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Litigation on a range of environmental, social and governance issues, such as climate change, pollution, diversity and CEO pay, is on the rise, putting pressure on companies to proactively manage ESG risks.
ESG-related factors are increasingly sources of regulatory change and liability, said Anton Lavrenko, regional head of financial institutions, North America, at Allianz Global Corporate & Specialty SE, part of Allianz SE, in New York.
Heightened concerns over ESG issues could increase potential directors and officers, errors and omissions, and employment practices liability exposures, he said.
In the U.S., recent developments such as growing scrutiny of ESG corporate disclosures by the Securities and Exchange Commission, a 2020 California law requiring publicly-held companies to diversify their boards, and a Nasdaq Stock Market proposal to mandate board diversity, signal a shift toward a compulsory compliance regime, Mr. Lavrenko said.
“Financial institutions will be held to a very high degree of accountability as respects to ESG actions and compliance, because they make investment, lending and insurance decisions on a daily basis for all types of companies,” he said.
Litigation concerning environmental rights and human rights is “taking off,” said Nigel Brook, London-based partner at Clyde & Co LLP. While the majority of cases to-date are against governments, the number of cases against companies is increasing, he said.
In addition, concerns about “greenwashing,” in which companies overplay their green or ESG credentials, are rising.
With more compliance, it will be easier for regulators, investors and others to hold companies to account on social and environmental issues, Mr. Lavrenko said.
There is the potential for litigation as regulators and legislatures start to introduce and apply rules and regulations around ESG, said Eric Dinallo, a partner at Debevoise & Plimpton LLP and a former Superintendent of Insurance of New York.
He cited recent New York Department of Financial Services-issued guidance that lays down certain expectations of how New York-domiciled insurers should be managing and accounting for ESG risks.
Brokers and insurers have long focused on helping companies mitigate climate risks, but managing a broad spectrum of environmental, social and governance concerns is becoming a critical part of how the industry does business.