ESG risks emerging as a future driver of liability losses

ESG-related risks are increasing, as governments and citizens exert pressure on businesses to change their ways for the greater good. Climate change is already a top boardroom issue, as companies face an array of physical- and liability-related risks from a more extreme climate and from the transition to a low- or no-carbon economy. However, social issues are also a growing area of exposure, from diversity and inclusion through to an organization’s impact on local communities and supply chains.

Climate change-related litigation is on the rise and is likely to become a significant source of liability exposure for companies and their directors in coming years. The directors and officers (D&O) insurance market has already seen claims related to climate change. California wildfires in 2018, for example, sparked climate change-related securities class action lawsuits. Companies increasingly face the prospect of litigation from activist shareholders seeking to influence company policy or compensation for alleged damage related to past pollution.

In a landmark case last year, a Dutch court ordered Royal Dutch Shell to cut its emissions by 45% by 2030 [1] after an environmental group argued the energy company’s fossil fuels activities threaten the human rights of future generations (Shell is appealing the ruling). Almost 2,000 climate change-related lawsuits have been launched around the world to date, of which around half have been filed in the past seven years, according to London’s Grantham Research [2] Institute on Climate Change and the Environment.

Another potential exposure comes from claims of ‘greenwashing’ or ‘climate-washing’ litigation, where a company is sued by investors for unsubstantiated or misleading ESG claims, or the failure to match Net Zero commitments with action. With growing ESG and climate change reporting requirements, as well as changing public and investor attitudes to global warming, companies and their directors will face growing liability from climate-related disclosure and breach of fiduciary duty.

In May 2022, KLM made the headlines after environmental campaigners said they were suing the Dutch airline over ‘greenwashing’ adverts. Lawyers from ClientEarth are supporting Fossielvrij NL, a Netherlands-based campaign group, to bring a claim that KLM’s ad campaigns give a false impression of the sustainability of its flights and its plans to address its impact on the climate [3].

The implementation of proposed ESG reporting requirements in Europe and the US will make it easier to hold directors to account for the impact of their organizations on the environment and society, as well as adding a further level of reporting and disclosure.

“In D&O and other financial lines we see increased claims activity around ESG issues,” explains David Ackerman, Co-Head of Global Practice Group for Commercial D&O and Financial Institutions Claims at AGCS. “For example, in the US and Europe we see growing environmental and biodiversity regulation, including reporting requirements. This has not led to large losses yet but may well do so in the future.”

ESG is likely to become a significant source of liability exposure in the future, Ackerman adds. “We would expect to see more frequency of ESG-related claims for financial lines and D&O, although particularly around social issues, it’s always difficult to foresee the issues, movements or trends that may drive claims activity in the future. We are very focused on analyzing and monitoring ESG risks and better understanding how they may evolve and translate to severity.”

D&O exposures from ESG continue to grow, adds Angela Sivilli, Co-Head of Global Practice Group for Commercial D&O and Financial Institutions Claims at AGCS. “Younger generations will not allow companies to continue investing in fossil fuels and carbon-intensive activities and will seek to hold companies and directors to account for their actions related to climate change, including claims for greenwashing. And while the focus of ESG is currently on climate change and board diversity, there are a host of potential topics for the future, such as biodiversity, sustainability and the wider impact of an organization on society.”

Environmental factors are also beginning to affect product liability and construction claims, according to Birgit Vosper, Head of Global Practice Group for General Liability Claims at AGCS. Extreme weather and unpredictable seasonal variations in climate could affect the quality and performance of building design and materials as the consequences of climate change intensify.

AGCS has been involved with a number of claims where products fail to meet performance expectations in changing environmental conditions. For example, AGCS has seen large claims where adhesives used in the windows of high-speed trains were affected by UV light, while claims have arisen from building cladding and paint finishes that failed to perform in extreme or unseasonal temperatures.