Weak Environmental Crimes Law a Risk to Investors

European Council’s position on the revised Environmental Crime Directive will damage portfolios as well as the environment, says WWF.  

NGOs say the European Council’s decision to weaken the Environmental Crime Directive (ECD) increases the chances of investors being exposed to reputational and nature-related risks.

Released on 9 December, the justice ministers’ position on the revised ECD effectively watered down both the penalty and sanction levels when environmental crimes are committed by companies. It also failed to extend the directive to cover all types of environmental crime.

“A weak directive means that environmental crimes will continue to damage our environment and society, [as well as] the business models of companies that are in the portfolios of institutional investors, with increasing costs, lower revenues, or both,” Audrey Chambaudet, Policy Officer of Wildlife Trade and Wildlife Crime at the WWF European Policy Office, told ESG Investor.

“If investors have in their portfolio companies involved in environmental crimes, they could face reputational risks and put in jeopardy their own commitments to protect the environment, in the light of public outrage and/or legal actions. By failing to take urgent action, they could be badly hit by the decreased market value of the given company.”

Insufficient deterrent  

NGOs have pointed out a number of shortcomings in the revised directive. They note that it doesn’t cover illegal, unreported and unregulated fishing and argue that its maximum terms of imprisonment and other sanctions are too low.

The directive outlines sanctions for natural persons (individual people) and legal persons (aka, companies) for crimes such as timber trafficking and illegal recycling of polluting components of ships.

If a company is caught timber trafficking, which includes the logging, trading and importing of timber from protected sites, member states are allowed to choose between imposing a fine based on the company’s total worldwide turnover (3%) or a fixed amount (EUR 24 million), according to the ECD document.

For the most ‘serious offences’, such as death committed either intentionally or due to serious negligence during the illegal activity (such as an employee becoming harmed due to working in unsafe conditions), these sanctions increase to at least 5% or EUR 40 million.

It is up to member states to determine the “seriousness of the conduct” to decide the proportionality of the sanction imposed, the document said.  Individual persons may receive a prison sentence, which ranges from a minimum of three years.

The document says “additional measures” may also be taken by member states, such as ensuring the offender pays compensation, excluding them from access to public funding, or withdrawing their permits or authorisations.

Given the fact environmental crimes are the third most lucrative crime category globally, NGOs warn that the level and flexibility of the sanctions may not deter companies from engaging in or profiting from illicit activities.

Chambaudet said this would “create unfair competition with companies respectful of the environment, which, in turn, can have negative impacts on investment portfolios”.

Environmental crime generates around USD 110-USD 281 billion in criminal gains each year, according to The Financial Action Task Force (FATF).

A provision originally included in the revised ECD required member states to grant protection to persons who report environmental offences or assist the investigation has also been deleted.

“This provision is crucial as these persons, including NGOs, play a key role in exposing and preventing breaches of environmental law,” said Ilaria Di Silvestre, Head of EU Policy and Campaigns at the International Fund for Animal Welfare (IFAW).

“They should be protected from intimidation or litigation when reporting environmental crimes or assisting investigations,” she said.

A January report published by the Finance for Biodiversity Initiative (F4B) said financial institutions should address the occurrence of environmental crimes in their financial value chains by improving their due diligence.

The European Commission published its proposal to improve the ECD last December, noting the original directive was failing to restrict environmental crimes.

No follow-through 

A weakened ECD also undermines other European environmental legislation, such as a recently agreed zero-deforestation law.

Earlier this month, the European Council and Parliament agreed a proposal to minimise the risk of deforestation and forest degradation resulting from EU imports and exports through mandatory due diligence rules for entities involved in the trading of commodities and products, such as palm oil, beef and chocolate.

“The ECD is an additional tool in the hands of governments to support the implementation and enforcement of environmental legislation covered by the directive, in cases that are of a criminal nature,” said WWF’s Chambaudet.

“As environmental crimes directly contribute to climate change and the biodiversity crisis, a weak directive means that the law won’t be strong enough to support efforts to protect our planet.”

The importance of accounting for and mitigating nature-related risks is currently being discussed on the global stage, as the Global Biodiversity Framework (GBF) is finalised at COP15 in Montreal. The framework will likely trigger a new wave of environmental laws and initiatives to reduce negative impacts and mobilise nature-focused investments around the world.

The European Parliament is expected to adopt its position on the ECD by the end of Q1 2023 ahead of trilogue negotiations.

Both WWF and IFAW have urged MEPs to support an extended, more progressive ECD with stronger sanctions.

“The EU is not immune, and is actually a major hub of organised environmental crimes, such as wildlife crime and waste trafficking,” said IFAW’s Di Silvestre.

“The revision of the ECD represents a unique opportunity for a strong, harmonised and ambitious legal framework to prevent and penalise these crimes. The previous ECD failed because of the lack of clearly defined, harmonised and truly dissuasive penalties and sanctions, in addition to the exclusion from the scope of the directive of major environmental offences.”

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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