Overpromising and underdelivering on climate ambitions could lead to D&O claims, warns lawyer

Companies must be careful not to overpromise and underdeliver when it comes to climate change adaptation, warned a lawyer at a Commercial Risk webinar.

Risk managers were warned that climate-change litigation is on the rise and directors and officers face a very real threat of direct action in the future if they are not careful.

Speaking at the webinar titled ‘Climate change: the post-pandemic supply chain’, Simon Konsta, a partner at Clyde & Co, said: “We are already seeing climate-change litigation. We are seeing professionals being sued for not taking climate change into consideration on projects, for example.”

And he stressed that the “absolute weak spot” for corporates and their boards is disclosing climate ambitions and their risk profile. Such disclosure is mounting and will increase further as mandatory reporting rules spread.

“What we are seeing within the UK, across Europe and I suspect increasingly in the US, is that premium listed entities are moving rapidly from a voluntary explain regime in relation to climate risks, into mandatory. For example, in the UK the Financial Conduct Authority has said that by 2023 it expects a significant proportion of listed companies to give mandatory root-and-branch 11-point-tested climate disclosure,” said Mr Konsta.

“You get that wrong, you break a promise that you made to your shareholders and investors about your path to transition, and that has an impact on your share price – and you will have class actions and share actions. I think there is no doubt that litigation is going to increase around the world,” he added.

The other panellists agreed that risk managers have a real role to play in managing this risk and those related to climate change.

However, Carl Leeman, chief risk officer at Katoen Natie, suggested that not enough risk managers are involved yet. “If you look at the figures from a recent Ferma survey, it shows only 27% of risk managers have been involved in discussions around climate change and supply chain,” he said.

Adding: “But it does depend on the type of company you work for. If you are in the financial sector there is more pressure on sustainability than in smaller private companies.”

Mr Leeman acknowledged that it is not easy for companies to become greener. “In my own company we have literally been fighting for five years to get building permits, fighting local people because everyone wants green energy but not in their back yard,” he said.

Fabio Petruzzelli, natural hazards and climate change manager at AXA XL, believes insurers have an important role to play in driving the climate conversation and behaviour.

“As a big investor there is a role to play, which is being mirrored by the underwriting side. There are severe restrictions on underwriting in the coal and oil industries, for example,” he said. Mr Petruzzelli added that insurers can support sustainable innovations by providing cover.

Mr Leeman said ESG is embedded into his firm’s enterprise risk management framework, and driven by the risk management division. But he said this is not easy.

“For a lot of risk managers, it is very difficult to define and quantify sustainable risks and you cannot limit the financial consequences of a natural catastrophe by just insuring it. It is much more than that, so a lot of risk managers are struggling. For some people, it is about stepping out of your comfort zone,” said Mr Leeman.

Mr Petruzzelli said it is important to set climate-related goals and equally vital to understand how they are achieved through transition. “I think it requires coordination and collaboration to understand if the pathway is the right one and if it is sustainable as well,” he said.

Commercial Risk is hosting a Claims Management Conference on 27-29 April 2021. We have worked with a number of European risk management associations to bring together a group of experts in a virtual forum to discuss how best to adapt to emerging long-term risk trends and explore the type of claims patterns that these new exposures are generating. Click here to secure your seat at the event.

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