The EC is considering a proposal to adopt a policy of strict liability for damage to the environment. Such a policy would open the way for the costs of environmental damage being passed back to the party that causes the impact regardless of fault. Peter Simmons discusses the influence that the EC proposals could have on European industry, notably in relation to the spread of risk management techniques and the adoption of the precautionary p xinciple.

a new interplay between the main groups of actors and the principal economic sectors through the use of an extended and integrated range of instruments. Policy decisions made under the Programme are to be guided by a precautionary approach and by the concept of shared responsibility, in an endeavour to strike a new balance between short-term benefits to the various actors and longer-term benefits to society as a whole. Among the instruments to be deployed is civil liability.

‘Liability will be an essential tool of last resort to punish despoilation of the environment. In addition - and in line with the objective of prevention at

source - i t will provide n very cleizr econonric incentive for rnrznrigeiiient and control ofrisk, polllition nnd waste.’ (CEC, 1992, p. 68, emphasis added)

Introduction

The Commission of the European Communities (CEC) is actively seeking to broaden the range of instruments employed in environmental policy. Its proposals on civil liability for environmental damage are outlined by Francesca Naylor in this issue’s Legal Profile.

Liability is typically seen as an instrument for making reparation. The CEC also sees it as a stimulus for precautionary action by industiy. Given the EC’s desire to promote a precautionary approach, the question is whether strict liability can be shown to stimulate anticipatory changes in the behaviour of economic actors and whether it does therefore serve as a technology-forcing mechanism to promote the development of cleaner processes and products. This article examines how this can work. It argues that, in addition to any direct impact that liability may have, its effects are mediated by networks of commercial relationships. In conjunction with credibility pressures, liability can lead to increased inter-organisational monitoring and control of exposure to environmental risk. This in turn can become institutionalised in restructured commercial relationships. These hitherto less prominent organisational dimensions of social regulation.open up new possibilities in the search for policy instruments to achieve the radical changes implied by the goal of sustainability.

EC Environmental Strategy

The 5th EC Environmental Action Programme, ‘Towards Sustainability’, represents a departure from the approach adopted in earlier Programmes in that, although it continues to address established environmental issues, it aims to create

Liability in civil law provides an important and necessary complement to the sanctions provided in criminal law. It encourages managers to adopt a precautionary approach, as the potential costs to the enterprise create an incentive for avoidance of harm. Avoidance of harm calls for more intensive and extensive risk management. This can also entail regulating the behaviour of other firms with whom an enterprise has a commercial relationship, where the conduct of those firms increases liability risks. Thus an important consequence of liability airangements is that they can alter the distribution of responsibilities, constraints and sanctions between organisations interacting within the economy and, with well designed arrangements, this can lead to more effective pressures and incentives from ’mutual regulation’ to prevent environmental damage.

Business Responses to Environmental Liability Risks

Liability is generally viewed in policy circles as an effective instrument for forcing technological change (Yakowitz and Hanmer, 1991). However, while industry representatives generally favour a clear system of criminal liability under public law, they tend to challenge the effectiveness of strict civil liability as an instrument to motivate change.

Commenting on the preventive intentions of the CEC proposals on civil liability for damage caused by waste, representatives of both the British chemical and waste management industries argued that strict liability would not be a significant stimulus for waste reduction. One waste management spokesman described it as ‘half a turn of the thumbscrew and no more than that.’ The chemical industry maintained that it would have little significance for the good performers, while the bad performers were best ‘encouraged’ through a combination of strong legislation, backed by severe

2 European Environment

Civil Liability and the Environmental Responsiveness of Industry

criminal sanctions, and peer pressure (House of Lords, 1990).

Studies that have examined the significance of liability for environmental management in the USA paint a rather different picture. A study of hazardous waste reduction in a number of US organic chemical plants conducted in the mid-1980s found liability concerns to be one of the dominant influences on the decision to adopt waste reduction practices (INFORM, 1985). Baram, Dillon and Ruffle (1990) note that changes in tort liability rules towards strict, joint and several liability, together with the withdrawal of insurers from the environmental liability market in the mid-l980s, have been a significant external pressure for improved risk management programmes in many firms. Similarly, a review by Ashford (1991) emphasises the significance of liability in promoting pollution prevention measures. A recent study of industry in the UK found that environmental liability concerns were becoming increasingly prominent in strategic decision making. A number of environmental consultants identified liability concerns as the main driver of current demand, particularly for risk management sei-vices such as environmental audits (Wynne and Simmons, 1992).

Liability, Credibility and Trust

The anticipation of the direct financial costs of being found liable is not the only reason, or necessarily the main reason, for companies to take preventive action, particularly where insurance or other financial guarantee provides cover. Harmful products and processes not only damage the environment but the attendant publicity frequently exposes the producer to critical media scrutiny. No business is going to welcome the sort of adverse publicity which can follow a liability claim. Media attention can, and often does, seriously affect reputation, investment and profitability.

Despite the elimination of the notion of guilt under strict liability, there is still a stigma attached to being found liable. Companies are more than ever sensitive to the harm that a poor image can inflict on their profitability. A 'dirty' reputation communicates itself to employees, to investors, to customers, to neighbours and to regulators. It can produce unwelcome responses from all quarters, including lower employee morale and friction with local communities. In research on the impact of publicity on corporate offenders Braithwaite (1989) found that the financial impact of a criminal prosecution was relatively minor and usually short- lived. Far more significant was concern over loss of reputation and the effect on the esteem in which the company was held by employees and local communities.

This can produce a vicious circle of mistrust. Industry has an interest in avoiding or breaking out of this pattern because trust is fundamental to the functioning of a market economy. Trust reduces the complexity of an organisation's task environment. Without a degree of underlying trust, an ability to take for granted that certain expectations will be met, the costs associated with transactions would become insupportable. But trust has to be actively constructed and

Harmful products and processes not only damage the environment but the attendant publicity frequently exposes the producer to critical media scrutiny. No business is going to welcome the sort of adverse publicity which can follow a liability claim. Media attention can, and often does, seriously affect reputation. investment and profitability.

maintained. When trust falters or fails to be met, control mechanisms are sought to underwrite continued confidence (Zucker, 1986). The publicity associated with liability litigation against a company acts as a mechanism that not only stigmatises the offender but can consequently undermine public confidence and the trust that a company cultivates with its stakeholders.

Business takes these issues seriously. Studies of the chemical industry confirms the importance of these credibility pressures in stimulating organisational and technological innovation to improve their environmental risk management (Simmons and Wynne, 1993; Baram and Dillon, 1993).

The environment is not merely a technical problem, it is a profoundly moral, social and political issue. As long as these pressures are maintained by commercial stakeholders and by the general public, the stigma associated with being found liable for environmental damage will render it a more potent sanction than can be measured by the amount of financial damages awarded. All firms and industries will not be equally susceptible to such pressures but, nevertheless, for those that are, liability will serve as an additional incentive to preventive action.

Liability and Commercial Relationships

It has already been suggested that liability risks have an effect upon commercial relationships. This can lead to a restructuring of inter-organisational networks, where concern about liability can result in increased self-regulation and stimulate innovative activity at the level of the firm. Firms have begun to incorporate environmental risk management into strategic decision making. This is bringing about a change in the role of environmental management. In many large corporations responsibility is increasingly being relocated to the highest level of management. As this takes place strategic concerns take priority over narrower operational considerations in environmental decision-making and leads to new relationships between strategic, production and R&D networks (Groenewegen and Vergragt, 1991).

Many firms are looking for ways of turning liability 'fear factors' into business opportunities by making improved environmental performance, in both their operations and their products, a source of competitive advantage (Baram & Dillon, 1993). This supports the view that, far from being merely an

European Environment 3

Peter Simmons - ***** 0 Shareholders, especially the powerful institutional shareholders, are increasingly reluctant to be seen to be investing in companies with a poor environmental record. As more information is demanded and the scrutiny to which investors subject the environmental performance of individual companies increases, and with the market increasingly sensitive to the risks, the salutary effect of civil liability actions will be reinforced.

inhibiting influence upon enterprise, social regulation of the environmental impacts of technology can be a stimulus to the innovative process (Irwin and Vergragt, 1989).

At an inter-organisational level it encourages processes of nzutuul regulution. The added uncertainty introduced by changes in the liability regime leads to increased levels of monitoring and control by economic actors in their commercial relationships with one another. Recent years have seen growing demands for information, improved performance and greater accountability coming from consumers, industrial customers, contracting companies, employees, investors and insurers. In many cases, these have lead to relationships taking on a quasi-regulatory dimension, as parties demand inspection rights to confirm standards of performance.

One example of this occurs in the waste management industry, where customers with arisings of hazardous wastes will routinely audit the facilities, management system and financial soundness of a contractor before they will allow them to handle their waste. Recurrent inspections by large customers are becoming increasingly common. Similarly, chemical companies supplying intermediate products to the pharmaceutical industry report that customers will frequently require an audit of the production. site and of the producer’s environmental management system before agreeing a contract. Strict liability, particularly where liability is also joint and several, encourages an intensification of these forms of monitoring, which are effectively backed by economic sanctions if they result in loss of business.

Liability and Mergers

Another area where environmental auditing is well established is in mergers and acquisitions. Companies are increasingly conscious of the liabilities that can unwittingly be acquired along with a new site. Proposals for increased access to environmental information, registers of polluted land and strict liability rules are making would-be purchasers wary of buying into latent environmental liabilities. Conversely, without a clean bill of health a potential vendor can find a site to be dramatically reduced in value and needing substantial financial guarantees to

fund the cost of the clean up, to the point where it could be virtually unsaleable.

Liability and Insurance

An additional example can be found in the insurance relationship. Most insurers have withdrawn cover for environmental impairment under their commercial liability policies unless it is due to a sudden and accidental occurence, although even this cover may now be removed. Where cover is being offered the underwriting decision is usually based upon a satisfactory site audit. In some cases this is conducted by the insurer, where the relevant in-house expertise exists. More generally, it is carried out by a specialist consultancy. While these surveys are usually less detailed than a full environmental audit they perform an important risk management function. This has led some to advocate the substitution of insurer regulation for state regulation, but the suggestion has been roundly rejected by the insurance industry. Despite their refusal to be cast in the role of policeman, there is no doubt that insurers often perform what can be broadly conceived as a regulatory role, amounting to ‘technology regulation by insurance’ (Mallagh & Ravetz, 1985). That role is resulting from the insurers’ need to reduce uncertainties surrounding environmental liability risks and to ensure that appropriate risk control programmes are implemented by the insured.

Insurability criteria can provide added pressure for the internalisation of risks by enterprises. Under joint and several liability, vertically integrated, single user sites will be more insurable than multi-user sites (Doherty, Kleindorfer and Kunreuthel; 1990). This has motivated some companies to internalise some functions, such as waste management, rather than rely on commercial contractors. For the majority of firms, however, this is not possible, with the result that they must seek instead a tighter control over market relationships.

Liability and Product Stewardship

Liability risk concerns are also motivating an increased control of product risks, particularly in the case of potentially hazardous products. These typically appear under the auspices of product stewardship and entail an extended involvement of the producer into the product use phase, providing additional product information, technical advice and support. It has also lead some chemical manufacturers to monitor customer compliance with manufacturers guidance on the use, storage and disposal of products. In other cases it has involved the return of the spent product to the producer for recovery or controlled disposal. This approximates the shift from a consumption to a service relationship identified by Stahel (1991) and represents a fundamental change in the relationship between producer and customer.

Liability and Investors

Increasingly, investors are also adding to this pressure. Shareholders, especially the powerful institutional shareholders, are increasingly reluctant to be seen to be

~ ~~~ ~

European Environment

Civil Liability and the Environmental Responsiveness of Industry

investing in companies with a poor eiwironmental record. As more information is demanded, and the scmtiny to whch investors subject the environmental performance of individual companies increases, and with the market increasingly sensitive to the risks, the salutary effect of civil liability actions will be reinforced.

Conclusion

In conclusion, civil liability, in addition to being a means of reparation for environmental damage, also provides a stimulus to industry to integrate risk management perspectives into all levels of decision making. Clearly though, this can only be effective'if the liability system itself functions effectively. Liability system reforms, including improved access to the courts and legal standing for common interest groups, could help to achieve this. Such reforms, in conjunction with 'horizontal' supporting measures such as improved access to environmental information and adequate levels of publicity, would help to encourage constant improvement in environmental performance and promote the development of cle'mer products and processes.

This article has outlined some of the ways in which environmental liability can contribute to changes in networks of commercial relationships that lead to improved management of environmental risks. Enterprise self- regulation is part of this but is itself embedded within and encouraged by wider networks of mutual regulation among producers and their stakeholders. Further evaluation is needed of the extent to which these new interactions lead to preventive innovations, rather than end-of-pipe measures, and to which they lead to the stimulation or transfer of new knowledge into R&D, technology and social organisation. Nevertheless, this organisational perspective opens up the possibility of developing new regulatory instruments that encourage and reinforce these networks of mutual regulation. It is through the development of innovative institutional mechanisms that the potential of these developing control structures can contribute to the formation of new relationships envisaged in the 5th Environmental Action Plan and to achieving its goal of sustainability.

References

7. Ashford, N.A., (1901), Response of Industrial Firms lo Enviroiunental Problems: ?he Past and the Future, paper presented to the Inteiiiational Research Conference on 77rr Griwiirig a/lrrdrtstry, Noordwijk aan Zee, Netherlands, November

2. Baram, M.S. & Dillon, P.S., forthcoming (1993), Corporate Management of Chemical Accident Risks, in J. Schot & K. Fischer (eds.) Em~iro~iriitm fi l l Striitegiesfor Iridiisfry, Washington, D.C.: Island Press. Baram, M.S., Dillon, P.S. & Ruffle, B., (1990), Min7iigiirg Clrerrric-ril Risks: Cor/~oriite Rrspor~sc lo SARA Title 111, Medford, MA.: The Centre for Environmental Management, Tufts University.

4. Braitliwaile, J., (1969), Crirttc, Shiitrre m i d Reitrfegriitiorr, Cambridge: Cambridge University Press.

5. CEC, (1 992), Toortmnls Susfiiirzribilib/. A Ertropm Cot!)w!/i?i/y Progrovitne 01 Policy r i r f r l Acfiori i r r reliitiori to tlie Eti7~iror~vr~~itf r r i r ~ l

17-19.

3.

Sr~sf~ii17uWe Dnwlqnrzctit, COM(92) 23 final - VOL. 11. Doherky, N., Kleindorfer, P. & Kunreuther, H., (1993), An Insurance Perspective on an Integrated Waste Management Strategy, in H. Kuiueuther & M. V. R. Gowda (Eds.) btegriiting Insitrunce md Risk Miitiirgmm t for Hiiziirilozrs Wustes, Dordrecht: Kluwer Academic. House of Lords, (1990), Puying for Polltcfirni: Cioil Liiibilihjfor Diiiniigr

G r u s e ~ l by Wiistr, Select Committee on the European Communities, Session 1989-90, 25th Report, HL Paper 84, London: HMSO. INFORM, (1985), Ciiftirrg CI~ernical W~isfes: Whit 29 Orgiinic Clremicul Plurzts Are Doirig to Recfuce Huzurdoits Wiistes, New York: INFORM. Irwin, A. & Vergragt, P., (1989), Rethinking the Relationship between Envjronrnental Regulation and Industrial Innovation: The Social Negotiation of Technical Change, Tedznology Analysis 6. Strutegic Mrrriiigrir~aff, 1, 1, pp. 57-70. Mallagli, C. & Ravetz, J.R., (1985), The "Third" Mode: Technology Regulation by Insurance, in C.Whipple & V.T. Covello (eds.) Risk Ariiilysis iri tlie Prioiife Sector, New York & London: Plenum Press. Simmons, P. & Wynne, B., forthcoming (1993), Credibility, Trust and Environmental Management in the British Chemicnl Industry, in J. Schot & K. Fischer (eds.) En7~iroriii7flifri~ Stnitegies for Indrisfnj, Washington, D.C.: Island Press. Stahel, Walter, (1991), Product Innovation in the Service Economy, paper presented to the Stockholm Environment Institute seminar Clem/ Pro~j~tcfiari: Urirllcr~grs r r i r d Opportziirifies, I'rague, 9-13 September.

13. Wynne, B. & Simmons, P., (1992), Irtdustrjrrl Respouses to Dmdoprtwtrls irr Erivirorrr~retitril Risk Miir i i~g~:r tmt , End of Grant Report to the Econornjc and Social Research Coiuicil, Grant W104251001, Jiine. Yakowilz, H. & Hanmer, R.W., (1991), 'Policy Options to Encourage Environmentally Friendly Technologies in the 19sx)s,' paper presented to the Stockholm Environment Institute seminar Clriiiz Proditctioii: Wziillozgcs inid Opporhtrzities, Prague, 9-13 September. Zwker, I-. G., (1986), 'Production of Trust: Institutional Sources of Economic structure, 1840-1920,' Reseiircli it1 Organ iziifioiziil Bhu7krtr,

6.

7.

8.

9.

10.

11.

12.

14.

15.

V01.8, pp. 53-111.

Peter Simmons js a rc-search fellow at the Centre for the Study of Etivfronmental Change, Lancaster Unlverslty. Laiicaster LA1 4YF, UK. Tel: +44 (0)524 65201.

CALL FOR PAPERS

Paper submissions are currently invited for European Environment. Submissions may be either as articles (c.3,500 words) or as shorter profiles (c.1800 words). Articles and profiles should relate to European environmental policy and practice, and should be written in a detailed yet readable manner. Articles from non-UK authors are particularly welcome as are country profiles with a high factual and statistical content. The Editor would be happy t o discuss any potential submissions and can be contacted a t the address and telJfax numbers on the inside front cover.

European Environment 5