Greenwashing, Climate Change Disclosures and Financial Line Risks | kennedy

With the increased attention paid by regulators, investors and businesses to environmental, social and governance (“ESG”) policies, insurers in the financial lines industry are assessing potential exposure to such risks. One such risk is the possibility of investigations and litigation over climate-related disclosures.

On March 21, 2022, the SEC announced a proposed rule requiring disclosure of climate-related risks, which could trigger potential liability for non-compliance under the Securities Act of 1933 or the Securities Exchange Act of 1934.[1] The proposed rule would require public companies to disclose their greenhouse gas emissions (including upstream and downstream supplier emissions for some large companies), material climate-related risks to the company and the business, and the climate risk governance and oversight processes in place at board and senior management levels. As of the date of this publication, the proposed rule remains open for public comment.

As of May 31, 2022, the London School of Economics has identified nearly 2,000 climate change-related lawsuits worldwide, most of which are filed in the United States.[2] The majority of these cases involved environmental regulatory actions or tort claims related to environmental or climate issues, but a growing number involved financial line exposures. A key category of climate change litigation involves allegations of inadequate environmental disclosures and misinformation. These claims are known as “greenwashing” or sometimes “climate-washing”.

Greenwashing or climatewashing claims generally fall into three categories of misrepresentation regarding: (i) company and government commitments, (ii) product features, and (iii) climate change investment disclosure and associated financial risks.

An example of corporate engagements includes the lawsuit filed against France’s largest energy company, TotalEnergies, in March 2022.[3] A lawsuit brought by a group of environmental organizations has accused the energy company of breaching the EU’s Unfair Consumer Practices Directive. Environmental organizations allege TotalEnergies misled consumers by publicly committing to net zero carbon emissions by 2050 despite plans to produce more fossil fuels, including the development of a multi-billion dollar oil project. dollars in Uganda. Another recent example of alleged breaches of corporate covenants is the SEC’s fine of $1.5 million against BNY Mellon for omitting or making misleading statements about ESG investment considerations made in under its managed mutual funds.[4]

The second category of greenwashing claims concerns misrepresentations regarding the attributes of climate-friendly products. These “product attributes” claims are exemplified in the securities class action lawsuit filed against oat milk manufacturer Oatly Group AB in July 2021 in the U.S. District Court for the Southern District of New York.[5] The shareholders alleged that Oatly misrepresented in its regulatory filings the environmental benefits of producing oat milk over producing cow’s milk. Oatly’s production techniques were advertised as environmentally friendly, when in reality they emitted comparable greenhouse gas emissions, required similar land use, energy consumption and transportation costs. to those of dairy production. Its practices also involved associated suppliers and manufacturers who engaged in deforestation and the generation of dangerous volumes of wastewater. This case remains pending.

The third category of greenwashing claims relates to misleading disclosures about corporate investments and climate and environmental security risks. A stark example of this type of claim is exemplified by the SEC’s enforcement action, brought by its new Climate and ESG Task Force, against publicly traded Brazilian mining company Vale SA (“Vale”).[6] In April 2022, the SEC filed a lawsuit alleging that Vale committed securities fraud by intentionally concealing that its Brumadinho dam could collapse and the flow from the dam would cause significant environmental damage.[7]

But how has the increased scrutiny of climate-related disclosures actually impacted greenwashing litigation?

Only twenty (20) greenwashing cases have been filed with the courts in the United States, Australia, France and the Netherlands since 2016.[8] Sixteen (16) of these cases were filed in the United States. However, ten (10) of these cases have been filed since 2020 and all but one were filed in the United States. Since January 2022, at least 5 putative class action lawsuits have been filed in the United States alleging misrepresentation regarding durability claims in advertisements.[9]

The 2022 U.S. greenwashing case filing rate continues to track the pace of 2021 filings. Since 2016, the greenwashing case filing rate has increased, with half of these cases filed during of the past two years. The prospect of increased SEC environmental disclosures and regulation of sustainability claims may provide additional leads for shareholder greenwashing claims. Likewise, the diverse nature of climate-related claims (including consumer protection, securities fraud, and tort) can open up evolving pathways of exposure.

But there are also other forces that could reduce the potential for climate-focused legislation and litigation. Although climate change bills such as the SEC Disclosures and the climate protection provisions of the Build Back Better Bill have been introduced, these proposals are hotly contested and could easily be overturned if opponents to this legislation prevail in future election cycles. Additionally, while some support the idea of ​​a formalized environmental disclosure process, others are concerned about what climate-related information may be considered material to the reasonable investor and how this may change over time. weather. There are also concerns that the non-financial expertise required to make the disclosures proposed by the SEC is beyond the capabilities of most companies and would require the assistance of outside auditors. Thus, the current focus on climate-related regulation could fade depending on the political and social landscape, which could impact the rate of litigation related to greenwashing and other climate-driven claims. ‘environment.

When assessing the risk of these potential liabilities, underwriting and claims professionals may wish to assess the extent to which an entity has made commitments to climate actions (specifically net zero strategies and climate commitments) through the through advertising, internal policies or otherwise, consider whether measures have been taken to achieve these objectives, and consider whether the activities of this entity may involve adverse environmental impacts involving climate issues. Investigation into these areas can help insurers assess the potential risks that litigation over sustainability practices and disclosures may entail, regardless of the formal regulatory policies adopted.

[1] Proposed rule available at https://www.sec.gov/rules/proposed/2022/33-11042.pdf.

[2] The Grantham Research Institute for Climate Change and the Environment, Global Climate Change Laws (2022), retrieved May 23, 2022, from https://climate-laws.org/#map-section.

[3] C. Hodgson, TotalEnergies target of a lawsuit to test “greenwashing” in advertising, FinancialTimes(March 3, 2022), retrieved May 23, 2022, from https://www.ft.com/content/bdef4e7a-7bc9-4061-968a-a68d9aa32771.

[4] P. Temple-West, SEC fines BNY Mellon for ESG in first such case, FinancialTimes (23 May 2022), retrieved 23 May 2022 from https://www.ft.com/content/ff0097c4-3f1c-49d8-8189-153fc56aeeb3.

[5] Kai Jochims, individually and on behalf of all others in the same situation c. Oatly Group AB, et al., SDNY case no. 21-cv-06360, doc. 1 (July 26, 2021).

[6] SEC v Vale SA, EDNY case no. 22-cv-2405, doc. 1 (April 28, 2022).

[7] ID. at ¶¶ 1, 209, 210.

[8] CSSN Research Report 2022: 1: Climate Wash Litigation: Legal Liability for Misleading Climate Communications5, appendix A.

[9] truth in advertising, Earth Day 2022: companies accused of greenwashing (April 22, 2022), retrieved May 23, 2022, from https://truthinadvertising.org/articles/six-companies-accused-greenwashing/. To see Jacobs et al. vs. Whole Foods Market Group, Inc., ND Ill. Case No. 1:22-cv-00002 (January 2022); Clark et al. vs. McDonald’s Corp., SD Ill. Case No. 3:22-cv-00628 (March 2022); McDowell et al. vs. McDonald’s Corp., ND Ill. Case No. 1:22-cv-01688 (March 2022); Hussain et al. vs. Burger King Corp., ND Cal. Case No. 4:22-cv-02258 (April 2022); Barrette et al. vs. The Clorox Co., Burt’s Bees, Inc. and The Burt’s Bees Product Co., ND Cal. Case No. 4:22-cv-02193 (April 2022).

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