ESG Blog: Companies must disclose environmental, social and governance procedures and manage liability risks

ESG Companies must disclose environmental, social and governance procedures and manage liability risks

Sylvie Gallage-Alwis, Paris partner, and Kate Gee, London counsel at Signature Litigation, consider how the impact of liability and litigation risks, and environmental, social and governance issues will affect insurers.

ESG issues have become one of the most important challenges currently facing financial institutions and other companies. The challenge is no longer just ethical, but also economic: ESG risk is becoming more prevalent as increasing investor demand for sustainable products combines with growing pressure from regulators.

Banks and insurers are facing pressure from environmental groups to withdraw their support from industries involved with carbon-intensive activities, such as new fossil fuel projects. They are also being challenged over their financing of a broader range of environmentally damaging industries.

Considerable progress has been made in recent years on international co-operation to address climate change and greenhouse gas emissions, for example The Paris Agreement. The resulting commitments are now materialising as government policy and regulation in a wide range of areas, including climate change reporting ESG-related disclosure and greenhouse gas emissions controls.

New regulation, together with the potential inconsistent approaches in different jurisdictions and a lack of data, presents significant operational and compliance challenges for companies. It also creates litigation risk.

To date, ESG-related claims have been used by activists seeking to advance climate policies and drive behavioural shifts. In 2017, investors sued the Commonwealth Bank of Australia over a proposed investment in a controversial coal mine before withdrawing their claim when CommBank increased its disclosure. Client Earth recently forced the closure of Bełchatów in central Poland – one of Europe’s largest coal plants. There are other pending claims by non-governmental organisations and activists that aim to get disclosure about banks’ activities.

Meanwhile, regulators have increased the obligations on companies to make disclosure about ESG matters. Financial institutions are increasingly in the spotlight in relation to greenwashing, which involves a company providing misleading information in order to present a more environmentally friendly and responsible public image, service and/or product.

The UK is set to become the first G20 country to make it mandatory for the UK’s largest businesses to disclose their climate-related risks and opportunities in line with Task Force on Climate-Related Financial Disclosures recommendations. It follows the publication of the UK’s Net Zero Strategy, and forms part of the government’s commitment to making the UK financial system the greenest in the world.

The UK is set to become the first G20 country to make it mandatory for the UK’s largest businesses to disclose their climate-related risks and opportunities in line with TCFD recommendations. It forms part of the government’s commitment to making the UK financial system the greenest in the world.

However, companies and financial institutions may struggle with TCFD implementation because it is difficult to identify, collect and analyse the relevant data across the breadth of their organisations and operations in sufficient detail. It requires attention at all levels of a company, from the board to the product teams, the client relationship teams and beyond. ESG disclosure needs to be brought into the heart of an organisation’s reporting process.

There is a concern that ESG disclosures will create liability risk for reporting entities and/or litigation in the jurisdiction where the company is based, or where investors are located and damage has been suffered. Management of that risk should be at the forefront of a company or financial institution’s approach to compliance with ESG obligations.

In terms of approach, methodology and any limitations, disclosure needs to be accurate and transparent. If not, a company risks facing a claim for failure to disclose, or for disclosure of misleading, inaccurate or incomplete information. More ESG-related claims against financial institutions are anticipated. The scope of such claims is expected to become broader to include claims about overstating the green credentials of their products and mis-selling claims, for example, if products turn out not to have the advertised ESG credentials and so investors suffer consequential losses.

Beyond accurate and complete disclosure, a firm’s legal or litigation function can monitor – and help to manage – the litigation risk by tracking market developments and industry standards. It can also monitor emerging trends in ESG-related litigation and disputes involving mis-selling and misstatement. The TCFD obligations are ongoing, so companies must be prepared to adapt their processes to reflect how the market responds to ESG-related obligations and the types of claims that are being brought.

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Post’s ESG Exchange

This article is part of Post’s ESG Exchange from 7 to 18 March featuring free to access  webinars, blogs and interviews focusing on ESG.

Today ESG is a powerful tool in the insurance industry, presenting both risks and opportunities for businesses. Register now to watch any of the ESG focused webinars, and have the opportunity to explore and read future content online.

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