ESG series: Environmental harm and corporate liability
- Prashant Mara and Devina Deshpande
Businesses the world over are increasingly being judged by regulators, stakeholders and civil society on their sustainability or ‘ESG’ (environmental, social and governance) practices. The assessment of a company’s ESG profile is progressively becoming a driver of decision-making, with consumers looking for, and investors relying on, ESG metrics as key criteria for engagement.
In recognition of the criticality of the environmental agenda, regulators (such as in the EU) have mandated standards for environmental reporting and are pushing towards a carbon-neutral economy, and the S&P 500 ESG Index periodically ranks companies within industries on ESG criteria and excludes those that have been underperforming. Poor performance on the environmental front could also mean alienating investors and consumers - for instance, Forbes India reported that Quantum Advisors and Quantum Mutual Fund divested their entire shareholding in a major engineering and construction company engaged in the in 2019 for governance issues and for failing to undertake an independent environmental risk assessment of the Mumbai Coastal Road project.
Future-focused companies have been prompt and proactive in embedding environmental goals into their business strategy and supply chain - such as carbon neutrality, responsible sourcing, biodiversity practices, investment in new sources of energy etc. However, despite these measures in specific instances, there is a huge gap to the base level of enforcement of environmental goals in India. Environmental obligations are often dealt with by companies at a bare minimum level (as a ‘check the box’ exercise), with limited impetus to the board or senior management to actively participate in formulating sustainable policies and initiatives and to monitor on-the-ground compliance.
While Indian environmental laws impose heavy monetary penalties on companies and subject directors and management to personal criminal liability for environmental harm, these laws have proved to be effective only to a limited extent due to the lack of comprehensive coverage of all issues and effective enforcement.
This article outlines the current state of affairs in this area and provides some key examples of how courts and the industry have been trying to plug this gap without waiting for affirmative legislative action.
Absolute liability sets the base The Indian judiciary established the doctrine of ‘absolute liability’ in the 1980s as a reaction to the devastation to human life and the environment caused by 2 industrial disasters - the Bhopal Gas Tragedy and Oleum Gas Leak. A company operating a hazardous and inherently dangerous industry is automatically brought within the ambit of this doctrine and will be absolutely liable for any and all damage caused by its activities, regardless of whether there was intention to cause harm. Liability will arise even in the case of accidents, such as the accidental release of effluents or toxic gas. The doctrine vastly expands the ambit of the traditional tortious principle of strict (no-fault) liability. There is no defence or exception to the absolute liability rule, unlike in strict liability where victim’s consent/participation, act of third party, act of God etc. are carved out as exceptions. This not only expands the scope of liability of the company but also of its board and officers who have on numerous occasions over the years been held vicariously liable for environmental harm caused by the company, as discussed further below.
Punitive penalties on the increase While courts in India are typically reluctant to award punitive or exemplary damages, environmental violations have emerged as an exception to this position. The Supreme Court has evolved the position that the quantum of compensation must be correlated to the capacity and magnitude of the enterprise at fault. As recent testament to this:
The National Green Tribunal (i.e. the environmental court) in 2020 directed LG Polymers to pay damages of INR 500 million on account of a gas leak that killed 11 people and affected thousands others. In the same year, the Tribunal also imposed damages of INR 250 million on (state owned) Indian Oil Corporation for oxygen depletion and surface water contamination by the illegal discharge of effluent.
During the (global) ‘Volkswagen emission scandal’ in 2019, the National Green Tribunal, in a re-assessment of the inquiry into the matter, enhanced the penalty on Volkswagen from INR 1 billion to INR 5 billion for deterrent value.
In 2013, the Indian Supreme Court imposed a penalty of INR 1 billion on Sterlite Industries (a subsidiary of LSE-listed Vedanta Resources Plc) for operating its copper smelting plant without a valid renewal of its environmental consent and having polluted the environment in the vicinity of its plant. When assessing quantum of damages for harm caused by Sterlite to the environment during the 15 years it operated without a valid environmental permit, the Supreme Court reviewed the company’s annual report and set compensation at 10% of its profit before depreciation, interest and taxes (amounting to INR 1 billion) on the basis that a lower amount would not have the desired deterrent effect on the company. In fact, after sustained violations over the years, the Madras High Court in August 2020 confirmed the permanent closure of Sterlite Industries’ factory, stating that “economic considerations can have no role to play while deciding the sustainability of a highly polluting industry”. Bolstering the approach taken by the courts over the years, the Central Pollution Control Board (“CPCB”) has, a few years ago, devised a formula to compute environmental compensation. The formula incorporates several factors including the severity and duration of the violation and the scale and location of operations. Besides the general environmental compensation calculated using the formula, additional penalties will apply for specific violations (for instance, to address illegal ground water extraction, improper solid waste management etc.). These penalties may be applied as a lumpsum (e.g. up to INR 20 billion for untreated sewage discharge) or levied on a per day basis for the duration of the offence. The CPCB has, of late, been taking penal action against, and seeking enhanced compensation on the basis of this formula from, polluting companies for damage caused to the environment.
Personal liability being fixed Courts, tribunals and enforcement agencies have regularly displayed readiness to step in to bring defaulters to task, relying on both sector-specific environmental laws as well as general criminal law. This has frequently resulted in senior leaders being held accountable for defaults as having been in charge of, and responsible for, the company’s business. For instance, in the cases mentioned in point 2 above:
CEO and senior personnel (including 2 foreign nationals) of LG Polymers were arrested for negligence under the Indian Penal Code, following a gas leak at the company plant in Vishakhapatnam on account of poor safety protocols and breakdown of emergency response procedures.
The National Green Tribunal directed the Haryana State Pollution Control Board to prosecute senior officers of Indian Oil Corporation Limited for prevention of the crimes committed under water and air pollution laws. Further, even the fact that litigation proceedings have dragged on for years (as is typically the case in India) may not shield the board and management from liability for environmental harm caused by the company. The Supreme Court has held even where litigation proceedings are severely delayed (17 years since the institution of the complaint, in the relevant case) this would not save the senior management and directors of the errant company from prosecution.
More robust disclosure The Indian Ministry of Corporate Affairs (“MCA”) has released a fulsome set of guidelines on responsible business conduct and format for business responsibility reporting (termed as the Business Responsibility and Sustainability Report or “BRSR”) , which take into consideration global developments in non-financial sustainability reporting. The BRSR reporting format requires disclosures on key ESG aspects in granular and disaggregated detail, including comprehensive disclosures on initiatives to address global environmental issues, low carbon economy projects, emissions/waste limits, carbon emissions, solid waste management practices, strategies to reduce usage of hazardous and toxic chemicals in products, environment impact assessment of operations etc. The top 1000 listed companies by market capitalization in India must make these disclosures to the securities regulator annually, commencing from FY 21-22. The MCA may subsequently also require unlisted companies with an annual turnover or paid-up capital above a certain minimum threshold to mandatorily make these disclosures. A more concise reporting format has also been released for voluntary adoption by smaller unlisted companies, with the aim of encouraging more companies to take up sustainability reporting. The government’s intention in the long term is to use the information captured through these filings to develop a ‘Business Responsibility Sustainability Index’ which will be relied on to give procurement preference to companies that demonstrate responsible business conduct.
In several of the examples discussed in this note, the defaulting company has been operating under permissions granted by the relevant pollution control board. However, these permissions and licenses have not operated as a shield against liability for environmental harm. A combination of the absolute liability principle, the polluter pays principle, precautionary principle and sustainability principle, as applied by the courts over the years, can mean heavy liability for defaulting enterprises.
That said, the approach to environmental reporting and prosecution has admittedly been sporadic and reactive. India has historically lacked a sustained reporting and disclosure framework which tracks the environmental management record of its businesses. This is partly remedied by the BRSR reporting requirements discussed above but, as with other aspects of sustainability disclosure, India is nowhere near the global standard. While this lacuna has not held back socially responsible companies like Tata, Infosys and Wipro from drawing from international standards to establish a higher degree of care as part of their business practices, the same cannot be said for Indian industry as a whole - yet.
As such, the achievement of environmental goals in India in the immediate term is likely to require a parallel track approach. The first is via market-driven measures and disincentives (such as the incorporation of environmental compliance into investment criteria and preferential treatment from stakeholders of strong ESG performance – something that we are already seeing in India). The second is by bringing the law up to global standards on good governance practices with consistent disclosure, monitoring and remedial programs to ensure compliance. While some (global) Indian companies will always set a standard much higher than the regulatory requirements, the regulations themselves should be designed in a way so as to make the vast majority of the industry to peg themselves at a global minimum standard. The challenge here is to also ensure that Indian industry doesn’t lose its competitiveness due to additional compliances. Hence the focus should be less on check the box compliance and more on creating incentives (both market and regulatory) to comply. In the short term, regulatory incentives (and disincentives) may be a more effective tool to achieve compliance. However, as more and more consumers are willing to pay a premium for products and services sourced/manufactured ethically, this would in itself create demand for compliance.
MC Mehta v. Union of India, 1987 AIR 1086, SCR (1) 819.
Sterlite Industries v. Union of India, 2013 (4) ABR 858.
Satpal Singh v. IOCL, OA No. 738 of 2018.
Saloni Ailawadi v. Union of India, National Green Tribunal, Principal Bench, New Delhi (2019).
Sterlite Industries v. Union of India, 2013 (4) ABR 858.
As in the case of Uttar Pradesh Pollution Control Board vs. Modi Distillery, (1987) 3 SCC 684, where the Supreme Court held that the Chairman, Vice-Chairman, Managing Director and other members of the board can be held vicariously liability for environmental harm caused by the company.
Satpal Singh v. IOCL, OA No. 738 of 2018.
Uttar Pradesh Pollution Control Board v. Mohan Meaking Ltd, AIR 2000 SC 1456.