Greenwashing, climate change disclosures, and financial lines risks
With the increased attention by regulators, investors, and businesses to environmental, social and governance (ESG) policies, insurers in the financial lines sector are evaluating the potential exposure for such risks. One such risk is the potential for investigation of and litigation over climate-related disclosures.
On March 21 2022, the SEC announced a proposed rule requiring climate-related risk disclosures, which could lead to possible liability for non-compliance under the Securities Act of 1933 or the Securities Exchange Act of 1934. The proposed rule would require public companies to disclose their greenhouse gas emissions (including upstream and downstream suppliers’ emissions for certain larger companies), material climate-related risks to the company and business, and climate-related risk governance and oversight processes in place at the board and management levels. As of the date of this publication, the proposed rule remains open to subject to public comment.
As of May 31 2022, the London School of Economics has identified nearly 2,000 climate change litigation cases globally, with the bulk of them filed in the U.S. The majority of these cases concerned environmental regulatory actions or tort claims related to environmental or climate issues, but a growing number related to financial lines exposures. One key category of climate change litigation involves allegations of inadequate environmental disclosures and disinformation. These claims are known as 'greenwashing', or sometimes 'climate-washing'.
Greenwashing or climate-washing claims generally fall into three categories of misrepresentations regarding: (i) corporate and governmental commitments, (ii) product attributes, and (iii) disclosure of climate change investments and related financial risks.
One example of corporate commitments includes the lawsuit filed against France’s largest energy company, TotalEnergies, in March 2022. A suit by a group of environmental organizations accused the energy company of a violation of the European Unfair Consumer Practices Directive. The environmental organizations allege that TotalEnergies misled consumers by publicly committing to reach net-zero carbon emissions by 2050 despite plans to produce more fossil fuels, including the development of a multi-billion dollar oil project in Uganda. Another recent example of alleged failure to comply with corporate commitments was the US$1.5 million fine imposed by the SEC on BNY Mellon for omitting or making misleading statements about the ESG investment considerations made in connection with its managed mutual funds.
The second category of greenwashing claims concerns misrepresentations regarding the climate-friendly attributes of products. These 'product attributes' claims are exemplified in the securities class action lawsuit filed against the oat milk manufacturer Oatly Group AB in July 2021 in the U.S. District Court of the Southern District of New York. Shareholders alleged that Oatly misrepresented in its regulatory filings the environmental benefits of oat milk production in comparison to cow milk production. Oatly’s production techniques were touted as environmentally friendly, when in reality they emitted comparable greenhouse gas emissions, required similar land usage, energy consumption and transportation costs as dairy production. Its practices also involved suppliers and related manufacturers who engaged in deforestation and generation of dangerous volumes of wastewater. This case remains pending.
The third category of greenwashing allegations involves the misleading disclosures about companies’ investments and risks related to climate and environmental safety. A striking example of this type of claim is illustrated by the SEC’s enforcement action, brought by its newly constituted Climate and ESG Task Force, against the publicly traded Brazilian mining company Vale S.A. (Vale). In April 2022, the SEC filed a complaint asserting that Vale committed securities fraud by intentionally concealing that its Brumadinho dam might collapse, and that the flow from the dam would cause significant environmental damage.
But how has the increased scrutiny on climate-related disclosures actually impacted greenwashing litigation?
Only 20 greenwashing cases have been filed with courts in the United States, Australia, France and the Netherlands since 2016. 16 of those cases were filed in the United States. However, ten of those cases were filed since 2020 and all except for one was filed in the United States. Since January 2022, at least five putative class action lawsuits have been filed in the United States, alleging misrepresentations regarding sustainability claims in advertisements.
The rate of 2022 greenwashing case filings in the United States continues to keep pace with 2021 filings. Since 2016, the rate of greenwashing case filings has increased, with half of such cases being filed in the past two years. The prospect of heightened SEC environmental disclosures and regulation of sustainability claims may provide additional avenues for greenwashing claims by shareholders. Similarly, the diversifying nature of climate-related claims (including consumer protection, securities fraud, and tort liability) may pose evolving avenues for exposure.
But there are also other forces that may lessen the potential for climate-focused legislation and litigation. Although proposed climate change legislation like the SEC’s disclosures and the climate protection provisions of the “Build Back Better” Bill have been introduced, these proposals are hotly contested and could easily be set aside if opponents of this legislation win in upcoming election cycles. Moreover, while some support the idea of a formalized process of environmental disclosures, others are concerned about what climate-related information may be considered material to the reasonable investor and how that may change over time. There is also concern that the non-financial expertise required to make the disclosures proposed by the SEC is outside the scope of most companies’ capabilities and would necessitate assistance by outside auditors. Thus, the current focus on climate-related regulation may wane depending on the political and social landscape, which could impact the rate of litigation over greenwashing and other environmentally motivated claims.
In assessing risk for these potential liabilities, underwriting and claims professionals may wish to evaluate the extent to which an entity has made commitments toward climate actions (specifically net-zero strategies and climate pledges) through advertisements, internal policies, or otherwise, review whether any steps have been taken to achieve those goals, and consider whether that entity’s business may involve any negative environmental impacts involving climate issues. Inquiry into these areas can assist insurers in evaluating the potential risks that litigation concerning sustainability practices and disclosures may bring regardless of the formal regulatory policies enacted.