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The True Cost of Environmental Prosecution

05 oktober 2020
For many businesses, having an Environmental Management System (EMS) is often seen as a key element of their risk management process.

Traditionally, most organizations have used risk assessment and preventive actions to try and control environmental performance and prevent any aspects or risks becoming so tangible that they affect the company results, and critically, the environment.

Often though the biggest risk relates to falling foul of the raft of environmental legislation that can lead to intervention. This can often escalate to an environmental prosecution. 

Water companies and local authorities also have roles to play in the enforcement of some relevant legislation. The main principal underpinning environmental legislation and associated prosecutions changed following the Rio Summit of 1992. This required:

“the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution”

This became known as the polluter pays principle. It is the now commonly accepted practice that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment. For instance, a factory that produces a potentially dangerous substance as a by-product of its activities is held responsible for its safe disposal.

This principle underpins most of the regulation of pollution affecting land, water and air. Pollution is defined in majority of laws as contamination of the land, water or air by harmful or potentially harmful substances. In law, the Polluter Pays Principle imposes liability on a person who pollutes the environment to compensate for the damage caused and return the environment to its original state regardless of the intent.

The Environmental Damage (Prevention and Remediation) Regulations (Environmental Liability Regulations in Scotland) enforce this principle (in the UK). Enforcing authorities must determine whether there is environmental damage and decide on the necessary remedial measures.

Environmental liability is however only a ‘backstop’. The emphasis should be on proactively putting in place appropriate pollution prevention measures so that imminent threats and damage do not arise. This brings us back to the role of an EMS in risk management and ensuring that issues do not arise in the first place.

For many business that have had environmental incidents resulting in a prosecution, the court costs are often the smallest element of financial and other associated penalties.

A good example of hidden costs - a water company was fined £15,000 for polluting a river. They also had to cover costs for:

  • Tankering away the chemical - £32,600

  • Plugging the leak - £8,300

  • An initial fish survey - £6,000

  • Installing leak detection equipment - £60,000

  • Charge for Environment Agency officers - £2,270

  • Further fish surveys - £20,000

  • Restocking of the river - £63,500  

  • ‚ÄčTOTALING: £192,670

The ‘hidden’ costs were over 12 times that of the fine levied in court. These do not cover internal costs, repairs etc. 

Scenario

A fire at a chemical manufacturing building spread to the whole facility, resulting in its complete destruction. The fire and water used to extinguish the fire, resulted in the discharge of heavily contaminated water to the river that eventually ended up in the estuary and the sea.

Consequences

The company alerted the authorities who subsequently activated the emergency protocol to prevent the spread of the polluted water and minimise the damage to the estuary. The emergency measures necessitated the use of 60 people, 10 vehicles, and the temporary installation of both anti-pollution barriers, and absorption barriers installed all along the river. As a result the authority issued the insured with a claim for £1.7m for clean-up costs and mitigation measures. Fortunately, because the detergent was of a biodegradable nature, the damages to the river and estuary were limited.

Losses arising from this scenario:

Losses

Levied (y/n)

Covered by
a typical Public Liability Policy?

Statutory Clean-up Costs

Yes

No

Third Party Damages

No

Only if sudden and totally accidental

Own-site clean-up costs

Yes

No

Biodiversity/habitat damage

Yes

No

Historical releases

No

No

Gradual releases

No

No

Many businesses believe that their insurance will cover them - as the above table indicates - the vast majority of the costs are outside of insurance and will have to be picked up by the business.

Reputational Damage

Businesses work hard to build a positive and respectable image and it's therefore vital that they keep that good name. Good public relations increase sales and generates more leads/business.

If an organisation comes into disrepute for any reason, including being found guilty of an environmental crime or even simply being publically named as responsible for an incident and associated clean-up costs, you can expect:

  • a media grilling

  • negative public opinion that is hard to reverse

  • unwanted attention from pressure groups

  • slump in sales leading to reduced profits and revenue.

Customers, both individual and corporate are increasingly making purchasing decisions based on the reputational elements of a company or product. Environmental stewardship is now a given in all sectors and successful companies strive to not only paint a sustainable picture but increasingly want to be able to demonstrate that there is substance behind the claims and that it is not simply ‘greenwash’.

Organizations are coming under increased scrutiny from a whole range of stakeholders to demonstrate that they understand environmental issues and obligations. Being able to confidently provide such evidence, in a transparent way through the use of a certified EMS is paramount to improving reputation. Conversely, the negative impact an environmental incident can have on an organisation can be just as damaging. Protecting against such incidents occurring in the first place is an important tool for overall business risk management.