Kennedys, a global law firm with specialist expertise in the insurance, (re)insurance and liability sectors, has announced the launch of its in-depth report, Rewriting the risk: Addressing the challenges of climate change, which finds that the underwriting practices of (re)insurers are a major catalyst for change among businesses in the ongoing climate crisis.
Appetites are changing in response to the growing environmental and significant business challenges posed by environmental factors, which in turn is mobilising insurers to reassess their own operations and increase efforts to demonstrate climate leadership.
In the latest of a series addressing business critical issues facing (re)insurers, the report launched today focuses on the ‘environmental’ pillar of environmental, social and governance (ESG) considerations. The report considers the impact of climate change on insurers; how to mobilise insurance markets to mitigate climate risks; value chain risk arising from climate risk; and the growing trend of climate litigation risk.
Environmental liability risks
In particular, Kennedys’ report identifies the three main types of climate litigation being seen in the courts which bring Directors and Officers (D&O) and Errors and Omissions (E&O) insurance into focus, namely:
- Lawsuits targeting states challenging the adequacy of climate policies.
- Lawsuits targeting companies over their emissions of carbon dioxide, alleging climate-related harms.
- Other litigation strategies including activist shareholder and employees, including with regard to misleading environmental promises (greenwashing) and non-disclosure of climate-related risks.
Within this already active, litigious landscape, Kennedys notes two major developments compounding pressure as companies transition towards sustainable practices. First, a climate change ‘duty of care’ is owed by public and private actors, which is already being tested when establishing causation. As with the ‘duty of care’, shareholder activism is also on the rise and is set to drive a change in corporate behaviour. Individuals and NGOs are increasingly using the court to try to achieve their objectives, including enforcing board responsibility with regard to corporate compliance with regulations, targets and broader environmental principles. Insured companies must, therefore, focus on improving their ESG regulatory frameworks.
Strategies for change
Incorporating views from leaders in insurance – including Cedric Lobo, Senior Vice-President at Transatlantic Reinsurance and Chair of the International Underwriting Association (IUA) Climate Committee and Katie Lennon, Head of ESG, UK & Lloyd’s at AXA XL and Vice-Chair of the IUA Climate Committee – the report recommends six strategies for (re)insurers and their corporate clients to adopt in order to identify and stay ahead of climate risks.
While the insurance sector has long taken steps in the right direction – for example, (re)insurers now make up 12 of the 26 members of the UN-Convened Net-Zero Asset Owner Alliance – many (re)insurers continue to identify climate risk as a significant business challenge. Major risk types include physical risks, which manifest in the form of physical damage via natural catastrophes; transition risks as businesses make changes to meet carbon emission targets; and environmental liability which could result in losses related to physical or transitional risks related to climate change.
Deborah Newberry, director, corporate affairs, Kennedys said: “The evidence of climate action being taken in many countries is deeply encouraging. However, it is clear that all sectors have an important role to play in achieving further and substantial emissions reductions. Addressing the challenges of climate change requires true innovation – in institutions and organisations; understanding and thought; technology and leadership. In turn, the right policies, infrastructure and regulatory landscape are required to enable business to help meet the targets.”