Increasing climate litigation to focus attention on ESG

Exclusions and climate risk policies may be on horizon

Climate change litigation is not new but cases are growing and the range of companies at risk has expanded considerably in recent years. As yet, exclusions in insurance policies are uncommon but limits on liability, reduced appetite and tougher terms and conditions may be on their way, with a growing focus on ESG, and there will undoubtedly be an impact on certain liability lines, notably D&O.

A report last summer by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science found that climate change litigation cases have been increasing markedly during the past six years, and pose a risk to an expanding range of companies and policymakers

The report, ‘Global trends in climate litigation: 2021 snapshot’, analysed figures from 40 countries and 13 international or regional courts and tribunals, and found 1,006 climate-related litigation cases have been filed since 2015, the year of the landmark Paris Agreement, compared with 834 between 1986 and 2014. There has been an upward trend in the number of cases brought by NGOs and individuals, particularly since 2017.

The most recent and high-profile case is the action brought against Shell’s board of directors by ClientEarth, seeking to hold the firm liable for failing to properly prepare for the energy transition. ClientEarth said this will be the first time ever that a company’s board has been challenged on its failure to properly prepare for the net-zero transition.

Wynne Lawrence, senior associate at Clyde & Co, says about half of climate litigation cases globally have been in the US. “So far, many of the most high-profile cases in the US have been against the government or the oil majors. However, in Australia we are seeing a growing number of climate litigation cases against fiduciaries and banks relating to their exposure to carbon-intensive projects and climate disclosures. There are more of these types of cases in the UK and other European jurisdictions, like Germany,” she says.

She adds: “We will see more climate litigation in parts of the world where there is an increase in amounts of climate-related loss. As we transition to a low-carbon economy and there is a perceived gap between ambition, public pronouncements and action, we will also see a rise in greenwashing or ‘climate-washing’ claims.”

Climate activist litigation
Toby Vallance, a partner in the global insurance practice at international law firm DAC Beachcroft, sees three distinct areas: climate activist litigation, primary-effects climate change litigation, and secondary-effects climate change litigation.

On climate activist litigation, he says a pattern is emerging whereby climate activists first target claims against national governments and, having succeeded there, the activists then go on to target big CO2-emitting corporates in the same jurisdiction. “There is no doubt that this climate activist litigation will continue to grow,” he says, “but to what extent such claims will succeed remains to be seen.”

He notes that, to date, the activists have had a fair level of success in civil law jurisdictions, such as the Netherlands and Germany, where the courts appear willing to expand the scope of tortious liability and duty of care. However, similar activists claims in New Zealand and Australia, both common law jurisdictions, have been rejected, with the courts reluctant to push the law of negligence as far as the courts of some civil jurisdictions have.

Primary-effects climate change litigation involves claims brought against large greenhouse gas emitters by claimants seeking damages/costs of mitigation due to loss or damage caused by climate change. Vallance says that as climate science continues to improve, this will encourage claimants to bring such claims, and the expectation is that ultimately more and more of these claims will succeed.

James Wickes, partner at RPC, says the main focus is likely to be on energy companies and those companies with direct interests in fossil fuels, and financial institutions that are alleged to have mis-sold investments.

“As for regions/countries, it is clear that certain jurisdictions are being more prescriptive than others about the levels of disclosure required from public companies about their emissions levels,” he said. “The EU, Japan and the UK are all leading the charge in this respect. However, the US has last week announced new proposed rules approved by Washington that publicly-traded US companies will be required to disclose their greenhouse gas emissions and their approach to managing climate change risks. These rules are unlikely to come into effect in the US until 2024 at the earliest.”

Exclusions and limits on the way?
What does this all mean for insurance and the ability to claim on liability policies – will there be growing exclusions and limits to liability policies? Potentially yes, says Vallance, but it remains to be seen what this might look like. He notes that the Chancery Lane Project has developed a suite of climate insurance clauses but it is not yet clear whether insurers have begun to adopt these.

“The drive towards ESG disclosures will likely have an impact on underwriting appetite, with insurers needing to evidence that their book of business fits with their net-zero strategy. For example, Zurich Insurance Group announced last year that it will no longer underwrite new greenfield oil exploration projects unless ‘meaningful transition plans are considered to be in place’. From that, it can be foreseen that underwriting questionnaires will be increasingly ESG-focused, potentially leading to limits on liability and new exclusions,” he explained.

RPC’s James Wickes says that in the main, fit-for-purpose policies will provide coverage for climate-related claims and investigations. But he adds: “The key thing brokers will be looking out for is if insurers start to broaden out certain exclusions, such as the pollution exclusion. Also, we may well see insurers seek to sub-limit their exposure to certain insureds with a higher risk profile from a climate perspective.”

Specific climate risk policies
Does this mean that new specific policies aimed at climate risk will start to appear?

Clyde & Co’s Lawrence believes the entire market is still getting to grips with the scope of climate risk in all its facets – including liability risk – and says this will be “an ongoing and iterative process”. She adds: “As risks become delineated, there will be further understanding of what can be mitigated or what needs to be done to plot a transition pathway. The multifaceted nature of climate liability risk means that there needs to be engagement between all parts of the financial sector to lessen their exposure. Businesses will want to manage down their risk before it is transferred.”

Vallance says he doesn’t think new policies will appear immediately but new climate change clauses may begin to appear in general liability, environmental liability, product liability and D&O covers. “In time, we may begin to see specific climate change risk products. One such area might relate to insurance for legal defence costs arising from climate-activist litigation. As these are not claims for damage/injury, in theory there is no trigger for cover under the standard liability policies for legal defence costs. Depending on insurers’ appetite for risk, there is a potential gap for such a product,” he says.

Impact on D&O insurance
Perhaps the biggest and most immediate impact will be on D&O insurance. Lawrence says directors’ duties around climate risk are evolving and standards of care are rising, noting that there are already examples of climate claims being made against fiduciaries for investment decisions, disclosures or climate risk management.

Vallance says a key driver is ESG disclosure requirements. “While not yet mandatory across the board, they are increasingly the focus of scrutiny by climate activist shareholders looking to reveal greenwashing. In the context of climate activist litigation, through which companies are being forced to accelerate their net-zero strategies beyond what may be feasible, the climate change transition risk is being exacerbated, which will likely give rise to further derivative-type actions where companies fall short of their ESG targets,” he says.

ClientEarth’s claim against Shell may well motivate other investors to turn the magnifying glass on their own investments and, if they don’t like what they see, may shift their focus to the actions (or inactions) of the board, says Wickes.

“If it wasn’t apparent enough already, ESG must be high on the priority list for companies and their directors, who must ensure all risks are disclosed and managed adequately. Directors may want to establish a committee with responsibility for the company’s ESG objectives and developing their ESG policies, as well as future-proofing their strategies. One thing is for sure, investor relations and shareholder engagement are more important than ever. Boards that engage with and listen to their key stakeholders’ concerns will be better placed to navigate the growing risk of ESG-related shareholder actions,” he says.

He adds that boards and their D&O brokers will be expected to provide greater information and specificity on how companies are managing, disclosing and mitigating their ESG risks, while a lack of clarity and direction, especially from companies in the most exposed sectors to ESG risks, could make for some difficult renewals.

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