With so much focus on ESG demands from investors and other stakeholders, it is sometimes easy to forget about old fashioned environmental regulatory risk. Here are three recent examples of environmental regulatory risk surprises that have financially material impacts to those that find themselves regulated.
From Risk.net, here is a story about a financial shock to an entire industry in the Netherlands due to announced air emissions limitation plans:
What does it take for a €10.3 billion loan ($10.5 billion) portfolio to deteriorate in quality overnight? A market seizure? A trading mishap? A pandemic?
For Rabobank, it was the unveiling of plans by the Dutch government to make the country’s air safer to breathe.
Measures outlined in June by prime minister Mark Rutte’s cabinet to tackle the Netherlands’ longstanding nitrogen oxide pollution problem – the legacy of decades of intensive livestock farming – sparked loud protests by farmers, fearing the new government targets could make their businesses unsustainable. That prospect led Rabobank – the country’s main financier to the agricultural sector – to classify its entire exposure to the Dutch dairy industry under stage two of the International Financial Reporting Standard 9 loan-loss framework, indicating a heightened risk of default.
Back here in the U.S., the State of Virginia is legally bound to implement the new California phase out of gasoline-powered automobiles. The Hill reports:
California’s newly-announced rule barring the sale of new gas-powered cars in 2035 will apply to Virginia as well under the terms of a 2021 state law, Attorney General Jason Miyares’s (R) office confirmed to The Hill on Monday.
In 2021, the state General Assembly, where Democrats then held majorities in both chambers, passed a law requiring the state to adopt the same automobile standards as those adopted by the California Air Resources Board (CARB). Although Democrats lost their majority in the state House of Delegates in 2021, efforts to repeal the legislation in this year’s legislative session were unsuccessful…
Under the terms of the 2021 law, the California rule would not take effect until 2024, giving Republicans in the legislature at least one more chance to attempt repeal, particularly if they take the state Senate in 2023.
Moving away from air emissions, the USEPA has proposed designating perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS) – more colloquially known as “forever chemicals – as hazardous substances. Such as designation would have two major implications:
- Releases of the chemicals into the environment above the reportable quantity (RQ) – 1 pound in a 24 hour period – would require reporting to the EPA and state environmental regulator within 30 days of the release; and
- Sites contaminated with the chemicals would be subject to remedial actions under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA, or “Superfund”). These actions can drag on for decades and be extremely costly.
What This Means
ESG is very fluid and it is difficult to stay on top of all the developments. Pressure coming from investors and stakeholders can make it easy to overlook more traditional environmental regulatory developments and their potential impacts, but those remain crucial – and frequently financially material. Environmental insurance coverage may not be adequate to cover the costs, or the new risk may be completely excluded from your policy – leaving you completely exposed.
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