Shifting climate litigation against corporates and D&Os ripe for growth

The current shift in climate litigation and ESG regulation means that corporates and D&Os face mounting risk, with things even more tricky for multinationals as major jurisdictions move at different paces, according to a recent expert panel discussion hosted by Commercial Risk. Corporate risk and insurance buyers were urged to work closely with advisers and insurance partners to stay ahead of new ESG rules driving climate-related litigation.

Directors and officers are in the firing line from innovative shareholder claims challenging their decisions on ESG issues, while consumers and NGOs take aim at corporate behaviour and greenwashing, said the experts on the webinar.

“It has never been tougher to be a business leader”, with climate-related ligation and wider ESG issues adding to the existing and growing list of risks facing today’s directors, said Tom Thornberry, global chief claims officer at Zurich Insurance.

Climate litigation has been rising, with almost 2,200 climate cases recorded across 65 jurisdictions in 2022, up from 880 in 2017. And this figure is likely to rise, according to the panel, which also included DAC Beachcroft partner Graham Ludlam and Clyde & Co head of financial institutions and D&O James Cooper.

Climate litigation up to now has mainly focused on polluters and their direct contribution to climate change, but things are changing, according to the lawyers.

“They were at one stage the only targets really,” said Cooper. “[However] a shift is underway. We’re seeing cities, counties, states, companies and shareholders all starting to look for innovative ways to claim from corporates where they think their activities have contributed to climate change or even for alleged failures to protect assets and investors,” he said.

Claimants are less likely to be driven by monetary gain and more focused on changing corporate behaviours, as seen in recent cases brought by NGOs, Cooper explained. “The definition of a win is beginning to move away from just damages,” he said.

“That is the distinction between climate change and other socially driven mass litigation,” Cooper said. But the panel agreed this could change in time, with the plaintiffs’ bar likely to monetise claims in future to significantly increase the numbers of climate-related litigation cases and class actions.

An increasingly connected world through social media has also changed exposures for organisations, according to Thornberry. “We’re seeing individuals almost single-handedly able to begin movements that can have direct impacts on corporates and their D&Os. There’s a greater readiness to call out wrongdoing,” he observed.

Research by the Grantham Institute published earlier this year revealed that half of climate change-related litigation cases in 2023 resulted in judicial outcomes favourable to litigants.

Thornberry said regulatory scrutiny, shareholder and consumer actions are standard risks for D&Os, but climate-related litigation is evolving. “The mechanisms of how actions are brought haven’t changed, but the drivers are changing and climate-related litigation is a driver,” he warned.

Governments around the world are moving at different speeds on regulations to curb corporates’ impact on climate change and boost disclosures about their climate risks. Ultimately, new regulations increase the risk of corporate litigation and claims against D&Os, the panel said.

Comparing the pace of change across the US, UK and the European Union, Ludlam said the EU is out in front, proposing more interventionist measures, with the UK seen to be taking the middle road and the US taking a more benign approach to regulation.

Cooper said the US approach reflects the current political divide. “We have to watch out for growing anti-ESG sentiment in the US, which is bucking the trend,” Cooper said. Europe is definitely “ahead” on ESG, and corporates operating in the region are seeing “some really hard rules coming through”, he added.

Regulation in this area is very much in its infancy, according to Ludlam. But it is developing at a pace, leaving corporates to face multiple new rules for each jurisdiction, moving at different speeds and different strengths.

“It’s a crucial factor to take into account. Any organisation that does not take it into account may expect, certainly in the UK and EU, regulatory scrutiny and ultimately climate-related litigation,” Ludlam said.

Greenwashing is a key area for new regulations and therefore climate-related litigation, with corporates increasingly required to publicly disclose carbon-cutting targets, with corporate policies and D&Os more exposed to regulatory scrutiny and legal challenge.

Labelling and marketing for sustainable investments products is a priority area for regulators currently, Cooper said. This where we are likely to see more action, particularly at EU level and in the UK, where the Financial Conduct Authority has made it clear that greenwashing is in its sight, he added. Meanwhile, the US SEC’s Names Rule sets “really quite a high barrier” for investment funds to use green or sustainable fund names, said Cooper.

Greenwashing actions to date have provided key lessons for corporates’ risk mitigation going forward. A lot of this is around educating the board and employees on the fundamentals of ESG and embedding ESG into risk management procedures. Here, some corporates may even introduce a bespoke ESG policy, Cooper said.

Corporates need to stay on top of this fast-moving area and evolving regulations to avoid the risk of greenwashing, Cooper said, highlighting the FCA’s anti-greenwashing rule due to take effect at the end of May.

“Trying to make sure you really stay ahead of what’s coming down the track is going to allow you to mitigate the risks that are coming through a lot of these changes,” Cooper said.

Crucially, corporates need to have greenwashing risk top of mind when making public statements. They must also have oversight of what statements are made, consider who’s checking statements and who’s responsible for external communications.

“Getting statements to be clear, measurable and accurate is so critical,” Cooper said. “That comes through almost all of the regulations at the moment.”

Communication with insurers and brokers will be essential to protect corporates and D&Os from the growing threat of regulatory and legal action, the panel agreed. Thornberry said establishing long-term relationships, beyond the annual renewal, will be crucial as the threat of climate-related litigation evolves.

“For this risk in particular, working in partnership with your broker and with your insurer is so important to stay on the same page and understand how this risk is evolving,” Thornberry said.

This discussion was from the latest in our webinar series. For future events please click here. For past webinar recordings click here.

The inaugural ESG Insight and Intelligence Conference will take place in London on 26 June. This event will examine the European regulatory demands associated with ESG, look at the impact on the corporate risk profile and consider how these risks can be managed more effectively. It will also drill down on the increasing demands and disclosures requirements placed upon insurance buyers by insurance carriers. For more information, please visit https://events.commercialriskonline.com/ESG-24