ESG and D&O Policies

A number of regulators in the Asia-Pacific (including Singapore) have recently announced mandatory climate reporting for listed and/or large corporations in line with global standards, with the requirements taking effect gradually and incrementally over the next few years. Climate change litigation is also on the rise globally, with an increased focus on directors and officers. Against this backdrop and the growing focus on Environmental, Social and Governance (ESG) goals, this article considers the “E” of the ESG and its implications for liability policies.

Mandatory climate reporting

Recently, it was announced that all listed companies must make climate-related financial disclosures compliant with the standards set by the International Sustainability Standards Board (ISSB) from as early as 2025.[1] Large non-listed companies (with annual revenue of at least $1 billion and total assets of at least $500 million) must do so from 2027. Adopting the recommendations by the Sustainability Reporting Advisory Committee (SRAC), there are other obligations such as reporting on indirect emissions that occur in the value chain of any reporting entity, including both upstream and downstream emissions. However, these would come into play at a later time (no earlier than 2026 for listed companies and 2029 for large non-listed companies).

Similar proposed regulatory changes can also be seen elsewhere in the Asia-Pacific. For instance, in Korea, the Financial Regulator announced that it will require local firms to disclose their investments and business activities related to climate issues.[2]  The Hong Kong stock exchange also recently published their conclusions on climate disclosure requirements which are to be effective from 2025.[3] In a similar move, the Australian government had previously announced its intention to hold companies to the higher standards of climate-related disclosures as set by the ISSB,[4] and recently tabled the Treasury Laws Amendment Bill 2024: Climate related financial disclosure (Draft Bill) in the House of Representatives.[5]

Climate change litigation

Other than regulatory developments, climate change litigation is also on the rise. Such litigation can take various forms and is often initiated with the aim of influencing corporate and societal behaviour. Examples include “climate washing” cases which focus on inaccurate or misleading representations on corporations’ transition towards a low-carbon future and “polluter pays” claims that seek compensation based on alleged harms to the environment.  

The 2023 United Nations Global Climate Litigation Report has reported that as at December 2022, there have been 2,180 climate change litigation cases filed in 65 jurisdictions, reflecting a steady increase in such cases.[6] Based on the report, whilst the lion’s share of such claims was filed in the U.S., 23.2% was filed in Oceania, and 6.6% was filed in Asia, across Indonesia, Philippines, India and Japan amongst others. It is noteworthy that some of the most climate vulnerable countries in the world are within the ASEAN region.  An increase in litigation aimed at putting pressure on corporations and government bodies may well be on the horizon for this part of the world.

D&Os are increasingly in the line of fire.  For example, ClientEarth, an environmental advocacy group that holds a small number of shares in Shell Plc, applied for permission to commence a derivative action against the directors of Shell plc in the English High Court (ClientEarth v Shell Plc & Ors. [2023] EWHC 1137).  The underlying claim was that there were breaches of the directors’ duties in failing to “strengthen its climate transition plans” and in so doing, the directors failed to sufficiently protect the company from future impacts of climate change. That claim was dismissed.

Recently, the European Court of Human Rights found by a 16:1 majority that the Swiss government had breached its human rights obligations in the case brought by an organisation of senior Swiss women (Verein KilmaSeniorinnen Schweiz) and four Swiss individual women concerned about the impact of global warming on their living conditions and health (Verein KlimaSeniorinnen Schweiz v. Switzerland). The judgment requires Switzerland to put into place frameworks designed for the specific features of risks associated with climate change impacts.

On the other end of the spectrum, the United States is seeing anti-ESG litigation on the basis that a corporation’s adoption of ESG practices run counter to the duties of fiduciaries to maximise investors’ profits.

Impact on liability policies

Climate related disputes are likely to continue to increase in light of regulatory and policy changes globally.  D&O policies may be particularly vulnerable to climate washing claims, allegations of breaches of fiduciary duties and the indirect financing of carbon emissions.

Insurers may wish to assess underwriting factors in light of the emerging regulatory and litigation trends in the Asia-Pacific associated with climate change. That may include a robust consideration of clients’ business practices, operations (including supply chain management) and risk management vis-à-vis climate change, any climate-related pledges or representations made by the corporation and their understanding of climate reporting obligations based on the jurisdiction(s) they operate in.