Legal Focus: Greenwashing is a growing risk for insurers
Most businesses have developed, or are developing, ESG strategies from outdated corporate social responsibility models
A greenwashing lawsuit tsunami has been predicted. While directors and officers will feel the impact of the first wave of litigation, it is inevitable that a second, smaller wave will hit those advising on ESG issues and strategies
Increasingly, businesses are under pressure from regulators and stakeholders to demonstrate their environmental, social and governance (ESG) performance.
Since April 2022, large companies have been required, as part of their annual reporting, to report on ESG strategy and performance (with a particular focus on climate disclosures). However, most businesses have developed or are developing ESG strategies from outdated corporate social responsibility models.
Greenwashing happens when a business overstates its sustainability credentials, whether unintentionally or deliberately. Greenwashing to attract investors, customers or employees (or to appease the regulators) is abhorrent, particularly in the context of the mounting climate crisis. Understandably, the regulators are expected to take a hard line against “greenwashers” and their directors and officers.
In recent years, specialist ESG consultants have emerged or have rebranded their previous offerings to include advice on ESG issues. Management consultants are also making a splash in this space, offering multi-disciplinary advice across the whole spectrum of ESG themes. Along with traditional professionals, who tend to provide more discrete advice on specific aspects, ESG consultants are helping to shape ESG strategies.
If the consultant gets their advice wrong and their client falls short in discharging its regulatory obligations or misrepresents its ESG credentials, that can have a devastating effect, not just on brand and reputation and, consequently, share price – but even on the existence of the business. In today’s climate, greenwashing really could become tantamount to commercial suicide.
Traditional professionals operating in this area are more likely to be focused on the “E” in ESG – helping businesses to look at their carbon emissions and their contribution to climate change.
Professional indemnity claims
Businesses are looking closely at the energy they use and the waste they create. Any professional involved in making carbon or energy assessments or in helping businesses to take steps to mitigate their impact on the environment, may face professional indemnity claims if the advice they give is not provided with reasonable skill and care or falls foul of a contractual requirement. When the ramifications of greenwashing can be so serious, significant claims may arise from small pieces of work.
It is not difficult to imagine a situation where directors might face shareholder class actions for greenwashing in particulars and prospectuses under sections 90 and 90A of the Financial Services and Markets Act 2000 (so long as they can prove dishonesty or recklessness).
If penalties are issued or civil claims are pursued against companies or their directors, those providing advice that forms the basis of greenwashing may well face professional indemnity claims.
As part of their own ESG strategies, insurers are looking at ways to attract professionals operating in the ESG sector through specialist products and specific wordings. Management consultant professional indemnity policy wordings are being modified and branded as ESG consultant products.
Insurers looking to attract those professionals are reconsidering the drafting of their policies and considering broader coverage, where needed. For example, a standard pollution exclusion that excludes claims arising “indirectly” from pollution may exclude a claim against a professional who provides advice to invest in an ESG-friendly business, which turns out not to be so green.
A penalties and fines exclusion may preclude a claim against a professional for recovery of civil penalties. In future, those types of exclusion may render certain insurers unattractive to professionals advising on ESG-friendly investments.
We expect some insurers have produced separate ESG questionnaires for any professional insured requiring cover for providing advice (however discrete) on ESG strategy-setting and it is certainly the case that proposal forms are being updated to include questions related to ESG.
Set against the background of litigation that seeks to hold corporates responsible for the global climate crisis (see, for example, Saúl v RWE), insurers will be taking extra care when insuring professionals advising clients in the energy and power sector.
Insurers and brokers are developing risk management tools to help their clients navigate the ESG landscape, producing guides for their clients on how to prepare ESG strategies and horizon-scanning in relation to future regulations.
For brokers, the main challenges will be to establish what needs to be disclosed to insurers to discharge the duty of fair presentation and to ensure the level of cover is adequate. The heavy regulation of certain sectors puts added pressure on brokers placing directors’ and officers’ cover for clients in those industries.
Bloomberg has predicted a “greenwashing lawsuit tsunami”. Without doubt, directors and officers will feel the impact of the first wave of litigation. However, it does seem inevitable that a second, smaller wave will hit those advising on ESG issues and strategies which turn into greenwashing statements.
Fleur Rochester is a partner at Kennedys