Addressing the gaps in Environmental Liability Directive

27 October 2017

The Environmental Liability Directive has had significant positive impact on policy development and the insurance market in the EU, but there are still gaps in its implementation. Finance Director Europe meets Jo Willaert and Typhaine Beaupérin from the Federation of European Risk Management Associations to find out how this can best be addressed.

Since it was fully implemented in 2010, the European Commission (EC) Environmental Liability Directive (ELD), which was established to prevent and remedy environmental damage, has resulted in an abundance of positive developments across EU member states. Yet, a recent assessment of the legislation by the EC has found that there is still work to be done to improve its execution, including gathering more data on its efficacy and ensuring that member states understand the concepts underlying the law.

The purpose of the ELD, which entered into force in 2004, was to establish a framework of environmental liability based on the ‘polluter pays’ principle, in order to prevent and remedy environmental damage.

According to a recent position paper by the Federation of European Risk Management Associations (FERMA), it has already had wide-ranging positive impacts, including contributing to the development of environmental policies in the EU. It has seen the introduction of concepts around biodiversity damages, remediation and compensation in every legal system of the EU member states, and the development of the insurance market for environmental liabilities.

FERMA offers several examples to support the claim that the market for Environmental Impairment Liability (EIL) insurance is growing in Europe. For example, in its latest study, published 3 April 2017, global insurer AIG found that 13% of environmental claims in 2016 were for non-pollution events, which are mostly characterised by direct damage to biodiversity. The company considered this proportion a significant development as it did not exist before the ELD.

Moreover, according to Marsh, a leading global insurance broker, the average limits of indemnity being obtained by midsized companies have risen from an average of €6.9 million to €7.9 million. As a consequence, the average premium paid for environmental insurance for operational risk policies has increased since 2011 from around €25,000 to more than €30,000.

Filling the gaps

While the legislation has had significant positive impact, and the EC and FERMA agree that no revisions are necessary, the two bodies also believe that gaps remain in its implementation.

For the EC’s part, following a full evaluation of the ELD as part of the EU ‘better regulation’ approach, it has devised a new multi-annual work programme (MAWP) to run 2017–20. It will serve as a guideline to steer activities by all industry stakeholders towards better implementation of the legislation over the next three years.

The programme will include improving the evidence base to gather more data measuring the efficiency of the ELD in member states, focusing on implementation tools for a common understanding of the key concepts of the directive, and exploring the availability of financial security.

FERMA’s executive team, which welcomes the MAWP as it capitalises on existing law without introducing costly new requirements for industrial operators, has strong views on precisely how the programme should be implemented.

“One of the most important points we made in our position paper is around the question of imposing mandatory financial security,” says FERMA president Jo Willaert. “At FERMA, we believe this would be unproductive because companies are already increasingly investing in this area and resources are limited. If the money had to go to a guarantee, it would have a negative impact on the investment capacities of companies in prevention and risk management.

“Moreover, technically speaking, it’s difficult to put a number on environmental issues,” says Willaert. “Amounts will be too high if nothing happens or not high enough if there is an incident.”

FERMA’s CEO, Typhaine Beaupérin, agrees: “A mandatory financial guarantee will not reduce the number of environmental catastrophes. It is only through promoting risk-management processes, enabling companies to put in place and invest in prevention measures, that the possibility of a catastrophe is reduced.”

Another key point FERMA made in its position paper on the MAWP was that the role of the risk manager is absolutely critical to preventing ELD incidents as, in their roles as coordinators, risk managers are responsible for the assessment and treatment of any identified risks, including those linked to the environment.

“The risk manager assists the organisation in taking the right investment decisions to reduce the risk through the use of prevention and protection measures, and thus reduce the likelihood of an incident,” the paper summarises.

Prevention and protection measures could involve coordinating systematic checks for leaks in tanks containing dangerous products, regular monitoring of nearby rivers or organising the protection of local species by cultivating them in a separate location before reintroducing them. Once risks have been mitigated in this way, a company can look to transfer the remaining exposure to the insurance market, which offers tailor-made products to suit different operators.

Fostering a close dialogue

Another key priority identified in the EC’s MAWP, and supported by FERMA, is the need to gather more data surrounding how well the ELD is working in member states. Until now, not only has reporting on the number of ELD cases been inconsistent among studies but the interpretation of key concepts has also been different in each country. For example, according to FERMA, member states use the concept of ‘significance’ for the threshold triggering the applications of the ELD in many different ways.

“Improving data collection could lead to a more coordinated approach to prevent and reduce risk as well as help enhance the effectiveness of the ELD,” FERMA’s paper states, noting that an ELD register would be an interesting solution to this issue.

From FERMA’s perspective, a register would act as an official record of environmental incidents falling under the scope of the ELD. In order to be beneficial for European businesses, it would need to contain the key elements of an incident, such as the nature and financial extent of the damages, the type and result of remediation measures, and the type of operators involved. Crucially, it would also have to be developed in collaboration with member states and operators without imposing unnecessary administrative burdens on public authorities or companies.

We advocate fostering a dialogue between member states, European institutions and operators to improve the implementation of the ELD.

This isn’t the only area in which FERMA strongly encourages a collaborative approach in order to improve the implementation of the ELD.

“When discussing the measures in this action plan put forward by the EC, European institutions and national authorities must work in close dialogue with the operators in the most sensitive industries,” Beaupérin stresses. “It’s by having such a dialogue that public authorities will understand the concerns companies have.”

He goes on to compare it to having a car, saying, “It’s not only by buying insurance that you can be sure you won’t have an accident. You also need to make sure your car is well maintained, and so on. We advocate fostering a dialogue between member states, European institutions and operators to improve the implementation of the ELD and promote risk-management practices to reduce environmental risks.”

Practicing what it preaches, FERMA considers itself among those collaborators. “We are in discussion with the EC and the European Parliament about organising training to ensure that the ELD is well understood by companies and risk managers,” Beaupérin notes, adding that, in 2017, this will take the form of a technical seminar focused on environmental risk. “We really want to make sure we do our part to raise awareness of this issue and ensure companies are protecting themselves.”

Keeping up with the regulations

The EC’s focus on improving the implementation of the ELD isn’t the only positive development FERMA has noticed in the arena of managing environmental risk. Not only are companies placing more onus on following the existing regulations in this area but they’re looking ahead, too.

“When we talk to our peers, it’s clear that [protecting the environment] is becoming one of their priorities – and not just because there are more legal requirements but also because doing business in a correct and environmentally friendly way has become one of the basics of entrepreneurship,” Willaert says.

“Just as companies have a strategy for market development, they also have a strategy for environmental issues. We are seeing that all disciplines are getting involved in the decision-making process – from environmental engineering to R&D, and from risk management to finance.”

That said, with regulations evolving so fast, companies do need help in this regard, which is why one of FERMA’s primary missions is to train and educate its more than 4,500-member base about what is compulsory, what will be compulsory and how regulations are evolving, in a European context and locally.

“We’ve seen that companies are following the evolution of regulations much more closely now, even before they are in force,” says Willaert.

When it comes to the ELD, FERMA will continue to advocate its key positions on how the EC’s MAWP can improve its implementation. If its advice is followed, the association believes, the plan has the potential to consolidate and strengthen best practices for a piece of legislation that has already had significant positive impact on European policies and the insurance sector.

The ELD has already seen positive impact around biodiversity damage and compensation.
European authorities are hard at work to improve the implementation of the ELD.