Green laundering, climate change disclosure and financial pathway risks | Kennedy

With the increasing attention of regulators, investors and businesses to environmental, social and governance (“ESG”) policies, insurance companies in the financial sector are evaluating potential exposures to these risks. One such risk is the potential for investigation and litigation over climate-related disclosures.

On March 21, 2022, the SEC announced a proposed rule requiring disclosure of climate-related risks, which could lead to possible liability for non-compliance under the Securities Act of 1933 or the Securities Exchange Act of 1934.[1] The proposed rules would require publicly traded companies to disclose their greenhouse gas emissions (including upstream and downstream supplier emissions for certain large companies), material climate-related risks to companies and businesses, and the governance and oversight processes for climate-related risks that are in place at the board level. and management. As of the date of this publication, the proposed rules remain open to public comment.

As of May 31, 2022, the London School of Economics had identified nearly 2,000 cases of climate change litigation globally, with the majority being filed in the US.[2] Most of these cases relate to environmental regulatory actions or tort claims related to environmental or climate issues, but a growing number relate to financial pathway exposures. One of the key categories of climate change litigation involves allegations of inadequate environmental disclosure and disinformation. This claim is known as “green washing”, or sometimes “climate washing”.

Claims of green laundering or climate laundering generally fall into three categories of misinterpretation regarding: (i) corporate and government commitments, (ii) product attributes, and (iii) disclosure of climate change investments and associated financial risks.

One example of a company’s commitment includes a lawsuit filed against France’s largest energy company, TotalEnergies, in March 2022.[3] The lawsuit by a group of environmental organizations accuses the energy company of violating the European Unfair Consumer Practices Directive. Environmental organizations allege that TotalEnergies misled consumers by publicly committing to achieve net zero carbon emissions by 2050 despite plans to produce more fossil fuels, including the development of a multi-billion dollar oil project in Uganda. Another recent example of alleged failure to comply with corporate commitments is the $1.5 million fine imposed by the SEC on BNY Mellon for omitting or making misleading statements about ESG investment considerations made in connection with a mutual fund it manages.[4]

The second category of greenwashing claims concerns the misrepresentation of climate friendly product attributes. This “product attribute” claim was exemplified in a securities class action lawsuit filed against wheat milk producer Oatly Group AB in July 2021 in U.S. District Court in the Southern District of New York.[5] Shareholders allege that Oatly misrepresented in its regulatory filings about the environmental benefits of wheat milk production compared to cow’s milk production. Oatly’s production techniques are touted as environmentally friendly, when in fact they emit comparable greenhouse gas emissions, require the same land use, energy consumption and transportation costs as dairy production. The practice also involves related suppliers and producers who engage in deforestation and generate hazardous volumes of wastewater. The case remains pending.

The third category of accusations of green laundering involves misleading disclosures about the company’s investments and risks related to climate and environmental safety. A striking example of this type of claim is illustrated by the SEC enforcement action, brought by the newly formed Climate and ESG Task Force, against publicly traded Brazilian mining company Vale SA (“Vale”).[6] In April 2022, the SEC filed a complaint alleging that Vale committed securities fraud by deliberately concealing that its Brumadinho dam might collapse, and that the flow from the dam would cause significant environmental damage.[7]

But how does increased scrutiny of climate-related disclosures actually impact green laundering litigation?

Only twenty (20) greenwashing cases have been brought to court in the United States, Australia, France and the Netherlands since 2016.[8] Sixteen (16) of the cases were filed in the United States. However, ten (10) of the cases were filed since 2020 and all but one were filed in the United States. Since January 2022, at least 5 alleged class action lawsuits have been filed in the United States, alleging false accusations of sustainability claims in advertising.[9]

The rate of filings of 2022 greenwashing cases in the United States continues to keep pace with those of 2021. Since 2016 the rate of filings of greenwashing cases has increased, with half of those cases filed in the last two years. The prospect of high SEC environmental disclosure and regulation of sustainability claims may provide additional avenues for greenwashing claims by shareholders. Similarly, the diversified nature of climate-related claims (including consumer protection, securities fraud, and liability losses) can give rise to evolving avenues for exposure.

But there are also other forces that can reduce the potential for climate-focused legislation and litigation. Although proposed climate change laws such as SEC disclosures and the climate protection provisions of the “Build Back Better” law have been introduced, these proposals are hotly contested and could easily be sidelined if opponents of these laws win in the upcoming election cycle. In addition, while some support the idea of ​​a formalized environmental disclosure process, others are concerned about what climate-related information could be considered material to reasonable investors and how that might change over time. There are also concerns that the non-financial expertise required to make the disclosures proposed by the SEC is beyond the scope of most companies’ capabilities and will require assistance from outside auditors. As such, the current focus on climate-related regulation may diminish depending on the political and social landscape, which could impact the level of litigation over greenwashing and other environmentally motivated claims.

In assessing the risk for these potential liabilities, underwriting and claims professionals may wish to evaluate the extent to which an entity has made commitments to climate action (particularly net-zero strategies and climate pledges) through advertising, internal policies, or otherwise, reviewing whether any measures are in place. steps have been taken to achieve these objectives, and consider whether the entity’s business may involve negative environmental impacts involving climate issues. Investigations into these areas can assist insurers in evaluating the potential risks that litigation related to sustainability practices and disclosures may pose, regardless of the formal regulatory policies in place.

[1] The Proposed Rules are available at https://www.sec.gov/rules/proposed/2022/33-11042.pdf.

[2] Grantham Research Institute on Climate Change and the Environment, World Climate Change Law (2022), retrieved May 23, 2022, from https://climate-laws.org/#map-section.

[3] C. Hodgson, TotalEnergies targets lawsuit to test ‘greenwashing’ in advertising, Financial time(3 March 2022), retrieved 23 May 2022, from https://www.ft.com/content/bdef4e7a-7bc9-4061-968a-a68d9aa32771.

[4] P. Temple-West, SEC fined BNY Mellon on ESG in first case of its kind, Financial time (23 May 2022), retrieved 23 May 2022, from https://www.ft.com/content/ff0097c4-3f1c-49d8-8189-153fc56aeeb3.

[5] Kai Jochims, individually and on behalf of all others in a similar position v. Oatly Group AB, et al., SDNY Case No. 21-cv-06360, Doc. 1 (26 July 2021).

[6] SEC v. Vale SA, EDNY Case No. 22-cv-2405, Doc. 1 (28 April 2022).

[7] Indo. at 1, 209, 210.

[8] CSSN 2022:1 Research Report: Litigation of Climate Laundering: Legal Responsibility for Misleading Climate Communications5, Appendix A.

[9] truth in Advertising, Earth Day 2022: Companies Accused of Greenwashing (22 April 2022), retrieved 23 May 2022, from https://truthinadvertising.org/articles/six-companies-accused-greenwashing/. Look Jacobs et al. v. Whole Foods Market Group, Inc., ND Ill. Case No. 1:22-cv-00002 (Jan. 2022); Clark et al. v. McDonald’s Corp., SD III Case No. 3:22-cv-00628 (March 2022); McDowell et al. v. McDonald’s Corp., ND Ill. Case No. 1:22-cv-01688 (March 2022); Husayn et al. v. Burger King Corp., ND Cal. Case No. 4:22-cv-02258 (April 2022); Barrett et al. v. The Clorox Co., Burt’s Bees, Inc., and The Burt’s Bees Product Co., ND Cal. Case No. 4:22-cv-02193 (April 2022).

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