The World Insurance Congress Australia (WICA) is getting underway in Melbourne. Hundreds of insurance stakeholders and speakers from around the globe are discussing industry challenges under the theme, “Insurance Upside Down.”
One focus of the Congress is financial lines and Environmental, Social, and Governance (ESG) issues. Persia Navidi (pictured above), partner at Hicksons law firm, is delivering a talk on the industry impact of the International Sustainability Standards Board (ISSB) global framework for climate-related financial risks.
“There’s a big conversation to be had about mandatory disclosure of climate-related financial risks,” said Navidi. “It looks like it is going to be introduced in Australia, it’s just a matter of when.”
She said insurers and insureds need to look at increasing liabilities and possible greenwashing issues across all of their products and services.
“Particularly where you’re making statements about that product being screened for ESG, you need to discuss the tough cases, you need to make sure that you’re being transparent,” said Navidi.
The standards are being adopted by some countries, she said, from January 2024 and the government has set Australia on a path to adoption. Navidi said adoption of the ISSB standards would be Australia’s first introduction of a legal framework laying out a standard way of measuring and reporting climate-related financial risks.
“If these laws are introduced, if they have the civil penalty regime, it’s something that could lead to, not only infringement notices that we’re seeing from ASIC [Australian Securities and Investments Commission], but also potential litigation,” said Navidi.
One big change these standards would bring to Australia’s regulatory regime, she said, is facilitating a new way for shareholders, investors and also consumers, to bring civil penalty proceedings against companies for greenwashing.
“What we have seen is ASIC and the regulators really focusing on this [greenwashing] and they are the ones issuing these infringement notices for misleading and deceptive conduct and commencing civil penalty proceedings,” said Navidi. “But having a specific part of the Corporations Act refer to climate-related financial disclosures and prohibiting those being misleading will certainly increase regulator action, and also from the community and shareholders at large, by providing that additional avenue.”
Navidi said Australia’s likely adoption of IISB climate shows that ASIC is continuing on its path of targeting greenwashing.
“Organizations need to be mindful of the statements that they’re putting out there - particularly where they have the potential to impact investor decisions,” she said.
Navidi said published reports about ASIC’s case against Vanguard Investments are an example of what sort of regulatory enforcement in the ESG space could be in store for insurers and other companies in the future.
She said the company was fined a relatively small $40,000 last year following infringement notices but then, this year, finds itself the object of ASIC’s civil penalty proceedings for allegedly misleading conduct concerning ESG claims.
ASIC alleges, according to a Hickson’s media release, that Vanguard’s Ethically Conscious Global Aggregate Bond Index was not adequately screened against the ESG criteria promised to its ethically-inclined customer base.
“So it demonstrates that organisations need to look at their business as a whole, look at their products as a whole, look at all of their offerings, not just compartmentalise it,” said Navidi. “If there’s any indication of potential greenwashing across certain products, and that’s dealt with, it doesn’t mean that the rest of the business is immune.
Transparency is key, she said.
“That’s what avoiding greenwashing really comes down to, being transparent,” said Navidi. “If you’re saying that all of your products have gone through an ESG screen, then you need to have the information to support that behind the scenes, you need to have the information to substantiate that.”
Company boardrooms, she said, need to be particularly aware of the looming likelihood of ISSB standards.
“I think the thought process behind having civil penalty regimes here is that you need to have these in place so that directors and companies can’t just rest behind safe harbour laws, for example,” she said. “They have to really put some thought behind their disclosures and also substantiate it with the work that’s being done at the organisation to back-up the statements that are made and what’s being reported.”
Navidi said this would be “the primary concern for D&O insurers.”
“The fact that this increased liability is there and also there’s the potential for it to hit them through claims litigation, enforcement action from regulators, potential class actions - and we’ve certainly seen it overseas, not yet in Australia, but it could happen,” she said.
Navidi said climate-related financial litigation is moving “fairly quickly.”
“This time last year, I don’t think ASIC had even instituted any infringement notices against organisations and they certainly hadn’t commenced proceedings but now we’ve got three on foot,” she said. “It just shows that they are looking at this very closely.”
The Australian Insurance Law Association (AILA) is hosting WICA 2023 which runs until Friday, September 1. The event is held every four years and Australia has hosted only once before, in 1994.
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