ESG & Greenwashing Explained

ESG and Greenwashing are two of the hottest buzzwords in the entire financial world at the moment, and the insurance market is no exception. These two concepts are fundamentally linked and present a very real challenge to insurers, brokers and their clients alike. In this article, we’ll examine exactly what these two terms mean and, in the context of D&O insurance especially, examine the challenges they pose.

What is ESG?

ESG stands for Environmental, Social and (Corporate) Governance. ESG is essentially used as a metric of a firms ethical standing. ESG metrics are not yet truly standardised across any one market, let alone globally, but more and more firms are making mention of ESG factors in yearly reporting, investment pitches or by publishing sustainability reports and the like on their websites.

ESG metrics can measure a company’s environmental friendlessness, such as the CO2 emissions and how they offset or reduce these, but also ESG includes social causes, such as a company’s commitment to charitable causes, the mental and physical health of its workers and the ethnic and gender diversity of a workforce. Finally, ESG also includes the company’s corporate governance, including things like asking if they pay their taxes fairly, or have they been involved in any sort of scandals in the media?

Why is ESG Important?

Aside from the obvious answer that we should all be playing our part to look after the planet and counter social injustice wherever we can, ESG metrics are increasingly important for several commercial reasons:

• Workers are increasingly looking to work for socially conscious employers, and especially in the current climate of greater employee and potential employee power, your company’s ESG policies and practices could be the different between getting and losing the new hire you wanted.

• Investors are increasingly considering ESG metrics in deciding where to invest their money. People are looking not only for long term gain, but sustainability as well.

• Companies with poor ESG policies and practices are increasingly being targeted by protestors and action groups, bringing negative publicity and damaging brand reputation and value.

• Suppliers, distributors and other third parties may refuse to work with companies that do not reflect their own ESG values.

What about Greenwashing?

Greenwashing is the practice of making an investment or company appear much ‘greener’ than it actually is. The most common example of greenwashing is a company purporting to have a strict ESG policy, which is not actually enforced in any practical way. By way of a very simple example a company may claim to be committed to gender diversity whilst in reality maintain a 95% male workforce.

Greenwashing is a very real concern amongst investors and financial market players in general. Earlier this year, the FCA wrote an open letter to the Fund Management industry, outlining their concerns that funds were looking to take advantage of consumer interest in ESG investments, without those funds having actual ESG substance.

The FCA is currently consulting on introducing a regime for ESG disclosures in an attempt to bring stability and consistency to potential investors, employees and business partners. However, until this is complete, ESG remains a very foggy measurement.

What is the Risk?

Poor ESG policies or attempts at greenwashing can leave a company open to multiple sources of litigation risk, as well as potentially fines and other actions from regulators as policies continue to develop. Climate litigation in particular is a rapidly developing area of law around the world, and the UK is becoming more and more active as a location to bring claims of this nature.

Let’s look two key sources of D&O claims relating to ESG and Greenwashing.

1. Investor Claims

Investors may be able to bring a number of different claims based on exactly what the company has done to earn their litigious ire. Investors who buy into company’s purporting to have strong ESG principles when they in fact don’t may be able to bring claims for misrepresentation and breach of contract. Companies may have to pay damages to investors and will suffer the associated brand and reputational damage that comes with high-profile litigation. They will also likely encourage regulators to begin investigations of their own if they have not already done so, which can bring further punishment upon their outcome.

2. Class Action Claims / Group Litigation

US style class action suits are becoming more common in the UK and Europe. Group litigation, especially for climate related issues has seen a significant increase in Germany, the Netherlands and indeed the UK.

Climate is not the only risk however, as the recent developments in the case of Thomas and others v. PGI Group Ltd [2021] EWHC 2776. In this case the claimants, 31 Malawian women, are suing the UK based parent of a Malawian tea company who allowed instances of sexual discrimination, abuse and even rape whilst the claimants were employed there. The High Court has recently declined to grant a Cost Capping Order (CCO), a significant win for the claimants.

Further Reading:

• https://www.cfainstitute.org/en/research/esg-investing

• https://www.paulhastings.com/insights/client-alerts/esg-in-the-disputes-and-contentious-regulatory-sphere-a-mini-series

• https://www.akingump.com/en/experience/practices/climate-change/speaking-sustainability/recent-developments-in-esg-related-litigation-in-the-english-courts.html#page=1

• https://www.dentons.com/en/insights/articles/2021/october/28/esg-investments-assessing-the-litigation-and-regulatory-risk-of-esg-failings-part-1

• https://www.wfw.com/articles/directors-liability-and-sustainability-objectives/