Reinsurers and insurers have been advised to consider whether their businesses are effectively complying with climate change regulation, to protect their underwriting from the potential impact of lawsuits, lawyers from Clyde & Co advised earlier this week.
The warning came at a Clyde & Co seminar on the impact of climate change on directors & officers’ (D&O) cover, after the firm said increased scrutiny has resulted in a possible upwards trend in climate litigation and disputes “in which corporate boards are being held to account for alleged reporting, regulatory and fiduciary failures linked to climate change and the fossil fuel sector.”
The law firm partners Ned Kirk and James Cooper were joined on the panel by Alice Garton, a senior lawyer for ClientEarth, and Anthony Hobley, CEO of the Carbon Tracker Initiative.
The panel described three key types of climate change related litigation that could hit re/insurers: companies failing to disclose how climate change effects their business, shareholders, pension fund members or investors suing investment and pension funds for investment in businesses adversely affected by climate change, and companies contributing directly to pollution and climate change.
Suggestions that this type of litigation in the U.S. could be reduced by the election of Donald Trump were rebutted as lawyers said that despite federal regulation steering towards a pro-business administration, private prosecutions by shareholders and activist groups would continue.
Kirk said the re/insurance industry has been coming under the lens as “regulators like the SEC have already issued guidance on climate change disclosure and are taking action against energy companies. They are also starting to look long and hard at sectors like mining, transportation and insurance.”
Clyde & Co said in the U.S. litigation against an energy firm for failure to disclose the impact of climate change, after it wrote down oil and gas assets in 2016, is already underway.
Cooper advised underwriters to ask “how they get to understand the climate change risks inherent in these businesses. They need to ask some searching questions about how companies are dealing with climate risks.”
He added; “President Trump’s election won’t stop this type of litigation. Private prosecutions will be used instead.”
Reinsurers and insurers could benefit from a cautious approach on energy firms’ investment and underwriting, as throughout the seminar, warnings were issued that these firms are “spending billions of pounds on exploration that will increase their reserves but will be unprofitable unless energy prices reach very high levels. This is depleting shareholder value and could lead to litigation.”
It was also suggested that energy companies can be very subjective in the choice of data they use to back up their business model; it was alleged, for example, that low estimates for the take-up of electric vehicles or adoption of renewable energy have been used.