Experts predict a significant rise in corporate litigation related to greenwashing, gambling, alcohol and governance

By Miranda Maxwell

On June 26, the International Sustainability Standards Board (ISSB) issued a new global baseline for corporate sustainability reporting.

The publication from the ISSB, which was created in 2021 at Cop26 in Glasgow to consolidate fragmented sustainability reporting around the world, is a major step forward for the standardisation of Environmental, Social and Governance (ESG) requirements.

These new standards are likely to inform yet-to-be implemented regulatory and legislative frameworks in Australia – and the implications for insurers are significant. 

Once viewed by many as a quick “tick a box” exercise or even fringe imposition, ESG standards are being taken ever more seriously by investors, workers, customers – and recently by Australia’s corporate regulators.

“We’re well and truly past ESG being something that’s nice to do and into the realm of serious risks that people are having to consider,” Dual Asia Pacific Head of CSR & Sustainability Emily Coates tells Insurance News.

Insurers and their clients “need to keep a watchful eye on what’s happening…and really be smart and able to demonstrate what they’re doing,” Ms Coates says. 

The new ISSB standards are a comprehensive global baseline for ESG disclosure. They aim to help companies “tell their sustainability story in a robust, comparable and verifiable manner,” ISSB Chair Emmanuel Faber says.

Environmental disclosure might cover energy use, waste and corporate climate policies. Social disclosure can refer to supply chain sourcing, health and safety and community engagement, particularly related to First Nations people. Governance disclosure can encompass conflicts of interest, illegal conduct, board diversity and tax transparency.

Industry experts predict a significant rise in ESG litigation related to unfulfilled environmental promises, gambling and alcohol practices, and governance failures – creating both a rise in insurance claims and opportunity for the risk and advisory industries.

There has already been a crackdown on “greenwashing” by the Australian Securities and Investments Commission (ASIC), and law firm Barry Nilsson says a rise in ESG claims against directors and officers and shareholder class actions will happen.

ASIC Commissioner Sean Hughes has stated ESG is a priority area of focus for the regulator, and it is “looking for misleading claims about ESG and sustainability”, including stated carbon emissions date targets.

Directors can be held personally liable for greenwashing, with penalties of $1.11 million or three times the benefit obtained for individuals, or up to $555 million for firms.

“Insurers (and their insureds) will need to carefully consider whether a raft of insurance products are adequately suited to meet this emerging claims area,” Barry Nilsson Principal Simon Black says.

“The proliferation of ESG considerations presents a number of challenges to the industry, both from an underwriting and claims perspective.

“Australia, in many respects, has not yet seen the level of ESG claims activity that has been seen in America and Europe. 

“The winds are changing and there has been a significant amount of regulatory attention over the past six months.

“As ESG has moved towards centre stage there has been a corresponding increase in ESG-related claims against directors and officers and shareholder class actions.”

The catchy “greenwashing” phrase sounds like jargon but has been given a formal definition by ASIC: misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

Changing times: Barry Nilsson Principal Simon Black sees ESG challenges on the horizon

ASIC has commenced legal action against superannuation provider Mercer, alleging it made false and misleading investment statements about carbon intensive fossil fuels, thermal coal, alcohol production and gambling. Energy firm Santos has also come under fire with allegations it misled about its plan to produce “zero-emissions” blue hydrogen.

These proceedings indicate what is to come for corporate Australia and the insurers that provide them with risk protection, and Mr Black says it is only a matter of time until there are more consistent, transparent and reliable reporting requirements and new legislative frameworks. 

“An era of structured sustainability reporting is an inevitability in the Australian market,” he says. 

“There will be a corresponding increase in ESG claims in the Australian market over the coming years, as reporting expectations are clarified and failure to comply with those expectations comes under sharp focus.”

ESG reporting is broadly voluntary in Australia and lacks transparency and reliability, but as that is addressed, it is clear that ESG claims will increase in volume, and within two years Barry Nilsson predicts they will “begin to transition from novelty to become a permanent part of the Australian claims landscape”.

Initially claims will revolve around regulator-driven proceedings, civil penalties, injunctions and declaratory proceedings. This will see the legislative and regulatory framework “crystalise” – giving way to D&O claims, shareholder class actions and general proceedings for damages relating primarily to capital raising and ASX disclosures.

Ms Coates, who spent 15 years in underwriting and broking, agrees there will “definitely be a rise in claims” related to ESG in Australia and New Zealand. 

She says both countries “so far seem a little bit behind the rest of the world. There’s going to be a rise in in claims coming out of these things, ASIC is focusing on this and it’s happening overseas.  

“Companies need to demonstrate that we’re doing what we say we’re doing. If you’re going to make commitments around things like net zero, then you really have to be able to demonstrate that you can back it up.

“Certainly, overseas, a lot of that reporting and the requirements are already in place,” she says, noting that to tender in the UK, United Arab Emirates and India, a company must demonstrate its commitment to net zero by whatever year.

“We need to keep a watchful eye on what’s happening further afield,” Ms Coates says, adding that local subsidiaries are already required to be compliant with their offshore parents.

KPMG says insurers are ahead of many companies in other sectors in Australia when it comes to ESG, but “behind the pack globally”.

Integrating ESG “into the DNA” of an organisation will avoid any suggestion of greenwashing and green fraud, and also attract investors and employees.

“ESG reporting is moving towards essential rather than optional,” KPMG said.

Taking the ESG profile of a risk into account is a growing phenomenon for sophisticated insurers to price cover and will become vital as ESG-driven claims numbers increase.

This presents the risk industry with opportunity to play an important advisory role.

“Some of the regulations that have come out are murky at best and often regulatory guides are all about the implementation. There’s going to be a huge role for advisers and opportunity for people to assist in guiding companies in this space,” Ms Coates said.