Regulatory changes are gathering pace

Companies are currently staring down the barrel of new environmental reporting legislation.

The recommendations of the Taskforce for Climate Related Financial Disclosure (TCFD) will inform two new prototype global standards: one on climate-related disclosures and the other on general sustainability disclosure requirements – both of which will be overseen by a new regulatory body - the ISSB (International Sustainability Standards Board).

These and the new UK requirement for large companies to publish net zero transition plans by 2023 and the European Parliament Directive on Corporate Due Diligence and Corporate Accountability represent a substantial increase in expectations and in corporate environmental responsibility.

This plethora of regulation is contributing to a complex landscape which will require a high level of corporate focus to ensure compliance and manage reputation risk.

Legal threats are mounting

While expectations to deliver growth and investment returns reman undiminished, businesses are also operating in a world where stakeholders expect better in terms of environmental risk management. Activist shareholders and pressure groups around the world are demanding that boards behave differently.

  • As of May 2021 there were 1,841 climate litigation cases ongoing or concluded around the world.3 This includes a Dutch court ordering an oil major to cut its CO2 emissions by 45% compared to 2019 levels.4
  • In September 2021, climate groups Greenpeace and DUH warned a number of car manufacturers and an oil and gas company that they would take similar action to that brought against an oil major.5
  • This year saw a case brought against French supermarket, by indigenous peoples from the Brazilian and Colombian Amazon and NGOs from France, and the US warning of environmental supply chain violations and threats to biodiversity triggering further climate change impacts.6
  • At the beginning of September 2021, two French NGOs - Notre Affaire à Tous and POLLINIS - commenced the first ever legal action against a state for its failure to protect biodiversity. The case against the French government was brought during the World Conservation Congress in Marseille which called for governments to protect at least 30% of the planet by 2030.7
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In the US there have been attempts at climate litigation – municipalities filing suits against major oil companies for example on the premise that their product has caused emissions that have contributed to climate change which in turn has caused property damage due to flooding and weather related catastrophes. We are still in the early stages of this type of litigation and its potential impact could have far reaching impacts for many lines of insurance as well as companies’ reputations.

David Schechter David SchechterFocus Group Leader,
Environmental Claims, Beazley

There is a paradox here: while litigation is driving a heightened focus on environmental risk, it could be diverting companies away from a more fundamental consideration of the risks themselves, particularly among businesses looking to defend the status quo, perhaps by utilising the provisions of the Energy Charter Treaty (ECT) which provides a mechanism for companies to sue governments for compensation for lost profits due to policy changes.8

Those companies that get the balance wrong risk being tied up in lengthy legal cases and subject to substantial fines. Others may see legal pressure as a stimulus for meaningful change in how they operate.

ESG concerns dominate

The rising pressure on companies to provide guidance about their environmental, social and governance (ESG) credentials is both an opportunity and a risk.

On the one hand it clarifies what is expected of companies. On the other it poses risks that businesses, in their haste to comply with new regulations, exaggerate their green credentials or release inaccurate, misleading or misstated information, which could in turn result in shareholder or derivative suits.

Activists and regulators alike are intensifying scrutiny on how companies disclose exposure to climate change. Introducing new regulations makes it clear what companies are expected to do, but difficulties arise when you get a spiral of public opinion and pressure driving ever more regulation. This can lead to issues in terms of reporting and misrepresentation, and the potential for litigation.

Companies need to ask themselves searching questions about how their business is dealing with environmental concerns. The insurance industry also needs to ask questions about how companies are monitoring and managing risk in these areas and this should certainly be part of every D&O renewal meeting discussion.

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Already there have been claims where a business has suggested that a product or production process is greener than it really is. That generates a reputational issue which impacts share price. That in turn creates the opportunity for a class action. The trend is gathering – the more public opinion pushes for greener, more environmentally friendly products; the more companies want to be seen to be ESG friendly – and the more likely they are to over-estimate their capabilities.

Catherina McCabe Catherina MacCabeFocus Group Leader,
International Management Liability, Beazley