Request Free Trial

How greenwashing concerns are reshaping corporate liability insurance

Flags with the logo of German insurance giant Allianz flutter in front of the venue where is taking place the company’s annual general meeting in Munich, southern Germany, on May 7, 2014. Allianz said it is “on track” to meeting its full-year targets after a strong first quarter 2014.     AFP PHOTO / DPA / ANDREAS GEBERT / GERMANY OUT (Photo by ANDREAS GEBERT / DPA / AFP) (Photo by ANDREAS GEBERT/DPA/AFP via Getty Images)
Flags with the logo of German insurance giant Allianz flutter in front of the venue where is taking place the company’s annual general meeting in Munich, southern Germany, on May 7, 2014. Allianz said it is “on track” to meeting its full-year targets after a strong first quarter 2014. AFP PHOTO / DPA / ANDREAS GEBERT / GERMANY OUT (Photo by ANDREAS GEBERT / DPA / AFP) (Photo by ANDREAS GEBERT/DPA/AFP via Getty Images)

Potential liabilities from greenwashing allegations are likely to hit board directors first, before affecting environmental insurance policies.

Companies’ exposure to risks related to accusations of greenwashing is driving debate in the insurance market on how to best incorporate this type of liability in the underwriting process.

Insurance products for corporate officers and directors (D&O) are likely to be affected first. “The potential liabilities surrounding greenwashing are likely to trend towards D&O, where commitments to ESG, adherence to reporting requirements and statements to investors and to the public are at the heart of the matter,” says Arthur Lu, head of global environment impairment insurance at Allianz’s global corporate and specialty, which provides risk consultancy.

Allianz’s co-heads of global practice for commercial D&O and financial institutions claims, David Ackerman and Angela Sivilli, add that incoming ESG reporting requirements in Europe and the US will make it easier to hold directors to account for their organisations’ impact on the environment and society. The pair have seen increased claims activity around ESG issues in D&O insurance and other financial lines and expects this trend to continue.

Similarly, Carl Puttock, underwriter at UK insurer Beazley’s international management liability practice, says that the firm’s underwriting around greenwashing leans towards clients’ policies and procedures around ESG-type disclosures to the market. This entails ensuring that disclosures are scrutinised internally, with a robust sign-off process and ideally in conjunction with third-party experts.

At present, generally, global D&O liability insurance does not provide a specific greenwashing exclusion. However, “some markets are investigating how this could be implemented”, according to one European insurer who wished to remain anonymous. Their company is currently reviewing its approach to assessing ESG risk development, and said coverage evaluation is part of that as well.

Environmental liability

The issue of greenwashing allegations has not yet affected the environmental liability market, but emerging litigation in this space could at some point bleed over into this specific market, notes Lu from Allianz.

Scrutiny of company statements related to advertising and marketing as well as ESG disclosure requirements (such as the Corporate Sustainability Reporting Directive and Sustainable Finance Disclosure Regulation in Europe and the US Securities and Exchange Commission’s proposed ESG disclosure rules) is on the rise and has regulators, investors, consumers and competitors alike on the lookout for greenwashing.

However, environmental and public liability insurance policies typically provide cover for risks arising from companies’ physical impact on the environment, and would not typically provide cover for the risks that may arise out of allegations of greenwashing, agrees Russell Butland, counsel at law firm Allen & Overy’s London office.

Lu from Allianz explains that the main triggers for environmental liability products are usually pollution conditions, and the resulting damages such as remediation costs, bodily injury or property damage.

Moreover, insurers themselves are having to reconsider how climate-related issues extend beyond the scope of environmental liability.

A report by law firm Kennedys warns: “For (re)insurers and businesses seeking to avoid future climate liabilities amid claims of potential greenwashing, one of the key concerns is the lack of sufficient progress in improving the ESG regulatory framework.”

Third-party claims

Experts agree that companies are increasingly vulnerable to third-party claims and litigation when allegations of greenwashing appear.

In recent months, regulators have raised their game in tackling unsubstantiated sustainability claims. Meanwhile, consumer associations and non-profits are calling for higher sustainability standards, often bringing companies to court over greenwashing concerns.

“These types of third-party claims and regulatory investigations may be covered under professional, civil or general liability insurance policies, though it will always depend on the terms of each policy,” notes Butland from Allen & Overy.

He adds that company board directors who find themselves targeted by third-party claims or by regulators may have some cover under D&O insurance policies, which typically includes companies’ or individuals’ defence costs and damages exposure to third parties, but not any potential fines incurred.

Butland further refers to the Bank of England results of the 2021 biennial explanatory scenario which consider D&O insurance policies as the most likely to pay out on climate change claims.

This is aligned with what law firm Kennedys points out in its climate risk report, advising insurers to start focusing more on conduct risks, thereby “addressing the potential for conduct failures, particularly in respect of misleading ‘green’ claims and statements”.

Increased claims activity around ESG issues in D&O insurance could be further driven by growing environmental and biodiversity regulation in the US and Europe, according to Ackerman and Sivilli from Allianz. “This has not led to large losses yet but may well do so in the future,” they say in a written note for Sustainable Views.

“As regulatory requirements around climate risk and ESG disclosures become more stringent, clients will be forced to disclose more and more information in this area, which only increases the risk,” concurs Puttock from insurer Beazley.

“While you may assume the focus might be on heavy carbon emitters and those industries that profess to be ‘green-friendly’, in fact we are finding that claims are coming in from a number of industry sectors – no industry is truly free from this risk,” he says.

Despite being an indirect product of climate-related issues, allegations around greenwashing are increasingly affecting companies’ risk management. Financial institutions who service companies will likely be tightening their grip, especially when underwriting loans or insurance policies, so as to protect themselves from similar liabilities.



A service from the Financial Times