Environmental Liabilities: Directors and Senior Officers face a more penal environment

On 2 April 2025 we held our annual D&O Conference in conjunction with Crown Office Chambers where the attendees enjoyed a number of different sessions on a variety of subjects concerning recent legal or regulatory updates or trends relevant to directors and officers. The first session concerned a panel discussion on recent developments in environmental law and potential liability for companies and personal liability for directors and officers. I had the pleasure of hosting this session and was joined by Mark Balysz KC and John Cooper KC, both of Crown Office Chambers.  The session explored the increase in environmental prosecutions and the fact that directors and personnel are increasingly being held to account and facing criminal penalties in the event that companies cause environmental harm.

Alongside the prosecution of a corporate entity, prosecutions can be brought against directors, officers, managers and employees (where appropriate) and this is particularly relevant in small companies where directors are closely involved in the day-to-day operations of a company. Accordingly, it is imperative that environmental breaches are treated seriously when at the outset the offence by the company can clearly be attributed to the acts or defaults of a director or senior person, as in such circumstances then they also commit an offence.

Company directors should be aware that environmental liability can be both civil and criminal, and in terms of criminal breaches, liability can attach both to a corporate entity and to individual directors or officers. There are a range of criminal sanctions against individuals convicted of environmental offences which can include fines, imprisonment and/or disqualification as a company director. These sanctions are of course contingent on the applicable facts, the severity of the offence, and any aggravating or mitigating factors that arise.  One area discussed in some detail during our session were the relatively recent changes in Variable Monetary Penalties (VMP’s) which are civil sanctions issued by the Environment Agency. Previously there was a £250,000 cap, but this has now been removed and as such companies now face unlimited penalties for a range of environmental breaches.

Readers may well be familiar or have some understanding of prosecutions arising from a pollution event. However, there are a number of other areas where environmental liability may arise.  For example, directors are obliged to act in good faith and act in a way that would be most likely to promote the success of the company for the benefit of its members and shareholders, etc. In doing so, a director must have regard to the impact of a company’s operations on the environment and the community along with a duty to act with reasonable skill and care (Section 172 & Section 174, Companies Act 2006).  Breach of this duty could result in action by the company against the director or a derivative action against the director by a shareholder. We have seen a number of these actions in the US, and increasingly pressure by “green” groups in the UK, particular in respect of so-called “greenwashing” suggests that we will begin to see a number of cases in the UK. Liability for greenwashing may arise where misleading or incorrect statements are made by a director about a company’s environmental acts or credentials. Claims may arise from misstatements in prospectus or company listings or made as part of external corporate reporting. In addition, there is of course a common law cause of action for negligent misstatement and fraudulent misrepresentation, as well as statutory liabilities under the Misrepresentation Act 1967.

Climate change risks also need to be considered by directors in respect of their duties under the Companies Act 2006, along with sustainability issue raised by greenwashing.  Climate change litigation continues to expand, and such litigation brings into scope the duties and obligations of directors. Climate reporting and sustainability disclosure obligations are increasing both in terms of number and complexity, and this places greater responsibility and scrutiny on directors in respect of their own companies as well as companies in their supply chain. Put simply, the concern is that a failure to adapt to climate change and climate risks associated with the commitment to net zero, by actions or inaction by directors will negatively impact a business to the detriment of its members and shareholders. As such, arguably, a director who ignores or fails to address climate risks may be in breach of his/her general duties, and specifically Sections 172 and 174 of the Companies Act.

As we continue to see an increase in potential environmental liabilities for directors and   senior personnel, greater scrutiny is being placed on D&O insurance policies. Such policies will commonly provide cover for defence costs, and investigations, including criminal and regulatory investigations as well as claims in respect of listings or offering of securities. Some bespoke policies will also have pollution and contamination extensions which will provide cover for claims in respect of environmental damage caused by pollutants and in certain circumstances clean-up costs. However, such polices will often have defence costs limits which may not extend to prosecution costs and also exclusions in respect of bodily injury and property damage as well as the payment of fines and clean up/remediation costs. The terms and restrictions contained in each insurance policy and the extent of coverage will differ on a case-by-case basis.

As environmental risks and liability increase, we would advise companies to implement or review their environmental and risk management programmes as well as their ESG programmes and plans. Directors and officers, and senior management, all need to take a proactive role in ensuring such plans are able to address contemporary risks as well as the ever-changing landscape of environmental legislation.

During the conclusion of our discussion, John and Mark referenced The Water (Special Measures) Act 2025, which received Royal Assent in February 2025. The Act states that Ofwat will be required to set rules on renumeration and governance. Interestingly such rules will be required to ensure that water companies stop the payment of performance related pay to directors and chief executives where a company’s performance fails to meet specified standards. The requirements in respect of governance and renumeration/performance related executive pay will be implemented following a consultation period. Additionally, Ofwat will also be required to set rules to ensure that individuals in senior roles meet standards for “fitness and propriety”, including training and setting specified standards for individuals. They also highlighted that the Environment Agency is now able to take a similar approach to the Serous Fraud Office investigations and quoted by way of “warning”, “…powers already allow for prosecutions against senior management, where offences are committed with their consent and connivance or are attributable to their neglect. Whilst it is for the regulators to assess the merits of each case, prosecution of executives should be actively considered where appropriate”.

Whilst these rules may be specific to the water industry at present, I have no doubt that they are a pointer to closer public and press scrutiny and more rigorous regulation in respect of environmental liabilities in a number of industries.