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Published 18 February 2022
Environmental, social and governance (ESG) issues feature at the top of most boardroom agendas, for insurers and insureds alike, as we embark on 2022. A recent survey conducted by the International Underwriting Association showed climate change and ESG as the greatest concern among its members. This is perhaps unsurprising when ESG encompasses an almost overwhelming spectrum of themes. Look more closely, however, and there is a considerable overlap between the E, the S and the G. It is these intersections that provide a fruitful place to focus attention. In the pursuit of resilience, these are the areas where boardrooms might achieve the most progress and most effectively reduce their exposure.
The overlap between social and governance issues houses a surprising number of key themes, from data protection to modernising the workplace.
Class actions seeking compensation for the loss of personal data are increasingly common place in the UK. Heightened awareness of data protection rights (in the wake of GDPR), eye-watering fines imposed by regulators, and the reporting of high-profile data breaches have fuelled this trend. The landmark decision of Lloyd v Google in November 2021 has curtailed, but not ruled out, the prospect of further data protection class actions.
The Supreme Court refused permission for Mr Lloyd to proceed with his £3bn “opt-out” representative action against Google. Mr Lloyd alleged that Google breached its duties as a data controller under the Data Protection Act 1998 when it collected and used the browser generated information of 4.4m Apple iPhone users during 2011 and 2012. He claimed that there was no need to set out any distress or financial loss for each of the claimants, arguing that they had all suffered damage simply by virtue that they had lost control of their personal data because of Google’s actions. The Supreme Court disagreed, determining that a breach of the Act was not evidence of damage itself. However, the door was left ajar that future actions could proceed if they were bifurcated: a class action could establish a legal breach had occurred and then each claimant could set out the distress or financial damages they had suffered. The Court noted, however, that this may make such class actions financially unviable.
In the workplace, the HSE will be increasing its attention on how employers manage stress. It is likely to take a more pro-active role in undertaking spot checks of employers to assess whether they have adequate policies in place. In particular, it will look at how organisations have adapted their policies in light of the demands placed on employees following changes to their work and working environment as a result of the global pandemic, including both those who have returned to the office and those now working permanently from home.
In a two-stream or hybrid workplace, employers will need to closely manage emerging risks, including workers being treated differently depending on where they are working; lower levels of collaboration; reduced team cohesion; and poor behaviours enabled by mute, camera off and chat functions in video-conferencing and collaboration platforms. Employers will need to be proactive to ensure they foster an inclusive environment as we all adjust.
At the core is the intersection between environmental, social and governance issues. This houses themes such as climate activist litigation, shareholder activism, ESG disclosures and ESG-washing.
This year will see a new trend in social inflation emerging, with climate activist groups using the courts to compel companies to comply more definitively with existing law and regulation around reducing emissions. The first example of this was seen in the collective action initiated against Royal Dutch Shell by climate groups and 17,000 civilians in the Dutch courts. In the 2021 judgment, the court agreed that Shell was not doing enough to mitigate its impact on the climate and ordered Shell to reduce global CO2 emissions by 45% by 2030.
More recently, German climate activists have issued a claim against BMW, Daimler and VW on almost identical grounds. While this type of litigation does not seek the immediate financial impact of a penal monetary award, the longer term consequences of achieving more stringent emissions targets will be significant, both in terms of increased transition risk and managing ESG disclosure obligations. This climate activist litigation will have wider implications for all large carbon producing entities, who may choose to adjust their own emissions targets for fear of being targeted directly by activists.
With the increasing pressure on companies to address ESG matters, shareholder activism has increased. Looking ahead, potential future actions against corporations may be focused on the failure of a board to meet investor expectations on certain ESG factors, including corporate actions on climate risk and energy usage. Additionally, corporate disclosure of initiatives on environmental and social actions that are voluntarily incorporated into annual reports and proxy statements, but not followed through, may lead to future litigation.
From April 2022, the largest UK-registered companies and financial institutions will be required to disclose their climate change related risks. Directors and officers need to be careful to ensure that all ESG information presented on behalf of the company is accurate. Although ESG disclosures are not yet mandatory in the UK, the risk of claims for E, S and G-washing remains an ever-present, and increasing, threat. Reputational damage alone can have a detrimental impact on share value.
An issue for insurers is whether this might trigger unforeseen liability risks, whether in the form of product liability, advertising liability or D&O exposures. Underwriters should seek evidence, pre-inception, that their corporate policyholders are issuing consistent and accurate statements regarding compliance with their climate, sustainability and ESG responsibilities in order to mitigate exposures and the reputational damage of being associated with companies that stray into washing their practices.
In focusing on the themes that fall within the intersections, boardrooms are able to make progress on a number of different fronts. The reverse takeaway is that there are very few topics that fall neatly into one silo, untouched by others. We need to work together more closely, collaborating and partnering on both internal and external strategies. We have previously highlighted the importance of a trialogue between government, regulator and industry in finding the interconnectivity of solutions to many of our systemic risks. That model works too at a more granular level. In our new, fully flexible workplace, let’s truly modernise it and see what we can create together, for all our futures.
Environmental, social and governance (ESG) issues are a critical focus for all businesses in 2022, covering an almost overwhelming spectrum of topics. Click here to learn more about ESG.
This article was first published in Insurance Day, written by Helen Faulkner, Head of Insurance and the ESG in Insurance Working Group at DAC Beachcroft and Charlotte Shakespeare, Senior Insurance PSL.
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Rob Biddlecombe, Neil Scott
Helen Faulkner, Charlotte Shakespeare