Why Climate Risk Is Here to Stay

As litigation strategies evolve, insurers face exposure risks on both sides of the balance sheet

June 07, 2023 Photo

Climate litigation is now widely acknowledged as a real and imminent threat to governments, public bodies, and company boards, particularly in carbon-intensive sectors like energy and heavy industry. Plaintiffs’ aims include upholding accountability for “climate harms,” driving direct and indirect regulatory shifts, prompting systemic behavioral change, and raising public awareness of climate change and environmental issues, as highlighted in the June 2022 policy report “Global Trends in Climate Change Litigation,” by the Grantham Research Institute on Climate Change and the Environment.

Most non-U.S. climate lawsuits to date have targeted governments and public bodies, challenging the implementation or ambition of climate targets (as in Association of Swiss Senior Women for Climate Protection v. Federal Department of the Environment Transport, Energy and Communications (DETEC) and Others) or particular policies [such as Ali v. Federation of Pakistan and R (oao Friends of the Earth) v. Secretary of State for Business Energy and Industrial Strategy “Net Zero Challenge”] or claiming that a state’s actions violate its human rights obligations. Now, international plaintiffs—many of whom are non-governmental organizations (NGOs)—are increasingly turning their attention to corporate targets, as seen in the Urgenda Foundation v. State of Netherlands (2019) and Milieudefensie et al v. Royal Dutch Shell (2021) judgments, which illustrate this shift.

In Urgenda, the Dutch Supreme Court ruled that the Dutch government’s emissions reduction pledge (21% from a 1990 baseline by the end of 2020) was not enough and increased it to 25%. This was the first case to establish that a state owes a duty of care to its citizens to prevent dangerous climate change. It had direct and significant consequences. In Milieudefensie, a Dutch court extended the duty established in Urgenda to companies, finding that energy giant Shell had a corporate duty of care to reduce its greenhouse gas emissions (based in part on human rights), and that its business practices violated that duty. Shell was ordered to reduce its scope one, two, and three emissions by 45% by 2030 (compared to 2019 levels). If this judgment is upheld on appeal, it could have significant implications for other companies well beyond carbon majors.

In April 2022, Milieudefensie sent letters to 29 Dutch companies from various sectors that “contribute significantly to causing dangerous climate change” highlighting the Shell judgment and threatening litigation unless the companies implemented climate mitigation plans to reduce emissions in line with the Shell judgment. In Italy, Greenpeace has just launched proceedings against Eni, the Italian oil major, relying on constitutional provisions as well as the civil code and international law, seeking an order similar to that granted against Shell together with damages for material damage and health impacts of historic emissions attributable to the company’s products.

But what is the impact on insurers that are underwriting large parts of these sectors? Climate litigation will likely lead to an increase in notifications and claims under corporate insurance policies, such as directors and officers (D&O), general liability, and professional indemnity, but might also expose insurers directly for their role as investors and financiers. Essentially, insurers face risks on both sides of the balance sheet.

While the field of climate litigation is expansive and rapidly evolving, this article focuses on this double exposure of insurers as underwriters and financiers, and the implications of climate litigation on the insurance sector.

Impact on Insurers as Underwriters

Insurers writing particular lines of business could face large exposures from climate litigation involving their insureds.

One such class of business is D&O, a concern that led the Bank of England to warn last year that climate litigation could affect “the cost and availability” of this insurance. This risk may be heightened in the wake of ClientEarth’s derivative action filed February 2023 in the English High Court against Shell’s directors personally. The claim alleged that Shell’s directors breached their duties under s.172 and s.174 of the UK Companies Act 2006 by failing to adopt and implement an energy transition strategy that aligns with the Paris Agreement. ClientEarth (as a shareholder of Shell) claims that the company’s energy transition strategy is insufficient and that it does not comply with the Dutch court’s order in Milieudefensie.

ClientEarth suffered a setback in May 2023, when the High Court refused permission for the derivative claim against Shell to proceed. This was partly on the basis that it is for directors themselves to determine (acting in good faith) how best to promote the success of a company, and it is therefore not up to the court to impose specific obligations on Shell’s directors. However, ClientEarth has since reported that it has been granted a hearing to request the court to reconsider its dismissal. Regardless of the outcome, we can expect NGOs to file similar claims against directors in the future.

The risk is no different in the U.S. On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed comprehensive rules for all registered companies that require “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk.” It is therefore expected that shareholder lawsuits arising from environmental, social, and governance exposures will increase and present difficult coverage issues. Many D&O policies contain pollution exclusions, and insurers have already indicated their intention to rely on these to deny coverage for lawsuits that allege “losses” as a result of D&Os’ “wrongful acts” in financial reporting related to climate change. No case law exists yet on the effect of pollution exclusions in D&O policies in this context.

But it is not just directors of energy companies who could be exposed. Directors at any company that makes climate-related decisions—including investors such as pension funds and insurers; financial institutions; local councils; and even subject matter experts—could be targeted.

Cases in which damages for climate impacts are sought from defendants based on an alleged contribution to climate change have been some of the highest profile to date. Indeed, much of the litigation in the U.S. has been mired in appeals regarding venue, an issue that has reached the United States Supreme Court. Of note, in April 2023, the Supreme Court in Suncor Energy (U.S.A.) Inc. v. Board of County Commissioners of Boulder County denied Suncor’s petition to have its case sent back to federal court. With this decision, it is expected that appeals in a dozen or so other climate change-related lawsuits in various U.S. jurisdictions will end, paving the way for these cases to proceed substantively in state courts that are considered by many as more friendly for claimants.

What is clear is that more and more sectors are at risk. The past year has seen the rise of strategic climate lawsuits filed against corporate defendants across different sectors, including cement (Asmania et al. v. Holcim); aviation (FossielVrij NL v. KLM); fast-moving consumer goods (ClientEarth, Surfrider Foundation Europe, and Zero Waste France v. Danone); and fast fashion (Commodore et al v. H&M), to name a few. Claims can relate to product liability, nuisance, fraud, and many more lines of business. This opens up insurers operating across a large range of sectors to claims for climate-related litigation.

To reduce the likelihood of such claims, insurers are asking more of their insureds. At the underwriting stage, insurers are considering putting additional exclusions in place, reassessing policyholders’ risk appetite at renewal, or even designing new policy clauses.

Impact on Insurers as Financiers

While insurers may seem somewhat removed from, or at least in control of, these liability risks in their role as underwriters, their investment divisions may not be so protected.

Insurers may be concerned by the recent rise in lawsuits and complaints filed against financiers for investments in fossil-fuel interests. There are currently only a handful of these cases, but finance has been pinned as the fourth most likely sector to be targeted by strategic climate litigation after energy, plastics, and food and agriculture, and the increasing spotlight on portfolio or “financed emissions”—which can be understood as the value chain emissions associated with a given institution’s investment decisions—is a cause for concern for private and public financial institutions around the world.

Unlike many of the claims discussed above, most cases against financial institutions to date have been brought against fund managers by investors, rather than NGOs. Around the world, plaintiffs have alleged a breach of fiduciary duty for failing to disclose climate risk and mismanaging funds by overinvesting in fossil-fuel assets with inflated valuations, and by failing to divest fossil-fuel holdings. Similar claims have been brought directly against banks for their indirect, causal contributions to climate change by financing fossil-fuel expansion.

As sectors including advertising and finance refine models for calculating their whole value chain emissions, it may not be long before the same is expected of insurers. Insurers heavily invested in fossil-fuel interests are, therefore, exposed to the same liability risk.

Related to this, greenwashing litigation has seen a sharp increase, especially in the context of consumer and investor protection against misleading communications. For instance, in the U.S., two securities class actions have been filed in recent years alleging that an oat milk company and its directors misled investors when launching its IPO by making the company’s product appear more sustainable than it actually was. This highlights the need to take into account the whole lifecycle of emissions, and it is relevant to insurers as they seek to reduce their greenhouse gas emissions, prove their sustainability credentials, and offer novel green insurance tools.

From Climate to Environmental Litigation

We are now seeing the tools and approaches used in climate litigation expanding into other types of environmental liability claims.

Litigation in relation to per- and polyfluoroalkyl substances (PFAS), which are known as “forever chemicals” because they break down very slowly in the environment, is an increasing risk to insurers. While the first PFAS claims in the 2000s were against manufacturers such as 3M, more recent claims have targeted companies like McDonald’s. These claims have been focused on the U.S., but as with climate litigation, they may also expand further afield with claimants using successful U.S.-based lawsuits as a blueprint. For example, the Belgian government in 2022 settled with PFAS manufacturer 3M to pay more than €571 million in remediation and clean-up costs after citizens complained of contamination. Also in Belgium, 3M appeared in court in February 2023 to face a claim for nuisance brought by a family over the presence of PFAS in their blood. Insurers could be exposed for PFAS claims under product liability, employer’s liability, public liability, and environmental liability policies, although some may be considering excluding PFAS in light of the Belgian settlement.

There have been several biodiversity cases against states and a few against corporations, such that this may be the next frontier for environmental litigation. For example, in March 2021, a claim was brought against the French supermarket chain Casino under the 2017 French Vigilance Law, which requires French companies to implement due-diligence plans, and concerns a wider issue of ecosystem destruction. Such claims focusing on environmental impacts and loss of biodiversity may trigger established pollution-prevention clauses of liability policies.

New standards for nature-related disclosures are under development, too. In September 2023, the Taskforce on Nature-Related Financial Disclosures (TNFD) will publish a framework for corporate and financial institutions to assess, manage, and report on their risks and opportunities in relation to nature. The climate-related financial risk disclosure framework was published in 2017 by Taskforce on Climate-Related Financial Disclosures and rapidly became the gold standard for climate reporting; this is widely expected to happen for the TNFD framework, too.

Plastics manufacturers have also been under increasing scrutiny, both for their contribution to climate change and the impact of plastic waste and pollution on public health and the environment. In recognition of this, last year 175 countries adopted a resolution for the development of a legally binding global treaty on plastic pollution, which should address the full lifecycle of plastic. The resolution gives a layer of legitimacy to NGOs seeking to bring cases against companies responsible for plastic pollution. Indeed, some claims have already commenced in the U.S. and France.

What is clear is that climate and other environmental litigation is here to stay. Insurers must adjust for this new normal both in their role as underwriters of risks across the globe and the corporate spectrum, and in their role as investors. 


About The Authors
Multiple Contributors
Nigel Brook

Nigel Brook is a partner at Clyde & Co LLP (London). nigel.brook@clydeco.com

David Ktshozyan

David Ktshozyan is a senior associate at Clyde & Co U.S. LLP (Los Angeles).  david.ktshozyan@clydeco.us

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