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Advising the Board on Environmental Law Risk in CEE

Reports looking at the full range of commercial risk

19 January 2021

Directors’ risk report

Environmental law is firmly and undoubtedly a board-level issue and all businesses need to focus on how it impacts their activities. Environmental authorities expect directors to play a key role in establishing and maintaining a culture of compliance in their organisations regarding environmental law. Any board that gets these issues wrong risks significant penalties not only for the business, but also for themselves as individuals. It is therefore critical that the proper management of environmental law issues is at the forefront of any responsible business compliance strategy.

Environmental regulations increasingly require businesses to perform better when it comes to environmental impact and this in turn often represents a significant increase of CAPEX on pro-ecological investment.

The level of changes required by environmental regulations can range from restructuring daily operations to complete changes in a company’s business model. It is no longer an incidental issue and this is particularly apparent for the CEE where environmental issues may not have played such a crucial role in the past. This change is evident and lasting can be seen in the fact that compliance with environmental law is often now a starting point in the financial world, e.g. where businesses are now required to demonstrate how they deal with Environmental, Social and Governance (ESG) risks.

stakeholder risk thermometer

Consequences of breaching environmental law

The consequences of breaching environmental law are serious and far reaching.

For the business these can include:

  • very high financial penalties imposed by administrative authorities with limited possibility for mitigation;
  • very high financial penalties imposed as a result of a criminal conviction under the rules on liability of collective entities;
  • suspension of operation including operation of production plants;
  • cancellation of permits resulting in the suspension of business operations;
  • inability to obtain new permits for the business;
  • damages actions from those who have suffered harm as a result of the infringement;
  • the need to cover costs of damage to the environment, clean up and restoration;
  • inability to participate in procurement procedures or restrictions in this respect;
  • significant problems with obtaining financing for further projects.

In-house legal perspective on competition law from Vishal Puri, Legal Director, CEMEX UK

What measures do you take to ensure compliance with competition law at CEMEX?

We tailor appropriate competition law compliance activities for all levels of the company. The UK Board receives the most comprehensive training as we recognise that they need to be fully aware of their own personal liability, as well as that of the company. Directors also need to understand the principles to help them drive compliance from the rest of the business. Certain teams to which competition law is most relevant receive targeted training. Company-wide, we issue detailed compliance guidelines and encourage employees to come to us promptly with any concerns even where these may seem insignificant. Most of the time a short telephone call can allay any concerns.

Environmental issues during investment process 

green mountains

 

Environmental regulations are already at play during the investment process. If a company is building or expanding a factory, an environmental impact assessment will most likely have to be conducted first. The purpose of this exercise is to ensure that the new business will not impact people or the environment in an unacceptable way. Skipping this obligation may result in serious sanctions, as well as financial and reputational damage to a business. In practice, a low-quality environmental impact assessment may result in hostile reactions by local communities or ecological organizations and might even put large scale projects at risk. It is recommended that any investment project have a fixed roadmap which should include advance liaison with environmental authorities with a view to clearing any legislative or regulatory obstacles.

Additionally, if the environmental impact is not properly assessed at the outset, it may later transpire that business operations cannot start or continue, e.g. due to noise emission violations. Apart from noise, the issues that need to be reviewed and analysed in the environmental impact assessment usually include air emissions, water intake and sewage discharge, waste management, hazardous substances management, and CO2. Before acquiring any land where the investment is to take place, it is worth checking it for soil and groundwater contamination. If it occurs, there are many technical and legal ways to deal with it, but some of them will involve high costs.

Environmental permits for operation

purple permit

 

Even if the environmental impact assessment is performed before development, it does not close the list of environmental obligations. Before a factory or other business starts operations, in most CEE countries it needs to obtain further environmental permits. These may include various sectoral permits such as air emission permits, water permits or waste permits. However, in some cases it is possible to obtain one integrated permit (an IPPC permit) which covers various environmental impacts. If a business operates without the necessary permits or in violation of an environmental permit (e.g. higher air emissions than allowed by the permit) this can result in severe financial penalties, suspension of operations or cancellation of permits. If the business operation results in any environmental damage, there is also the risk of criminal sanctions. Non-compliance with environmental permits may lead to administrative or even civil law litigation which apart from obvious financial risks, also has negative PR impact.

Environmental services

blue hills

 

Apart from environmental permits, it is also important to secure the necessary environmental services. These may include, e.g. waste or sewage collection and management. Not only should these services be rendered on good commercial terms, but it is also important to be sure that they are provided by a trustworthy contractor. For example, in some CEE countries the responsibility for waste management will not pass from its producer unless the collector operates fully in line with the law and in particular has the necessary permits. If the waste collector does not operate in line with environmental law, the producer of waste still bears liability for this even if the waste was handed over to that collector. As a result, the producer may be required to collect the waste from the place of illegal storage, pay very high financial penalties or even be held liable for damage which such waste caused.

Environmental fees and formalities

orange banknotes

 

Under environmental law in most CEE countries, it is necessary to incur fees and related expenses for using the environment for business purposes. Such fees can relate to, e.g. sewage discharge, landfilling waste and air emissions. In many cases, there are also specific reporting obligations which usually involve completion of paper forms but recently it is more common that reporting takes place online. Whether environmental impact reporting is done in paper form or online, there are specific time scales to adhere to and environmental impact must be accurately reported. Late or improper reporting may result in penalties, including financial and criminal.

Monitoring the constantly changing regulations

brown magnifying glass

 

Environmental law is changing rapidly. It is essential to keep an eye on the legislative pipeline to avoid unpleasant surprises. Monitoring goes beyond assuring compliance of day to day business operations with the law, although that is critical for the continuity of the business. For example, it may be crucial to know that a new, stricter chemical substances regulation has recently come into force, which may entail a reorganisation of business operations. It is as important to pay attention to other developments, such as the adoption of BAT conclusions at the European level, which set much stricter emission levels for many businesses and hence require significant investments to reach compliance. Some new regulations introduced at the European or national level may have an even greater impact on businesses as they can undermine the whole business model. In this vein, the single-use plastics ban has changed the landscape for many businesses connected to the plastics market. Additionally, other notions such as the circular economy or climate change related regulations will, in the long run, result in a need to reconsider the business model.

Environmental due diligence

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“Prevention is better than cure” when seeking to keep up with environmental law requirements. It is advisable to periodically carry out environmental due diligence. This should be done by both environmental lawyers and technical advisors. It helps identify the areas which may expose the company to legal or factual environmental risk. Due diligence is absolutely crucial during any M&A. Each target business should undergo strict scrutiny of environmental matters. Issues which tend to crop up during transactions include soil and groundwater contamination and non-compliance with environmental laws or permits. Once these are properly assessed and addressed in transaction documents, the risk associated with them drops significantly.

ESG and sustainable investing

green leaves

 

Businesses that do not keep up to date with environmental developments and new technologies may have problems with obtaining necessary financing due to new European rules on Environmental, Social and Governance (ESG) compliance reporting and sustainable investing. The European Union is at the forefront of development on this aspect, establishing the actual list of environmentally sustainable activities by defining technical screening criteria for each environmental objective. The aim of this is to enable objective assessment of sustainability and its comparison between businesses. Business which do not meet set requirements may face difficulties in advancing their commercial interests both now and in the future. Every Board member and director should be aware of ESG requirements well in advance and equip themselves with the necessary advice to navigate a path forward.

Summary: practical risk management for directors

Directors should actively manage environmental law risks by ensuring that the following compliance principles are followed:

green eye
 Awareness – Staff at all levels of the organisation are reminded by their supervisors that compliance with all applicable environmental laws is a requirement of their employment.
green seminar
Training – Adequate and regular training is compulsory at least for the staff responsible for any environment-related operations.
green approval form
Audits – Periodic internal or preferably external legal and technical environmental audits of operations are performed to allow for higher comfort of compliance.
green quotation marks
Reporting – There are clear guidelines to refer issues to managers, internal legal teams and where necessary external legal advisors to manage any potential issues swiftly and avoid the risk of penalties. 
green globe
Monitoring - The changing environmental regulations are monitored to keep up with developments which could threaten a business’s operations or impact its CAPEX or OPEX.

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Publication
Advising the Board on Environmental Law Risk in CEE
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Authors

Picture of Varinia Radu
Varinia Radu
Partner
Bucharest
Agnieszka Skorupinska
Agnieszka Skorupińska
Partner
Warsaw
Michal Hutan
Michal Huťan
Partner
Bratislava
Lukas Janicek
Lukáš Janíček
Partner
Prague
Picture of Peter Simon
Péter Simon
Partner
Budapest
Picture of Kostadin Sirleshtov
Kostadin Sirleshtov
Managing Partner
Sofia
Picture of Vitaliy Radchenko
Vitaliy Radchenko
Partner
Kyiv (CMS CMNO)
Alican Babalioglu
Alican Babalioglu
Managing Partner
Istanbul
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