What Will it Take to Deter Corporations from Violating Environmental Regulations?

Giuilano Stefanutti

Associate Editor

Loyola University Chicago School of Law, J.D. 2023

Beverage corporation Diageo has recently been fined £1.2 million for violating environmental regulations. Diageo is a multinational corporation that owns a variety of liquor brands, including Johnnie Walker, Tanqueray, Smirnoff, Captain Morgan,  Don Julio, Crown Royal, and several others. Headquartered in England, it operates all over the world, with its North American subsidiary being one of its most profitable. In violation of UK regulations, the beverage company has failed to report the environmental impacts of some of its sites for the past six years and has failed to secure permits for the relevant operations. The corporation alleges that these omissions were the result of an administrative error.

Diageo and the Emissions Trading Scheme

Under the UK’s Emissions Trading Scheme (ETS), companies are required to disclose all their operations that contribute to greenhouse gas emissions, and to purchase permits for such operations. The maximum permitted levels of emission are gradually decreasing as part of an attempt to drive the industrial sector towards carbon-neutral operations. Under what is known as a ‘cap and trade’ system, each individual actor is only allowed to obtain permits for a certain amount of emissions, but those permits can be sold between entities. This creates a market incentive for each organization to lower its greenhouse gas emissions. It also offers each individual participant more leeway than an absolute cap on each individual’s emissions, but still limits total emissions. Diageo has acted in violation of these regulations for the past six years by operating three whiskey production plants – the Roseisle Distillery, the Glen Ord Distillery, and Burghhead Maltings – without disclosing their environmental impact or buying permits. In response, the Scottish Environmental Protection Agency (SEPA) fined Diageo £1.4 million, which the company appealed and successfully lowered to £1.2 million. James McGeachy, the SEPA’s carbon reduction, energy and industry manager, has commented on the imposition of these fines: “SEPA is clear that compliance is non-negotiable… These civil penalties demonstrate SEPA’s commitment to enforcement of obligations under ETS…  These penalties should serve as a warning to not only the company involved, but all others in Scotland, that we will take the appropriate action to ensure compliance.” These statements demonstrate a laudable opposition to the tendency of large corporations to flout environmental regulations when it suits them. However, whether the imposed fines will be sufficient to achieve their intended purpose is another question.

Do fines actually work?

While this is Diageo’s most recent fine for violating regulations, it is not the first. In 2020, Diageo paid a $5 million penalty for failing to disclose certain market conditions affecting its North American subsidiary, leading distributors to buy higher amounts of beverages from Diageo than customers were likely to buy otherwise. While that incident was not related to environmental concerns, it demonstrates another recent incident where the corporation failed to make required disclosures. That penalty may have been motivated by sentiments similar to McGeachy’s, seeking to deter similar future conduct from this and other companies, but given that Diageo continued to conduct unauthorized operations and omit key disclosures, it seems dubious that the fine imposed in 2020 accomplished that purpose.

With this in mind, one might reasonably doubt the effectiveness of imposing a smaller fine in response to the more recent issue. One might also reasonably wonder how many other major corporations are flouting environmental regulations, and whether they will be deterred by fines. As a tool for regulating the conduct of large, wealthy corporations, fines tend not to be very effective. There are several reasons for this, not least of which is the fact that they tend to simply not be large enough. Diageo’s net worth has been reported to exceed $102 billion, so it has been able to pay both the $5 million and £1.2 million fines without suffering serious consequences. When a corporation is rich enough, punitive fines become more akin to a business expense than a genuine deterrent. As the harmful effects of climate change continue to intensify, it becomes more and more vital to ensure that regulations related to environmental impact are followed. Though noncompliance rates are inherently difficult to track – many violations go unnoticed or unreported – research has shown that it is disturbingly common. The linked research from Harvard focused on noncompliance in the United States, but one would be wise to ask about the extent to which environmental regulations are followed in other parts of the world. Assuming that fines alone are insufficient to ensure compliance, it is necessary to develop alternative strategies. For instance, some have suggested imposing criminal penalties on the individual corporate executives whose decisions cause their organization to break the law. This approach is intended to circumvent the issue of corporations becoming too wealthy for fines to be a genuine burden to them. Whatever it takes, it is essential to ensure that large corporations still follow the law.