What D&Os should know about rising climate litigation risks

From emission credits to greenwashing, lawsuits are targeting non-compliant firms

What D&Os should know about rising climate litigation risks

Risk Management News

By Kenneth Araullo

Environmental, social, and governance (ESG) considerations have become central to risk assessment, with issues such as climate change, climate litigation, and regulatory developments posing challenges for insurers and their clients.

Clyde & Co counsel Dr Rebecca Hauff highlighted the increasing influence of these factors on insurers, noting that natural disasters, business interruptions, and heightened regulation all contribute to a complex risk environment that insurers must navigate.

The volume of climate-related litigation, also known as "climate change litigation," has more than doubled since the 2015 Paris Agreement, Hauff explained. While most cases are directed at governments, plaintiffs are increasingly targeting corporations, particularly in the United States, with Europe and Germany also witnessing an increase in such lawsuits.

“The subject matters in climate change litigation range from the assertion of so-called climate damages to the review of emission credits, lawsuits for the reduction of greenhouse gases, the tightening of national climate protection laws, and the omission of misleading advertising,” Hauff said.

Prominent examples include claims against the German automotive sector and a high-profile lawsuit involving a Peruvian farmer seeking proportional damages.

Accompanying this trend in climate litigation is a progressive wave of ESG regulation, as noted by Hauff. German board members and managing directors now face various regulatory requirements, including those set by the German Supply Chain Due Diligence Act (LkSG) and the Corporate Sustainability Due Diligence Directive (CSDDD).

The Supply Chain Due Diligence Act, implemented in January 2023, mandates that companies with at least 1,000 employees in Germany observe human rights and environmental standards throughout their supply chains.

“The law provides for sanctions including fines, which for companies with an average annual turnover of more than EUR 400 million can be up to 2% of the average annual turnover,” Hauff said. “This could lead to fines of at least EUR 8 million for the company.”

The CSDDD, approved in July 2024, will also require German companies to align with new EU standards by July 2026, likely via amendments to the Supply Chain Due Diligence Act. According to Hauff, this directive compels companies to evaluate risks along their "chain of activities" and take preventive and corrective actions to address potential human rights and environmental issues.

The CSDDD mandates that companies adopt a climate change mitigation plan to help align their operations with the EU's 1.5°C climate target, with sanctions that could reach up to 5% of global net turnover for non-compliance.

“The CSDDD also contains provisions on evidence, limitation periods and procedural costs,” Hauff said. “Overall, it therefore remains to be seen how the German legislator will implement the requirements of the civil liability standard under the CSDDD. However, it is already certain that the liability risks of companies, and thus also for their managing directors and consequently D&O insurers, will increase.”

Further regulatory developments impacting companies in the EU include the Green Claims Directive, which addresses "greenwashing" in advertising, a concern raised by Hauff. The directive, proposed by the European Commission in March 2023, seeks to establish uniform standards for "green claims" used in advertising.

It mandates scientific substantiation of these claims and requires verification by independent bodies, ensuring environmental performance claims are well-founded. Non-compliant companies face fines of up to 4% of global turnover and may be excluded from public tenders and subsidies for up to 12 months.

“Companies that fail to provide the required evidence for green claims face various sanctions. In addition to a levy on the profits made from the sanctioned products, there is the possibility of excluding companies from public tenders and subsidies for up to twelve months,” Hauff said.

Hauff also emphasised growing liability risks for directors and officers, which have implications for D&O insurers. ESG regulations, such as the Green Claims Directive and the CSDDD, impose fines on companies for violations, and it remains uncertain whether German courts will allow companies to recover these fines from managing directors in cases where duties have been breached.

In light of these regulatory trends, D&O insurers may face increased exposure due to the evolving liability landscape, particularly if companies pursue recourse actions against directors or officers in relation to breaches of ESG compliance.

“The liability risks for managing directors will therefore continue to increase in the coming years, which will also be noticed by D&O insurers,” Hauff said. “It will be all the more important for companies to have appropriate risk management in place to avoid ESG-related risks and damages, along with appropriate documentation of the information base and decision-making by managing directors. D&O insurers will therefore also have to further align their underwriting with the risks associated with ESG regulation and, in addition to a company‘s business model, thoroughly review.”

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