What do you see is a major issue for your area of insurance, and how it could be resolved?

One issue that I consider to be a continuing area to watch going into 2024 in the financial lines space is the increase in regulatory scrutiny facing companies, and potential regulatory and litigation risks to Insureds as a result. In particular, new regulation relating to ESG requirements will continue to be an area of focus into 2024. Given the new directives emerging in various jurisdictions, such as the Corporate Sustainability Reporting Directive (CSRD) and the European Corporate Sustainability Due Diligence Directive (CSDDD) coming into force in the EU, companies will have more stringent obligations placed upon them in relation to the ESG-related disclosures that they make. Specifically, under the CSDDD, directors would have a direct duty of care to ensure that their decisions take into consideration their sustainability goals and climate impact. Similarly, in the UK, FCA-authorised firms will be required to ensure that any reference to the sustainability characteristics of their company are not misleading.

This increased scrutiny leaves companies, as well as their directors and officers, open to investigation by regulators and litigation risk from shareholders alike. In the US, the SEC recently finalised the “Enhancement and Standardisation of Climate-Related Disclosures for Investors”, which would again require companies to publish information pertaining to their climate risk which may have material impacts on their business.

Whilst the idea of “greenwashing” claims is not a new concept for 2024, the impact of the types of regulatory developments discussed above may increase the frequency of these types of allegations being made. The increased demand for transparency means companies are now required to make clearer public disclosures, and are less able to avoid commenting or use “greenhushing” as a mechanism to avoid making public statements around their ESG impact, which could later become subject to scrutiny and lead them into complications. As such, companies will now need to strike a careful balance in ensuring that they share the right amount of information to enable them to comply with the regulatory requirements of their region and ensuring that this information is adequately substantiated.

This then leads to the question of how these issues might be resolved. On the one hand, when seeking to mitigate the risk of receiving ESG-related claims against Insureds, Insurers may wish to assess the ESG-related policies and current practices in place at prospective Insured entities. One potential method of assessing this risk might be benchmarking assessments produced by ESG ratings agencies. However, concerns have also been raised by regulators over the dependability of these resources and they have cited a lack of regulation over such agencies as a cause for concern, highlighting that, as a result, there is a risk of inaccuracies in the ratings produced.

Given that ESG ratings alone may not necessarily be a dependable measure, another way to mitigate the challenges created by a renewed focus on ESG is ensuring that Underwriters engage in detailed and targeted conversations with prospective Insureds around their internal procedures. This would include ensuring that Insureds not only have good internal practices around ESG, but that their processes are also robust and, specifically, that they allow for a methodical upwards reporting of relevant data, which should enable companies to make the required disclosures.

Additionally, whilst much of the latest regulation appears to be heavily “E” focussed, it remains important to consider a company’s approach to ESG holistically by taking into account how they might manage “S” and “G” factors, such as health and safety practices and psychosocial risks, which are notably an increasing area of concern in the Australian context, and considering how failure to do so might lead companies into litigation risk.