The evolving landscape of climate-related lawsuits and ESG regulations is placing new demands on companies, their leaders, and insurers.
Climate Litigation on the Rise
Climate-related litigation has surged since the 2015 Paris Agreement, affecting corporations globally. According to Clyde & Co counsel Dr. Rebecca Hauff, while most lawsuits have historically targeted governments, an increasing number are now directed at private companies, especially in the United States and Europe. Key legal challenges range from emission credit disputes to allegations of greenwashing.
Notable cases include claims against major players in the German automotive sector and a lawsuit brought by a Peruvian farmer seeking damages. This growing trend underscores the need for businesses to carefully navigate environmental responsibilities and compliance to mitigate potential legal risks. For insurance agents and insurers, understanding these emerging liabilities is crucial to properly advising clients and developing relevant coverage solutions.
Regulatory Pressures Intensify for European Companies
The increasing number of climate litigation cases goes hand in hand with a growing wave of environmental, social, and governance (ESG) regulations. Germany, for instance, has introduced stricter requirements for corporate accountability, as outlined by regulations like the German Supply Chain Due Diligence Act (LkSG) and the Corporate Sustainability Due Diligence Directive (CSDDD).
The Supply Chain Due Diligence Act, effective since January 2023, requires companies with at least 1,000 employees in Germany to observe human rights and environmental standards throughout their supply chains, imposing substantial fines for non-compliance. Meanwhile, the CSDDD mandates that companies implement climate change mitigation plans in alignment with the EU’s 1.5°C climate target, adding further pressure on firms to meet stringent sustainability criteria.
For insurers, these regulations create a heightened need to understand the scope of compliance obligations faced by their clients. Failure to comply can result in significant fines and liabilities, making tailored insurance solutions that address ESG-related risks more important than ever.
Greenwashing: A Growing Liability Concern
The European Union’s Green Claims Directive aims to tackle “greenwashing” by enforcing uniform standards for environmental claims in advertising. Proposed by the European Commission in March 2023, this directive requires companies to scientifically substantiate their “green” claims and submit them for independent verification.
Non-compliance could lead to fines of up to 4% of global turnover, along with exclusion from public tenders and subsidies for up to 12 months. This directive poses a significant risk for companies looking to market their environmental initiatives, adding to the liability risks for directors and officers. Insurers need to be aware of the greenwashing risks their clients face, as these can directly impact directors and officers (D&O) liability coverage and underwriting.
Implications for Directors, Officers, and Insurers
The evolving regulatory environment places heightened liability on directors and officers, particularly in light of the ESG regulations. Dr. Hauff points out that D&O insurers will likely face increased exposure as companies seek recourse against their directors for compliance breaches. In Germany, it remains uncertain whether courts will permit companies to recover regulatory fines from directors who have breached their duties, further complicating the risk landscape.
For insurance agents and insurers, it is vital to help clients maintain robust risk management practices, including comprehensive documentation and informed decision-making processes. D&O insurers, in particular, need to adapt their underwriting practices to address these evolving ESG-related exposures. Ensuring that clients have appropriate risk mitigation measures in place can reduce the likelihood of claims and improve the risk profile of insureds.
Adapting to a New Risk Environment
As climate litigation and regulatory requirements grow, companies must proactively adjust their risk management strategies to avoid ESG-related liabilities. For directors and officers, the focus should be on building sustainable, transparent business practices and ensuring proper compliance with emerging regulations.
For insurers, aligning underwriting strategies with these new realities is key. D&O insurers must ensure they are prepared for the changing liability landscape, which includes not only understanding ESG compliance but also offering products that meet these evolving needs. Insurance agents should prioritize educating their clients on the importance of proactive ESG compliance and the potential benefits of comprehensive D&O coverage in this shifting environment.