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Author: Theresa Lewin
With Australia's regulatory watchdogs, the Australian Securities and Investments Commission (ASIC) and The Australian Competition and Consumer Commission (ACCC), taking legal actions against businesses that overstate or mislead the public or stakeholders in relation to their environmental, social and governance (ESG) values, there are a number of measures that organisations should be considering.
In managing exposure to greenwashing allegations there are key areas companies should take into account.
- Organisations should carefully consider any statements around disclosures and targets, eg: green, sustainable or net zero forecasts that are put into corporate documents, particularly those provided to current or potential consumers and investors.
- Be transparent and clear — don't use vague or unclear claims which could mislead consumers or investors.
- Ensure that your organisation can back up any aspirational claims or targets with clear evidence and a plan on how these goals will be achieved. If investigated, you will be required to substantiate any claims made.
- Review the available supporting documents provided by the regulatory bodies, including Information Sheet 271 which provides ASIC guidance on how to avoid greenwashing when offering or promoting sustainability-related products.
How can insurance help businesses protect themselves from greenwashing claims?
Directors and officers liability
When faced with ESG related claims and regulatory investigations, directors and officers will naturally look to their directors and officers (D&O) policy for cover.
Core D&O cover typically applies to claims against senior executives for actual or alleged acts, or errors or omissions committed in their directorial or official capacity. A claim against a director or officer, alleging unintentional greenwashing related failures, is likely to fall within this category.
D&O coverage for regulatory investigations typically applies to costs incurred by directors and officers in responding to non-routine regulatory investigations into the business's affairs or the conduct of the senior executives. A regulatory investigation into ESG or greenwashing issues should be covered under the business's D&O insurance.
Modern D&O policies tend to carry a small number of exclusions and most policies have some form of pollution exclusion. It's advisable to consider such exclusions in the context of potential claims and regulatory investigations involving environmental issues.
Given that the incidence of ESG related claims and regulatory investigations is rising, the increased risk should be considered in the context of determining the correct limit of liability under a D&O policy. In some cases it may be appropriate to opt for increased limits, particularly for publicly listed entities, and dedicated Side A coverage (which applies if your business is unable to indemnify its directors and officers).
Many D&O insurers now ask specific questions at renewal around ESG and target-setting in public statements as it is now viewed by many as a major risk area. If a business can demonstrate robust ESG policies, implementation and reporting, it will undoubtedly assist in making your risk more attractive to insurers.
Some businesses struggle to understand and manage the evolving ESG landscape, and fall short in demonstrating well-structured and transparent corporate sustainability practices. This is where having the right consultative partner is key to effectively mitigating against greenwashing risks and regulatory pitfalls.
Professional indemnity insurance
When faced with ESG related claims and regulatory investigations, businesses that provide professional services or advice or which make statements about their ESG credentials look to their professional indemnity policy for protection.
Core professional indemnity cover typically applies to claims against the insured company for actual or alleged acts, errors or omissions committed in its provision of professional services. If a claim alleges misrepresentation around ESG investments in the provision of professional services or advice to third parties it's likely to be covered by most professional indemnity insurance policies, although this can depend on how certain policy terms are defined — particularly the definition of 'professional services'.
Professional indemnity coverage for regulatory investigations typically applies to costs incurred by the insured company in responding to non-routine regulatory investigations into its provision of professional services. If a regulatory investigation focuses on alleged misrepresentations around providing professional services or advice within an ESG framework, it's also likely professional indemnity insurance will be applicable, depending again on how certain policy terms are defined.
Coverage for regulatory investigations is by no means a standard feature of professional indemnity insurance. In the last few years many insurers have attempted to remove or amend this cover so it only applies to costs incurred by employees, as opposed to the insured company itself.
Accordingly this is a point that should be reviewed. The considerations around D&O insurance in respect to pollution exclusions apply equally to professional indemnity as most policies include these exclusions. The issue of increased limits of liability and insurer scrutiny are also relevant to professional indemnity insurance, although perhaps to a lesser degree than for D&O insurance.
How Gallagher can help
Connect with us to request a professional and financial lines risk insurance consultation, quote or proposal in consideration of possible greenwashing exposures. Our insurance brokers have the expertise and experience to advise you on obtaining the cover you need.
