage, whether a fault or negligence was established or not. Under the current provisions of the ELD, strict liability only applies to a restricted list of dangerous activities (so-called “annex III” operators). Other operators are liable only when a fault or negligence has been demonstrated. Extending strict liability to all operators would represent a significant additional cost for EU businesses, particularly for environmental insurance premiums.
FERMA’s final concern regarding future ELD development is connected with the potential extension of the scope of environmental damages falling under the ELD regime. New categories like damage to air or the accidental release of alien invasive species (i.e. foreign plants or animals causing losses to the local biodiversity) could be considered.
In both cases, FERMA believes that encouraging operators to investment in risk mitigation is much more likely to be cost-effective in protecting the environment than a potentially expensive extension of liability whose value is not proven.
Preventing environmental damage incidents is for the mutual benefit of everyone, companies and society altogether. Overall, FERMA believes that the ELD multi-annual work programme 2017-2020 will improve the implementation of the Directive.
The ELD has pushed operators and regulators to work together and cooperate because the consequences of environmental incidents are larger than the incident itself. Risk managers also know that environmental incidents mean business interruption, damage to reputation and loss of competitiveness.
FERMA is now focusing on demonstrating the value of environmental investment in prevention and protection. The ELD has already had also a positive impact on the development of the insurance market for environmental liabilities. It is crucial to show policymakers that market-based environmental insurance solutions are encouraging prevention and protection measures and promote good risk and will do more to achieve the ultimate objectives of the ELD than mandatory financial security or an industry-based EU fund.
On 11 April, the Secretary General of the Federation of European Risk Management Associations (FERMA) Gilbert Canaméras presented FERMA’s views on the future of the European Environmental Liability (ELD) to a public hearing held at the European Parliament.