This article was first published by BRINK here.
The number of climate change-related litigation cases has more than doubled since 2015, reaching a total of 2,000 recorded cases worldwide. In the past, climate litigation has been mostly an instrument used to enforce or enhance climate commitments of governments or major emitters. But over time, climate litigation has broadened to include disingenuous climate commitments and greenwashing.
Swenja Surminski of Marsh McLennan Insights is joined by colleagues Maureen Gorman and Stephanie Manson, as well as Nigel Brook of law firm Clyde & Co., to discuss what to make of climate litigation’s evolution and how to prepare for its expanding risks.
On sectoral and geographic hot spots:
The targets for litigation are still mainly governments. But we’re increasingly seeing companies and now sometimes directors being sued as well. The obvious sectors … energy, oil and gas, and now power as well. But also … automotive, cement, airlines, and also in investment and banking, where there’s strategic litigation trying to force investment funds and banks down a certain path. In terms of geographies … about three-quarters of cases are in the USA. But where we’re seeing big rises and real hot spots include Australia … Europe … specifically Netherlands, Germany, and, to an extent, the U.K.
On climate litigation’s evolution:
Climate litigation risk is evolving … we’re seeing novel approaches, so whether ultimately from a directors and officers point of view, it will end up being a risk similar to other event-driven style D&O claims, or whether there will be new theories of liability remains to be seen.
On Greenwashing:
Greenwashing is a really acute risk at the moment. … Investors, customers, rating agencies, to an extent, regulators now putting pressure on companies to report but also to declare ambition, so companies feel obliged to say something … but can they actually deliver? … Is it accurate, if it’s about a target … is it actually achievable? … Maybe when they get into fine detail [they discover] you can’t do it.
Transcript
Swenja Surminski: Welcome to this Brink podcast on climate litigation. I'm Swenja Surminski, Managing Director at Marsh McLennan Advantage and responsible for thought leadership on climate and sustainability. Today's topic is not really new, but it has grown and important in the face of a changing climate and rising losses and damages. The number of climate change-related litigation cases has more than doubled since 2015– reaching I believe– a total of 2,000 recorded cases worldwide. And almost every large law firm now has a climate change team, and judges have been reading up on the science to better understand the complexities and challenges that this topic brings with it.
Swenja Surminski: Over the last few years, climate litigation has become some sort of instrument used to enforce or enhance climate commitments with governments or major emitters – the so-called carbon majors as the main targets – usually challenging their responses to climate change. But as the world gets hotter, there's also now growing focus on possible legal recourse for the losses and damages resulting from climate change. While initially seen as a form of protest by activists, the focus of climate litigation has broadened with investors increasingly alert to disingenuous climate commitments and greenwashing. And there are indeed first signs that this is also affecting insurance markets, with some reports of rising costs of directors' and officers' liability insurance, or some climate exclusion imposed by underwriters. And indeed, the UK's Bank of England warns the industry of a potential wave of claims related to breaches of fiduciary duty or the financing of emission heavy industries. So what to make of this and how to prepare which trends to look out for? These are some of the questions that we want to discuss today in our podcast with our expert panelists, who have kindly joined me here today and who I very warmly welcome. We have Maureen Gorman, Senior Client Advisor at Marsh U.S. Fin/Pro (Financial and Professional Services).
Swenja Surminski: We have Stephanie Pestorich Manson from Marsh UK, Head of Management Liability at Fin/Pro (Financial and Professional Services). And Nigel Brook, Partner at the law firm Clyde & Company. Many thanks for joining me.
Swenja Surminski: Nigel, let's start with a reflection on recent developments in the climate litigation space. What is your take on what's going on? Working for a law firm, you're very close to these developments. Where do you see sectoral and geographic hotspots?
Nigel Brook: Yeah, good question that we've been following this now for five years. And we're seeing really distinct trends. The targets for litigation, they're still mainly governments, but we're increasingly seeing companies and now sometimes directors being sued as well.
Nigel Brook: The obvious sectors to start with: energy, oil and gas, and now power as well. But also then stretching outside that to other carbon intensive sectors. We're seeing that in automotives, in cement, airlines and so on. And also in investment and banking, where there's strategic litigation, trying to force investment funds and banks down certain paths.
Nigel Brook: In terms of geographies, the USA likely dominates in just about every other kind of litigation: dominates in terms of case numbers, still, about three quarters of the cases are in the USA. But what we're seeing – where we're seeing big rises, and the real hotspots will include Australia, then in Europe, which again, is a hotspot, specifically Netherlands, Germany, and to an extent the UK, where there's been a big increase in cases. The Netherlands in particular, is punching way above its weight in terms of population.
Swenja Surminski: Stephanie, you work with insurance and with industry on a variety of complex liability challenges. So where do you see climate litigation coming into this? And what are your thoughts, particularly from an insurance broker perspective? Is climate litigation different to other risks? Are risk managers concerned about these trends that Michael just described?
Stephanie Pestorich Manson: Yeah, I think climate is an interesting risk because there's so many different interested stakeholders. There's capital providers, including banks, shareholders and bondholders and insurers, regulators, customers, employees, suppliers and other business partners, not to mention climate activists, all looking at this area. This can be particularly difficult to navigate for multinational companies, which operate in multiple jurisdictions that are subject to different legal frameworks, but also with employee and customer bases that might have differing views on how companies should be managing their climate risks. Specifically, with regard to climate litigation risk, it's evolving, as Nigel says, and we're seeing novel approaches. So whether ultimately from a director's or officer's point of view, it will end up being risks similar to other event driven style D&O claims, or whether there'll be new theories of liability remains to be seen.
Stephanie Pestorich Manson: Risk managers are having to navigate, define and quantify these new risks, working with our internal stakeholders about how this risk is communicated to others, and making sure all the required disclosures are made, while at the same time working to understand the best ways to mitigate the risk to try to limit their exposure to this litigation. So it's a really complicated area.
Swenja Surminski: Yeah, I think you've mentioned, directors' and officers' liability there. I think Maureen, particularly from a US perspective, what is Marsh doing to help clients, particularly with a D&O focus, but also wider to support them in the climate sustainability ambitions here?
Maureen Gorman: Sure. Well, I think, more broadly speaking, Marsh has developed an ESG risk rating tool, which is basically a self-assessment that clients can use. And it's a tool that isn't just Marsh's view, but it measures against more than 10 international frameworks viewed as good ESG. And so from that perspective, that's one thing do. Specifically, litigation as a business, we've developed initiatives, and we can talk about it in more detail later. But to help underwriters identify those clients that are really extraordinary when it comes to a focus on ESG. And while types of companies vary, and the work that they're doing around ESG, may vary by type and by industry, we work really closely with our clients to share with their insurers, what risk management initiatives they are undertaking as part of the underwriting process. And basically, with an eye toward trying to negotiate the broadest coverage that they can get for their directors and officers in particular.
Swenja Surminski: So, Maureen, can you tell us about the D&O initiative that Marsh has developed to recognize clients that are going above and beyond what's required as it relates to ESG?
Maureen Gorman: Sure, I'd be happy to talk about that. Our initiative was basically developed to help COP clients who are going above and beyond from an ESG perspective, get recognition from underwriters in the way of policy enhancements. And so, basically, for clients that are engaged with certain law firms and who are working to kind of either evaluate, validate, bolster their ESG frameworks, underwriters will take that into consideration. And on a bespoke basis offer coverage enhancements, which could include more favorable policy terms such as increased policy limits, reduced retentions, and specific enhancements around ESG-specific, related coverages.
Swenja Surminski: Yeah, you mentioned ESG there, and I think it's fair to say the environment, social and governance elements are much broader than climate. We're talking about climate litigation, but I think it's fair to say that litigation is also relevant beyond climate in the broader sustainability space in the context of greenwashing. As we've recently seen, Nigel, what is your advice to corporates who are setting themselves challenging climate or ESG targets? What do you tell them about how to prepare for litigation or avoid litigation?
Nigel Brook: To pick up on this first, something that Maureen's already mentioned that well, climate has solidifying standards and that is all confirmed and converging around the TCFD standard. With the broader ESG – that is not yet converged, and I think several years behind the climate metric. It will happen, but it's going to take time. And at the moment, it is a bit of a free-for-all. We've seen as with ESG funds, for example, (the question of) what exactly what are the criteria you're using here? So that by itself makes it difficult for a company to set ambitious ESG targets – because how can you compare companies against each other when they're looking at different criteria? And I think particular care is needed there. Therefore, if you overclaim your credentials in that area, you can be called out by reference to some standard that perhaps you weren't even thinking about.
Nigel Brook: Greenwashing, I think is a really acute risk at the moment, because, as already been mentioned by Stephanie, the variety of stakeholders, investors, customers, rating agencies, (and to an extent, regulators) are now putting pressure on companies to report but also to declare ambition, in net zero and so on. So, companies feel obliged to say something there. But can they actually deliver? If it's about what they'd achieve today – is it accurate about the company as a whole? If it is about a target for 2025, 2030, or whatever – is it actually achievable? Have they checked internally, with all the various departments and the geographies? Maybe when you actually get into fine detail, you can't do it. And also the danger with anything that's put into it, for example, in an advertisement – Is that an accurate summary? Does that accurately summarize what you're doing or aiming to do? Words like "green", and "climate neutral"? So these are potentially slippery terms. I think I'd suggest this is an 'all of company' approach that you do want the board to take control of, and you want to make sure they get all of the relevant departments fully on board with this... And do really take it seriously.
Swenja Surminski: Yeah, I guess it's interesting, because initially, the focus was mainly on companies who haven't started their ESG, or climate journey. Is inaction making them vulnerable to litigation? Now we're talking about greenwashing, which is on the other end, but if you haven't done anything, and you're really just at the very early stages of embracing climate or ESG, what's your advice?
Nigel Brook: I think there's danger both ways. If you say nothing at all, obviously, there'll be a different kind of pressure – commercial or whatever – from stakeholders. But you could be, by omission, misleading. For example, if there are material climate risks or environmental risks that that your company faces, headwinds, potential headwinds, which could impact results... Are you giving a false impression, by omission to, for example, shareholders? Could they complain about this? You didn't tell us that we weren't addressing this particular risk. We're actually seeing a lawsuit like that in the States already against former directors of a corporation. I think there's a real danger in not declaring ESG-related risks in your corporation.
Swenja Surminski: Yeah, I think Stephanie, you mentioned that this is a complex area to navigate for corporates, I think also for investors and carriers for insurers and brokers. But at the same time, litigation takes time and plays out differently across jurisdictions. So that probably makes it even more difficult. Where do you see the role of insurance and supporting companies with those challenges, particularly in the context of net zero transitions and are our markets ready for this? Or, are there going to be more refusals to underwrite or new policies? What are your thoughts on the market?
Stephanie Pestorich Manson: Yeah, so to get to net zero, certainly, we all have to contribute and insurers have a large role to play at getting us there. Both with their own investment activities and in supporting companies that they ensure as those policyholders transition to a net zero future. There are, happily, quite a number of examples about how the insurance industry is responding. And this is from an industry that may not always be known for innovation. So I think it's quite good to see that the market is responding. Although, there is still a lot of work to do. I'll just highlight a few activities by way of example. First is, as Maureen mentioned, some, you know, enhanced coverage or terms for those clients seen as 'good risks' in this area – where clients can demonstrate that they're doing the right thing. One thing that we have here in the UK that we've introduced recently to one of our D&O products is what we're calling "Side D". A bit of D&O jargon, the main areas of cover we refer to a side A, B, and C, historically. We've introduced what we're calling "Side D", which stands for "disclosures" to respond to regulatory investigations against a company regarding their climate related disclosures. We're identifying an area that we know there will be activity in the future, and rewarding those companies that can prove that they're doing good things in this area by giving them that additional cover. And we have a number of insurers who have signed up to offer that coverage. So that's a good additional thing that the market is doing for companies doing the right thing. Other things are capital allocated to particular green projects. Marsh has recently launched, a first-of-its-kind insurance and reinsurance facility that provides dedicated capacity for new and existing green and blue hydrogen and energy products or projects. So that also is providing new additional capacity specifically for the green economy. Other things that insurers are doing are things like offering additional capacity for good risks. Beazley has an ESG-specific syndicate, where if you meet their ESG scoring criteria, they will offer you additional capacity than they would otherwise through this particular syndicate.
Stephanie Pestorich Manson: And then on the other side, insurers are looking at reducing their exposure to certain activities. Here in London, Lloyd's of London have asked their managing agents to no longer provide new insurance cover for things like thermal coal-fired power plants, thermal coal mines, oil sands, or new Arctic energy exploration activities, and to have a transition period to move away from those activities for renewals. So on both sides, the insurance market is responding to the challenge. No doubt there will be exclusions for certain activities or companies. And it's really important for insurance buyers to be able to articulate their risk and what they're doing towards their net zero transition to avoid those kinds of exclusions.
Swenja Surminski: Yeah, I think that that's an interesting development and also how the market responds through innovation. Maureen, you mentioned this ESG rating tool. Would you say that, broadly speaking, ESG is on the radar of underwriters? And is there now more and more demand for more information? The tool is designed to help with that, but you know, is these early days, so do you think this is long overdue and the underwriters are basically using and waiting for this?
Maureen Gorman: It’s a great question. And ESG, including climate is absolutely on the radar of underwriters. And when you look at it in any item that becomes important enough on a global basis, just as ESG has, especially if it's going to generate regulatory issues or requirements for disclosures. They're going to prompt D&O underwriters to ask questions. Just think about, you know, for instance, cyber, the ‘Me Too’ movement, other issues around D&I, all of these are examples of issues that are now important to underwriters. And as ESG continues to grow in importance with stakeholders and regulatory bodies, it too has gained more focus with insurers. Now, I think the level of specificity in terms of the type of questions that people or insurers and underwriters are asking is going to vary. They're asking about a broad array of exposures such as climate-related disclosures, diversity and inclusion programs, board engagement around ESG decisions such as supply chain management and things like that. But it is absolutely on the radar, and I think here to stay.
Swenja Surminski: I guess, from what I'm hearing from you, and our conversation here shows that climate litigation is no longer a far-fetched ambition of some climate activists, but it is a real business risk across sectors and geographies.
Swenja Surminski: Given the complexities of the climate challenge and the scale of the issue and the messiness of rules and regulation... To me, it seems obvious that there will be more climate litigation in the future. But I want to have your take on this. My final question, as we come to the end of the podcast is, how will the climate litigation landscape look like five years from now? A quick challenge there. Maybe we'll start with Nigel, what's your perspective?
Nigel Brook: Yes. So extrapolating from what we're seeing, I think we're going to see a rapid increase in greenwashing cases. And one reason for that is that just about every kind of company can be called out for this using existing law. It doesn't need any new radical theories. It just needs someone, or a company that's potentially misleading stakeholders.
Nigel Brook: Right space cases – we've seen an explosion of these in Europe and a few other jurisdictions. I think there's a lot more to come here, where there's a couple of enormously consequential cases making their way through the European Court of Human Rights. And this would be human rights cases and constitutional rights cases, which could have major impact. Cases against directors and officers – which we've talked about for a while – there haven't been many so far. But I anticipate, again, because the law is already there, there could be a lot more of those. And then the broader look at ESG. More broadly, more cases about environmental and biodiversity risks, particularly in supply chains – we've got new laws coming in, particularly in Europe, and new directives that have come into force to go into national laws, within the next couple of years. This is going to put big obligations on companies to go looking in their supply chains and look for environmental and human rights abuses, and then call it out and try to put it right, and potentially compensate for it with enormous fines if they don't do that. And we think the NGOs are waiting for that. They're already doing this in France and Germany and in a few other cases, with the existing national laws that will really ramp up.
Swenja Surminski: Well, not a very promising outlook there. But it sounds like you will be busy. Stephanie, are you going to be busy in five years from now?
Stephanie Pestorich Manson: Absolutely. I think this area of litigation is and will continue to be in five years still in its infancy. This is such a complex area, and complex litigation can be very slow moving. So I think we'll have a bit of a better idea of what types of claims might be more successful. But as obligations on companies and directors and climate disclosures become more common, the risk will continue to evolve and activists and stakeholders and the plaintiffs' bar will be there to respond. So as the risk evolves, litigation will no doubt follow. I'm sure it will still be with us in five years.
Swenja Surminski: Okay, Maureen, what's your take?
Maureen Gorman: Well, I have to agree with Nigel and Stephanie, I do think that there will continue to be growing litigation around this area. And I think whenever you see a change in the regulatory environment or regulations, you're going to see additional litigation coming out of that. So I think this will be an area that will continue to grow from a litigation perspective, for sure. And it will keep us busy for many years to come.
Swenja Surminski: Well, let's meet again and reflect on trends and innovation. But I suggest we don't wait five years. But I would love to continue that conversation with you, so many thanks for your contribution and sharing your insights on this important topic. Thank you very much.
Additional Contributor: Nigel Brooks, Partner at Clyde & Co
