2022 Predictions: ESG concerns will drive reputation risk

As the ESG liability landscape continues to shift, requiring ever greater accuracy to manage greenwashing and reputational risk, we will need to build closer and more responsive insurance partnerships that focus as much on risk management and mitigation as on traditional risk transfer.

Expectations of companies are building. The recommendations of the Taskforce for Climate Related Financial Disclosure will inform two new prototype global standards: one on climate-related disclosures and the other on general sustainability disclosure requirements – both of which will be overseen by a new regulatory body - the ISSB (International Sustainability Standards Board).

These and new Treasury rules requiring most big UK firms and financial institutions
to set out detailed public plans for how they will move to a low-carbon future - in line with the UK's 2050 net-zero target , plus the European Parliament Directive on Corporate Due Diligence and Corporate Accountability, represent a substantial increase in expectations and in corporate environmental responsibility.

This plethora of regulation is contributing to a complex landscape which will require a high level of corporate focus to ensure compliance and manage reputation risk.

While expectations to deliver growth and investment returns reman undiminished, businesses are also operating in a world where stakeholders expect better in terms of environmental risk management. Activist shareholders and pressure groups around the world are demanding that boards behave differently.

As of May 2021, there were 1,841 climate litigation cases ongoing or concluded around the world. Most recently this included the late December 2021 decision by a South African court to halt oil exploration off the South Africa coast pending further investigation of the potential damage that sonic noise used in finding oil has on marine life.

2021 also saw a Dutch court ordering an oil major to cut its CO2 emissions by 45% compared to 2019 levels and a case brought against a French supermarket by indigenous peoples from the Brazilian and Colombian Amazon and NGOs from France and the US warning of environmental supply chain violations and threats to biodiversity triggering further climate change impacts.

2021 also saw two French NGOs - Notre Affaire à Tous and POLLINIS - commence the first ever legal action against a state for its failure to protect biodiversity. The case against the French government was brought during the World Conservation Congress in Marseille which called for governments to protect at least 30% of the planet by 2030.

The rising pressure on companies to provide guidance about their environmental, social and governance credentials is both an opportunity and a risk.

On the one hand it clarifies what is expected of companies. On the other it poses risks that businesses, in their haste to comply with new regulations, exaggerate their green credentials or release inaccurate, misleading or misstated information, which could in turn result in reputational damage leading to shareholder or derivative suits. The liability implications of ‘greenwashing’ are something both insureds and insurers will have to be mindful of going forward.

Against this backdrop, 2022 will see companies asking themselves searching questions about how their business is dealing with environmental, social and governance concerns. It will also require the insurance industry to make better use of artificial and industry intelligence and most importantly, to engage better with insureds so that together we can drive improved understanding of stakeholder attitudes to ESG risk and better alignment with disclosure requirements both voluntarily and mandated, to improve reporting and reputation management.

Such targeted responses will become essential if the industry is to remain relevant amid the shifting sands of liability.

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