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Intro: Hello and welcome to Insured Success, a podcast brought to you by Reed Smith's insurance recovery lawyers from around the globe. In this podcast series, we explore trends, issues, and topics of interest affecting commercial policyholders. If you have any questions about the topics discussed in this podcast, please contact our speakers at insuredsuccess@reedsmith.com. We'll be happy to assist.

Carolyn: Hi, everybody, and welcome back to Insured Success, where today our topic is It's Not Easy Being Green, ESG Claims and Potential Protections. I'm Carolyn Rosenberg. I'm a partner in the Chicago office of Reed Smith in our insurance recovery group, where I work with policyholders in connection with insurance review, as well as handling insurance coverage disputes and all kinds of risk management and corporate governance. My partner, Jennifer Smokelin, who is a partner in Pittsburgh, is steeped in energy and ESG and related issues and is one of our leaders in our ESG initiative. We're delighted that she is here today to help inform us and discuss these important issues. We've certainly talked about all the acronyms, ESG, DEI. Most people are familiar with greenwashing claims and, of course, the newest claim of green hushing. So, Jennifer, to try to hallucinate this a little bit further, when companies are talking about ESG and green hushing, what is the landscape? What is green hushing?

Jennifer: Thanks, Carolyn. Companies are talking less these days about ESG in earning calls and marketing materials. But they are mentioning it nearly as frequently as ever in their financial reports and disclosures. The apparent disconnect here suggests that companies haven't fully shelved their sustainability-related goals. They're just talking about them less. There's a number of data points over the past year that indicate that investor interest in ESG has cooled down. Many companies in the last year have exited the Climate 100+, an initiative pushing companies to address environmental issues. However, many companies still recognize that investing in sustainability is important for long-term value creation. So they keep doing the initiatives related to sustainability, just not specifically labeling them as ESG. Companies have adjusted their terminology. As I said, they don't use ESG. They might refer to sustainability instead. We're even seeing some companies talking more in the language of clean air, clean water, and economic opportunity, effective and apparently palatable terms other than ESG. This trend, nicknamed green hushing, stems from a recent tide of ESG backlash and mounting legal considerations.

Carolyn: What are some of those mounting legal considerations?

Jennifer: In three words, Carolyn, litigation and regulation. From shareholder suits to regulatory actions to class action litigants that have lodged greenwashing claims against companies they accuse of releasing rose-tinted marketing materials. To those of you listening, we strongly recommend you talk to us or the lawyer you regularly deal with at Reed Smith regarding how to address these litigation and regulatory risks. Let me highlight some examples of legal risks and quick upshot regarding specifics to talk to Reed Smith about. First, there is a risk regarding NGO suits. These are suits brought against public companies for allegedly misleading climate change with regard to ESG. The up shot here is that it's important to regularly act on any given ESG commitment in meaningful ways that are grounded in science, regardless of how many years away a particular deadline for an ESG goal might be. We also recommend publicly sharing clear updates on progress towards any ESG goal. From a regulatory risk standpoint, we are still seeing a risk with regard to SEC regulatory action. This despite the fact that the public company climate disclosure rules are currently stayed due to a pending litigation in the Eighth Circuit. For example, the SEC has recently brought enforcement action for allegedly inaccurate representations of recyclability. The upshot here is that recyclability, as interpreted by the SEC, is not simply a matter of the materials used. There must be a process in place to facilitate the act of recycling the item. It is important to be aware of and consider recycling practices wherever a company operates and sells to ensure statements with regard to recyclability are accurate. Another takeaway here is that the SEC is willing to go after fines and civil penalties for such representations. On the DEI side, California may require employers to report voluntary social compliance audits. If adopted, this bill, called AB3234. Would essentially mean that if an employer voluntarily conducts a social compliance audit, that employer must then publish a clear and conspicuous link on their website to a report detailing the findings related to compliance with child labor laws. The upshot here is that this bill is likely to be adopted. AB3234 has received broad bipartisan support, easily passing in both the State Assembly and the Senate at the end of August in California. Governor Newsom is expected to sign the bill soon. The final risk we want to highlight is shareholder suits. We have seen these both offensively, that is, brought by shareholders, and defensively, brought by the company, to fend off shareholder proposals with regard to ESG issues from going to vote at a company's annual meeting. The upshot here is that, ideally, there is a shared desire to better a company between both the shareholders and the leaders of the publicly traded entity. However, these legal battles illustrate that there is a tug between activist groups and company leadership that is rife with legal risk.

Carolyn: What about from a global perspective? I know we've been speaking about principally the U.S. I know there's much going on in the world. Can you tell us a little about that?

Jennifer: Carolyn, we see even more potential liability across the pond. As an example, in France, there is a criminal complaint linked to contributions to climate change filed against an energy company and its directors and officers in France, from which the upshot suggests that there is a possibility of criminal liability for major decision makers at companies. Another takeaway point from this case is using timing of shareholder suits to influence shareholder meeting outcome. This complaint was filed a few days before the energy company's annual shareholder meeting, which included a climate-focused shareholder proposal. The criminal complaint would likely influence the voting shareholders regarding that climate action. So speaking of corporate and corporate officer liability, Carolyn, how can insurance help?

Carolyn: The important thing about insurance is I think we start with the premise of looking at a director's and officer's liability insurance policy because that is typically where you would see coverage for an individual director officer's liability. And if you're a public company, D&O policies typically cover securities claims. So it depends if one of these suits led to stock drops or derivative shareholder lawsuits or claims against directors and officers in the company could very well be a house for that claim in a D&O policy. Private company D&O policies have broader coverage for the entity. And a key question to look at, which is what we do a lot of in reviewing insurance policies and negotiating for the most enhanced terms and conditions working with your in-house legal risk management and outside brokers, is that you want to also look and see whether there is potential coverage for investigations. For subpoenas, for regulatory actions against both individuals or if they're requested to provide documents, books, and records, as well as look in your policy to make sure there's no pollution exclusion. Although the claims against directors and officers are not for pollution, and therefore even if there were a pollution exclusion, it should not apply, it's best to look at your policies for any potential exclusions that could apply. Another important takeaway is that. When you are applying for insurance, typically you may be filling out a renewal application if you're renewing the insurance, but you may also be filling out longer questions and questionnaires if you're looking at insurance for the first time, or you may be looking at a broad panoply of options. And in looking at applications, you should be thinking about and being very careful about how you're answering. If there are questions asked about ESG initiatives, about DEI, about all kinds of what we would call under the rubric of environmental, social, and governance issues. That's because potentially insurance applications could be discoverable if considered part of the insurance policy. And, of course, insurers may be screening applications not just for underwriting but for purposes if there is a claim to determine whether or not there was any sort of alleged misrepresentation or omission in how the risk was presented to the insurer for purposes of the insurer turning around and using any sorts of exclusions or other terms and conditions against the policyholder. The important takeaway here is to have the insurance applications as well as the policies reviewed by knowledgeable coverage counsel. But D&O insurance is really the starting point. It's not the ending point. You could potentially have coverage for ESG-related claims under other policies, depending on how the claims are alleged and the causes of actions they're in. You could have environmental coverage claims. You could have coverage under general liability and business interruption. You could have employment-related claims and look under your employment practices liability policy. You could also potentially have coverage under a cyber or data tech and privacy policy, depending on, again, the tentacles, the allegations, the causes of actions that are alleged. The important takeaway here is to review your coverage before a claim, demand, or investigation or regulatory action occurs, and then if there is an issue, to take a look very carefully, work with knowledgeable counsel to determine when and how to report that claim, and then how to maximize coverage, not just for the defense costs of defending the action, but of course for any potential judgments or settlements. Those are some thoughts on how to access insurance in addition to good risk management reporting, regarding making sure your representations are careful and considered, as Jennifer was discussing. Jennifer, any last take away from your perspective?

Jennifer: Carolyn, I think you did an excellent job giving an overview of insurance, and we discussed green hushing and the mounting legal considerations with regard to ESG claims. So, no, I have nothing further.

Carolyn: Thank you. Well, thanks everybody for listening. Please reach out to us if you have any questions and we look forward to having you listen in on our next podcast. Thanks again.

Outro: Insured Success is a Reed Smith production. Our producer is Ali McCardell. This podcast is available on Spotify, Apple Podcasts, Google Podcasts, PodBean, and reedsmith.com. To learn more about Reed Smith's insurance recovery group, please contact insuredsuccess@reedsmith.com. 

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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