Looking for some actual evidence of change in ESG? Watch this year’s Annual Report season starting …. now.

09 February 2023

Ed Smerdon

Helping Insurance with Wordings & Products | Solicitor | Director at Coverage Matters

Companies have to start showing their commitment in legally measurable terms by publishing their Climate-Related Financial Disclosures.

This is the last of the three bitesize reads on Environment, Social, Governance by Edward Smerdon, consulting editor of the new fourth edition of Directors’ Liability and Indemnification. The “E” has seen the most legal and business scrutiny.

Looking for some actual evidence of change in ESG? Watch this year’s Annual Report season starting …. now.

Companies have to start showing their commitment in legally measurable terms by publishing their Climate-Related Financial Disclosures.

This is the last of the three bitesize reads on Environment, Social, Governance by Edward Smerdon, consulting editor of the new fourth edition of Directors’ Liability and Indemnification . The “E” has seen the most legal and business scrutiny.

UK’s Main Market Listed Companies
In December 2021 the FCA (UK’s listing authority) issued a Policy Statement PS 21/23: ‘Enhancing climate-related disclosures by standard listed companies’. This extended climate disclosure requirements from Premium listed to Standard listed company shares.

Institutional Investors
The FCA also published a Policy Statement (PS21/24) which introduced requirements for certain asset managers, life insurers and pensions providers to make climate disclosures.

It’s Happening Now
The new rules apply to accounting periods starting on/after 1/1/22. So, the first annual financial reports subject to the new rule will be published from now.

Backstory
This is part of a global initiative to engage listed companies and institutional investors in halting climate change:
- In 2015, Mark Carney, Bank of England Governor, gave a speech at Lloyd’s in which he said climate change had become a financial stability risk.
- The Financial Stability Board established the Task Force on Climate-Related Financial Disclosures (TCFD). The disclosures now being reported follow the recommendations in the TCFD Report.
- In 2021 the Glasgow Financial Alliance for Net Zero (GFANZ), a $130 trillion global alliance of institutional investors formed, which will drive investment to net zero.

Implications for D&O?
It’s good news companies are making climate disclosures, but they could lead to civil liability for directors where:
1. they are too positive or optimistic: there could be securities claims. In the UK offering disclosures are riskier than annual disclosures. In the US the risk is high in both.
2. they suggest companies are moving too slowly or quickly: shareholders may try to influence strategy by bringing derivative claims. These rarely get far in the UK but tactically may secure concessions. In the US they are common.
3. companies’ transition to the green economy goes badly: claims against former boards for failing to “promote the success of the company” or not “acting with reasonable skill, care and diligence”, if inaction since Paris was contributory.

Will the changes lead to more or fewer claims?
More, with reputational impact. D&O practitioners should focus on the disclosures in the placement process.
The good news is that if there are "E" related D&O claims, as an “all-risks” product a D&O policy should, subject to its terms, provide cover. This doesn’t mean the D&O product can’t be more ESG “friendly”.