Greenwashing and the risk of climate-related litigation for directors and officers
Greenwashing and the risk of climate-related litigation for directors and officers
Arati Varma, Asia Head of Financial Lines and Casualty
Company executives are increasingly facing costly lawsuits for environmental misinformation, negligence, and non-compliance — irrespective of whether these acts were unintentional.
For many years, we’ve known that the benefits of being environmentally sustainable outweigh the drawbacks, yet with limited data to support this claim. As far back as 1994, Harvard Business Review noted that while it was challenging to go green, it is possible to be both environmentally friendly and profitable. “Being green is no longer a cost of doing business,” the publication added. “It is a catalyst for innovation, new market opportunity, and wealth creation.”
Fast forward almost 30 years, and research by McKinsey & Company suggests that strong environment, social and governance (ESG) commitment adds additional shareholder value for companies that also exceed their peers in growth and profitability. Such companies are 2% more profitable in terms of total shareholder returns.
Offering environmentally friendly products is particularly appealing to a wide range of stakeholders, especially those within the millennial demographic that tend to prefer brands and offerings with a sense of purpose like climate action. Research finds that 73% of this age group are willing to pay extra for sustainable products for example. Furthermore, companies that proactively make sustainability core to their business strategy tend to attract more enthusiasm and loyalty than their rivals — not only from customers, but also from employees, suppliers, communities, and investors.
However, there is a risk that businesses overstate the sustainable credentials of their products and services without a credible basis for doing so — a scenario known as ‘greenwashing’. We discuss below what is driving the greenwashing trend.
Evolving regulation
While publicly listed companies in jurisdictions such as Singapore and Hong Kong are experiencing greater ‘greenwashing’ regulation, oversight in most markets, is still evolving. For example, labelling frameworks like the ASEAN taxonomy are not legally binding and sustainability claims typically don’t have to be independently verified.
Data captured over the past half-decade highlights the scale of greenwashing globally. The number of publicly reported ESG risk incidents, including ‘social washing’ (false statements about an organisation’s social impact), is skyrocketing, as too is misleading information about corporate governance: in 2018 there were just 583; by 2022, this number had ballooned fourfold to 2,229. And while the lion’s share of these incidents has been in Europe and North America, representing 40% and 28% respectively, Asia’s 16% share is not insignificant, and is expected to rise.
That’s not to say that all businesses claiming to be sustainable are deliberately engaging in greenwashing; in many instances such misinformation is unintentional. Greenwashing often emanates from a lack of appropriate systems and procedures in place to collect and analyse data and undertake the appropriate due diligence to verify the environmental credentials of products and services.
Beyond greenwashing
The fallout from greenwashing can be severe. Not only can it ruin company reputations; it could also lead to financial losses — whether the result of declining customer revenues, regulatory fines, and critically lawsuits, among more.
Costly litigation relating to misleading information about a company’s green credentials is notably on the rise. At the time of writing, there are several high-profile lawsuits ongoing. In the US for example, a major airline faces a proposed class action lawsuit over claims it is “carbon neutral” based on carbon offsets. The lawsuit, made by a passenger, claims that carbon offsets don't work as advertised, and that consumers have been misled. And in Australia, the Australian Securities & Investments Commission (ASIC) has launched a lawsuit against a global asset manager claiming to provide a ‘green’ fund, which excluded assets with exposures to fossil fuels; yet upon further investigation fossil fuel assets were in fact included in the fund’s investment portfolio.
The threat of greenwashing and climate litigation is fast emerging in Asia. In South Korea for instance, the nation’s Ministry of Environment recently rolled out a new law that fines perpetrators of greenwashing: the move came four months after one of the country’s largest oil and gas companies claimed it could produce “carbon dioxide-free” natural gas.
And in Japan, former executives from a power company, linked to the environmental fallout from the Fukushima nuclear disaster, each faced five-year jail sentences in a criminal trial whereby prosecutors argued that the former executives were aware of the dangers, accusing them of negligence. The defendants were acquitted by the criminal court in January 2023, though this stands in stark contrast to a separate civil case brought by shareholders, whereby the court judged that due care had not been exercised and ordered the former executives to pay approximately 13 trillion yen (USD90 billion) in damages.
Greenwashing therefore isn’t the only litigation risk that companies must now contend with. Companies are dealing with so many other issues, including problems pertaining to wording and varying standards and metrics; pressure emanating from differing political agendas; and ‘green hushing’ — where companies underreport their sustainability credentials to avoid stakeholder scrutiny. As such, globally we are seeing claims for negligence, reporting errors, inadequate disclosures, non-compliance, and more. Such actions are being filed by a wide range of plaintiffs, including customers, activists, investors, communities, and regulators.
As of May 2023, there have been over 2,300 climate change related lawsuits filed globally: 800 of these were made between 1986 and 2014; with over 1,000 cases filed in the last seven years alone.
It’s now personal
Of these climate-related lawsuits, the overwhelming majority of these have been made against corporate entities. Yet increasingly, company directors are personally being sued.
These involve climate-related claims for breaches of fiduciary duties, with plaintiffs — mostly customers and shareholders — declaring these executives didn’t act in their best interests. They also encompass claims for mismanagement, compliance failures, reporting inaccuracies, and product marketing misrepresentation.
Already there have been several high-profile climate-related lawsuits targeting company executives. In 2022 for example, directors and executives from a utilities company in California, US, made a US$117 million settlement for a lawsuit filed for negligence over the company’s safety measures prior to two of the state’s most destructive wildfires. The lawsuit was filed by a trust established by wildfire victims. And in Europe, an environmental law charity is suing directors from an oil major, holding them liable for failing to properly prepare the company’s transition to net zero.
Risk mitigation strategies
These cases show that there is appetite to sue company directors for greenwashing claims, and failures to respond to climate change related risks. We discuss below some measures company executives can take to understand the environment related risks to their business and how to manage these risks.
A good place to start is to understand each climate-risk and its impact on both the business and individual company executives. This can be done with the assistance of various third parties, to access high quality data, which not only quantifies the severity of each risk, but also benchmarks the entity against industry peers.
They should also put in place governance structures that oversee, report, audit and verify each sustainability credential, to ensure that every claim is backed by empirical fact. They should simultaneously instil systems and processes that identify and monitor the company’s climate risk overall. To achieve this, training and development of all staff would be necessary, especially if they are unfamiliar with such solutions.
A further consideration is to frequently engage with all stakeholders, keeping them up to date on progress, and critical challenges. By doing this, companies will reduce the likelihood of stakeholders misunderstanding a particular fact, or becoming sceptical of a company’s sustainability endeavours.
And lastly, companies should speak to their insurance advisor, who will be able to advise on the types of products that can provide cover in relation to climate litigation. Directors and Officers (D&O) liability insurance for example, is playing a major role in mitigating the threat of climate litigation, as well as providing protection for company directors and officers for climate-related risks. A comprehensive D&O liability insurance policy, which covers a broad range of errors, omissions and other conduct made by businesses and their directors and officers, can go a long way toward reducing these exposures.
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If you’re an insurance advisor seeking more information on how customers can help navigate the myriad of climate-related risks impacting today’s businesses, drop me a note.
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