Corporate boardrooms across the globe are under increasing pressure to develop strong environmental, social, and governance (ESG) initiatives, backed by strategic implementation plans and demonstrable results. The scope of ESG initiatives is evolving to include an array of hot-button social issues, including climate change and pollution, gender and racial equality, board diversity, and transparency and anti-corruption. Although ESG initiatives may make a company more attractive to institutional and individual corporate investors, treading into ESG waters may lead to expanded investor and regulatory risks. Shareholders are demanding that corporations back up their statements with real investments and results, and regulators have already demonstrated their commitment to investigating companies that fail to follow through with their marketed ESG initiatives. In the wake of these exposures, directors, officers, and their companies understandably want reliable insurance protection.
Expansive regulatory and claim landscape – Why worry?
- Newly proposed SEC rule – The United States Securities and Exchange Commission (SEC) recently proposed a new rule that, if adopted, would require public companies to report their climate-related risks, including the level of greenhouse gas emissions they produce – both directly and indirectly – and how climate risk affects their business. For those SEC registrants that publicly set climate-related targets or goals, the proposed rule would require those companies to disclose their implementation plans, including the projected time horizon by which those companies intend to achieve those goals.
- SEC investigations and fines – The SEC has demonstrated its commitment to identifying ESG-related misconduct by creating a special task force designed to identify any publicly traded companies’ compliance with ESG strategies and/or misstatements in public disclosures concerning climate risks.
- Liability for misleading statements – Multiple companies ranging from airlines to retailers have been accused of overstating or outright misleading investors, consumers, and regulators with respect to the environmental sustainability of their products or services. For instance, the “fast fashion” clothing retailer H&M has faced criticism for using a scorecard purporting to show that the production of a particular piece of clothing is better for the environment when in fact it is no better than comparable products. H&M, which has since stopped using this scorecard, is not alone: the scorecard used by H&M is a clothing industry-developed metric (known as the “Higg Index”) that has been widely adopted, but now abandoned, by other apparel makers. A Dutch airline, KLM, was recently sued by environmental groups alleging that its advertisements and carbon offset program “give a false impression over the sustainability of its flights and plans to address its climate harm.”