Europe readies environmental standards.

Europe readies environmental standards

Environmental issues are at the top of the political agenda worldwide. Certainly this is true in the EC, which has recognized since 1987 that pursuing environmental objectives is an end in itself, rather than merely a part of the process of economic expansion.

Less recognized is that U.S. firms and their affiliates have substantial advantages in coping with this new environmental order. Consider the following:

* U.S. firms are familiar with a complex and sophisticated system of environmental controls. * U.S. firms know how to work in stages, which regulators like, in order to achieve realistic improvements. * U.S. firms have experience in costing out the effect of environmental requirements in situations where the impact may vary because of the local infrastructure, the enforcement timetable, or the viability of the plants involved. * U.S. firms recognize the need to have an environmental policy, to have a senior executive implementing it, and to keep employees and customers aware of it. * U.S. firms know how to evaluate the environmental record of a potential partner, acquisition, or investment. * U.S. firms have experience in operating under a federal system.

As a result, U.S. executives may be better prepared than they think for the new EC requirements. However, political pressure, combined with a legal obligation to set high environmental standards, are expected to prompt EC proposals that are more and more demanding.

Radical departures are already being made. Only two years ago, the idea of an energy tax was a subject of ridicule. Now, discussions of a "green taxation" have introduced proposals for a mixed carbon and energy tax aimed at stabilizing carbon dioxide emissions at 1990 levels by the year 2000.

However, there are limitations to what the Commission can achieve. A North/South divide exists in terms of the stage of economic development by each member state. This, in turn, produces disparities in economic and social priorities. Moreover, environmental standards differ widely. Countries like Germany, Belgium, and Denmark are pressing for stricter standards, which the poorer member states claim they do not have the resources to achieve.

There is an obvious danger in member states operating at different speeds on environmental matters. There is an additional danger when many of these environmental problems extend across borders. For example, the former West Germany, which works to high environmental standards, will be faced with enormous problems in financing and implementing such standards in its new eastern sector.

The Commission has proposed a two-stage policy to ensure that the environmental goals to be set will be viable for all the member states. Compulsory targets will be set initially. Once members have reached this initial target, more stringent objectives may be set on a voluntary basis. This approach can already be seen in the implementation of emission restrictions on cars and commercial diesel vehicles. New standards will apply to new model cars beginning in July 1992, and for all new cars in January 1993, with proposals to tighten these standards in 1996 and again in the year 2000 in the light of technical progress.

Implications for business

New EC environmental standards will affect both the cost of business and the manner in which a business is run. The type of businesses to be affected will correspond closely to those affected in the U.S.: energy companies and paper, chemical, and automobile manufacturers. The importing of U.S. goods will also be affected by restrictions on product quality, labeling, and advertising, such as for health care items, food products, or medical equipment.

A recent U.K. report by Environmental Policy Consultants suggests that the cost of complying with the 86 EC environmental proposals currently being considered would in Britain alone go well beyond the $25 billion that U.S. business incurred in complying with the 1990 Clean Air Act. The U.K. Petroleum Industry Association estimates the European oil industry alone would need to spend $4 billion to meet proposals for reduced sulfur content. With all such costs being passed along the chain of production and with landfill costs rising to reflect the cost of aftercare facilities, streamlining the manufacturing process becomes all the more imperative.

To enforce the principle that "the polluter should pay," the EC is focusing attention on market-based measures, in addition to regulatory standards, to encourage environmentally friendly behavior. The result may be to change the emphasis in policing from the government to the financial sector, which will want to ensure that customers have taken the proper steps to limit liability.

Of major significance is the EC proposal to introduce liability on a no-fault basis for damage caused by waste. Liability would fall primarily on the producer of the waste; but if the actual producer cannot be identified, then liability may arise for those "with actual control of the waste." Such third parties might include lenders who enforce their security or liquidators in an insolvency. Commission officials stress, however, that this situation would arise only when it is not possible to identify the producer; it would not extend to a situation in which the producer is known but is in liquidation. However, the most important effect of the proposal will be the impact that liability will have on the value of property, for lenders will examine this closely in evaluating security for a loan.

Imposing strict liability represents a radical change. Liability would extend not only to the cost of preventing damage and compensation for the damage, but also to the cost of restoring the environment.

This will significantly affect due diligence requirements on acquisitions. Not only will purchaser and lender carry out due diligence on a target's land holding, operations, and environmental management, the lender will also want to evaluate the environmental policy of the purchaser itself - including research, staff training, and the budgetary allowance for environmental risk. This is a well-known concept in the States, but a recent survey of large European companies showed that some 50 percent had no established system of environmental assessment.

The packaging controversy

The Commission's first draft directive, issued in June, seeks to impose responsibility on industry for "post-consumer" waste, including packaging. But while economic and financial measures are heavily emphasized, the form of those incentives is not yet specified.

The aim of the packaging directive, which is proving to be highly controversial, is to regulate all packaging and to limit the amount of packaging the overall output of packaging to 1990 levels within five years, and by ensuring that at least 60 percent by weight of the waste is recycled. Landfill is to be used only as a "last resort."

To achieve these requirements will require a redesign of packaging on a cradle-to-grave basis. The package itself needs to indicate the nature of the material, and whether it is returnable or recyclable. A charge would be levied if products were not so marked. The marking system would also, some note, reduce the space available for other consumer information, ranging from marketing messages to pharmaceutical ingredients.

All stages of manufacturing and distribution will be expected to collaborate in establishing take-back and collection systems for packaging waste. Discussions between industry and the Commission have put a ballpark figure for infrastructure costs at between $17 and $22 billion.

Fears that local producers may be given advantages in terms of the ease and cost of the collection system are illustrated by the "Danish bottles" case. Denmark, in this instance, required all bottles to be returnable. Action was brought against Denmark on the grounds that this restricted free trade between member states. The decision by the European Court of Justice was that environmental considerations supersede the free-trade requirements of the European Community.

Environmentally compliance within Europe will increasingly come from top management. In the U.K., for example, the Environmental Protection Act (EPA) exposes directors, officers, and managers to criminal liability for a company's breach of EPA provisions. Every company will therefore need to adopt a systematic approach, being aware of the provisions that will affect it and the dates of compliance. Evaluating the risk and the means of minimizing it should also include the availability of insurance to cover those risks.

Potential developments

Many insurance companies "caught a cold" as a result of environmental insurance claims filed in the States in the 1980s. As a result, the insurance market is now very cautious. General public liability policies offer only a limited measure of protection. Damage caused by a deliberate act or omission is not covered, for example, nor is damage caused to the insured's own property. Nor is it possible to insure oneself against criminal liability or penalties now being enacted by member states. Moreover, damage arising from a cause that is gradual and ongoing may not be covered.

But while a demand is developing for more extensive coverage of environmental risks, without a legal obligation to provide such coverage it is questionable whether insurance companies will respond to market demands. Where environmental impairment liability policies are available, they provide only limited protection. Such policies usually relate to specific sites, and maximum coverage is likely to be about $8 million.

A voluntary plan for environmental audits (or "eco-audits") is expected from the Commission shortly. This draft regulation will invite industrial and manufacturing companies to submit to an assessment of the environmental implications of their operations. The Commission's proposal describes such eco-audits as "a management tool comprising a systematic, documented, periodic, and objective evaluation of how well an organization's management and equipment are performing, with the aim of contributing to safeguard the environment."

While the eco-audit will initially be voluntary, it is likely to become a prerequisite to commercial activity - for example, when obtaining insurance coverage or raising financing. Companies will have to demonstrate that they are complying with environmental legislation, that environmental costs are properly accounted for, and that they are aware of changes to come.

How to influence the EC

The EC legislative system is relatively open to approaches from business. But keeping abreast of developments at the early stages is essential for those wishing to have an input into the legislative process. The Commission is especially open to a constructive approach, which facilitates drawing up legislation and alleviates the inevitable bureaucratic problems that arise when drafting in multinational committees.

In summary, U.S. business executives can exert influence on proposed EC legislation if they follow two keys to successful lobbying:

* Be familiar with the legislative process. * Be alert to proposals as early as possible. * In addition to establishing relations with the Commission, cultivate contacts in the European Parliament and in the Economic and Social Committee. The point is to know when there are issues about which you should be concerned, and to know how best to put your views across. This may involve joining others of a like mind.

We have found that U.S. companies often do not take advantage of the opportunities the system offers. They often raise their voices too late in the day, when proposals are too far down the line to be negotiable.

On the other hand, U.S. companies have substantial advantages over European companies They are familiar with environmental responsibility. Operating under a tougher regulatory system, they have much more sophisticated methods for monitoring and complying with environmental requirements than do European companies. U.S. companies should capitalize on these advantages, as well as on the advantage of having operated for many years under a federal system.

PHOTO : U.S. Grant, Commanding General of the Army, steel engraving, C. B. Richardson, New York, c. 1864

Although unknown in the first year of the war, Grant quickly rose to prominence after early victories in the West in 1862. Even though he lost large numbers of men in battle, Grant won Lincoln's attention because he was willing to fight and he often won.

PHOTO : Above, Democratic candidates McClellan and Pendleton, lithograph, Currier & Ives, New York, 1864

Recalled from retirement to serve in the Civil War, George B. McClellan rose to Union general-in-chief. When Lincoln removed him from that post, mainly due to McClellan's failure to attack, McClellan challenged Lincoln for office. Ohio Congressman George H. Pendleton was known for his "Ohio idea" to pay the national debt in greenbacks, a plan growing out of the national debate on "soft" paper money versus "hard" coinage.

Julian Doyle and Susan May are U.K. lawyers in the Brussels office of Gouldens. They were assisted by Clare Deanesly in London.