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Climate disclosure rules may have D&O consequences


A U.S. Securities and Exchange Commission proposal requiring companies to disclose climate-related risks could lead to more securities litigation and higher directors and officers liability insurance rates, some experts say.

But the proposal also may lead to a more standardized system of reporting climate change-related risks, compared with the hodge-podge of standards companies currently must navigate, they say.

The 506-page proposal issued by the SEC earlier this month asks companies to report on three “scopes”: their direct greenhouse gas emissions; their indirect emissions from the purchase of electricity or other forms of energy; and indirect emissions for upstream and downstream activities in their “value chain,” which refers to their supply chain and end-users.

Observers say Scope 3 is the most problematic for companies because it would require detailed information on companies that are not necessarily publicly held or U.S.-based.

The proposal could become effective in December and would be gradually phased in.

In presenting the proposal, SEC Chair Gary Gensler said it would provide investors “with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.”

The proposal was opposed by the lone Republican SEC commissioner, Hester M. Pierce, who said in a statement it “will not bring consistency, comparability and reliability to company climate disclosures” and will “undermine the existing regulatory framework that for many decades has undergirded constant, comparable, and reliable company disclosures.”

Experts say the proposal had been long anticipated.

The rule, or some version of it, “was probably inevitable,” said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC. “There was a lot of pressure on the agency from various constituencies to issue guidelines.”

“It’s fairly consistent with some of the requirements for disclosure” seen in Europe and other parts of the world, said Matthew McLellan, Washington-based managing director and D&O product leader for Marsh LLC.

Britain issued mandatory environmental, social and governance disclosure laws in January.

Its effect will vary by company, experts say.

“Different companies have different levels of exposure,” said Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co. “It depends on how mature various companies are when it comes to thinking about” their climate-related issues.

Experts say the proposal will provide standardization in evaluating climate issues.

James Rizzo, New York-based underwriter for U.S. executive risk for Beazley PLC, said it will drive transparency and consistency in corporate reporting.

But it will also generate compliance costs and create time demands, which can have a knock-on effect that drives up policyholder costs, he said.

“It will add to an ever-growing list of D&O questions for insureds about their progress to date,” and their adherence to the proposal once it is finalized, said Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC.

The proposal should not affect premiums or terms and conditions on D&O placements but will add to the preparation process, he said.

However, Matthew C. Franker, of counsel with Covington & Burling LLP in Washington, said, “You’re looking at a potential increase in securities litigation,” which could lead to an increase in D&O premiums.

The proposal could lead to climate change derivative lawsuits, which could impact D&O rates, said Daniel Drennen, Birmingham, Alabama-based AmWins Group Inc. vice president and environmental practice leader.

In addition, D&O insurers may be less willing to write the coverage or may add policy exclusions, he said.

Mr. Drennen pointed to a statement by London-based environmental law charity ClientEarth, which said earlier this month it was preparing legal action against the directors of Shell PLC over the company’s climate transition plan, in what they said would be the first such case of its kind. Its attorneys said they are seeking to hold Shell directors personally liable for failing to be prepared for the global shift to a low-carbon economy.

Susan Friedman, New York-based area senior vice president for Arthur J. Gallagher & Co., said the proposal “is a new roadmap” for the plaintiffs bar to follow in filing derivative lawsuits.