Predictions 2023: ESG disputes

We predict that in 2023 UK multinationals with overseas operations will face more mass claims in the English courts arising from ESG-related failures.

Why?

• In 2022, the Court of Appeal overturned the High Court’s decision to strike out a claim brought in the English Courts by a group of over 200,000 claimants (individuals, businesses and municipalities) who suffered losses due to the 2015 collapse of the Mariana dam in Brazil.
• The dam was owned and operated by a Brazilian joint venture company established by Vale S.A and BHP Brazil, the latter being a subsidiary of BHP England and BHP Australia.
• The Court of Appeal’s decision to allow the claim to proceed rested, in part, on their view of the 'significant and unresolved uncertainties' around the claimants’ ability to access justice in Brazil, which meant that it was not 'pointless and wasteful' to pursue parallel proceedings in the English Courts.
• In 2023, the English Courts are likely to continue to take a more expansive view of access to justice, and to examine the role it should play in holding multinationals to account for ESG-related failures. This developing trend should serve as a warning call to UK-domiciled parent companies of the potential risks of weak governance over the actions of their foreign subsidiaries.

Prediction author: Chloe Morris

We predict that 2023 will see increased ESG insurance claims activity and coverage issues, with no reduction in ESG pressure on insurers and insureds.

Why?

• Businesses and their insurers face increased prospects of claims arising from ESG risk. Environmental risks range from the physical impacts of climate change, through professional liability issues across multiple sectors (eg construction and asset management) to litigation and enforcement risks (eg greenwashing) falling on corporate directors and officers.
• Similarly, multiple lines of insurance business - particularly D&O - are likely to see claims arising from a broad range of social and governance risks. We see an increasingly strong regulatory and public focus on culture and conduct issues in the UK, and many other jurisdictions. Global supply chain and business risks include exposure to corruption and human rights violations.
• Insurers are actively considering their ESG exposure and wordings across all lines. Proposal forms are likely to require more clear and comprehensive ESG data from insureds at the pre-inception stage. We are likely to see the tightening of liability wordings to exclude unintended cover for environmental risk. US Courts have already been asked to consider the impact of pollution exclusions in policies.
• Insurers and insureds looking to improve ESG risk transfer mechanisms will lead to greater ESG focused underwriting and new ESG insurance products. New products may fill protection gaps which form as businesses transition from, for example, fossil fuels. Partnerships with NGOs and state-backed entities may help with transfer and spread of climate risks.
• We expect to see increased clarity around ESG taxonomies, and better insurance-focused data to improve consistency and assist insurers in writing ESG risks. Good overall governance, and a good ESG rating, may mean better pricing and coverage options for insureds. Many insurers are seeking actively to avoid underwriting poor ESG performers.
• ESG claims are likely to be particularly ripe for 'social inflation', and even in the English system (where outsized jury awards are not the cause) insurers and defendants to litigation may face higher payments out, given the sensitivity, and the reputational and social value, of ESG issues.
• As during the COVID-19 pandemic, we are likely to see continued regulatory focus on duties of insurers to their customers during the cost of living crisis. In September 2022, the FCA raised concerns with insurers, and suggested measures to help customers in financial difficulty.

Prediction authors: Jonathan Spencer, Sharlmaine Willetts, Kirsty Oliver

We predict that in 2023 the UK government will take steps to introduce a corporate criminal offence of 'failure to prevent human rights abuses', and will require more robust supply chain due diligence to address forced labour risks as part of a revamped modern slavery regime.

Why?

• There is a clear shift towards more stringent requirements for corporate supply chain due diligence and risk management within other Western economies, including the EU, Germany and the USA. Both UK Government and UK companies are under pressure to adhere to equivalent standards.
• The importance of reliable and resilient supply chains has never been clearer: the supply-side shock imposed on many economies in the wake of the Covid pandemic and the war in Ukraine, and subsequent imposition of sanctions, has emphasised the importance of supply chains as an operational resilience - and even national security - issue. The relatively weak position adopted by the UK to date is increasingly unsustainable.
• The Law Commission has proposed the introduction of a corporate 'failure to prevent human rights abuses' offence, as one of several options for reforming corporate criminal liability in the UK. If introduced, this offence would result in corporates being found automatically guilty of human rights abuses by their subsidiaries, employees, and potentially those in their wider supply chain, where they do not have reasonable procedures to prevent such offending. There is increasing support for 'failure to prevent' offences as a tool for driving changes in corporate behaviour and enhancing compliance standards; this proposal is likely to garner support from across the political spectrum.
• The UK Government has been making progress in its reform of the UK’s modern slavery regime. A Modern Slavery Bill 2022 was announced in the Queen’s Speech which is expected to strengthen the requirement for large businesses to publish an annual modern slavery statement and, critically, to introduce civil penalties for organisations that do not comply with the reporting requirements. Efforts have been made to introduce criminal penalties for breaches of the modern slavery reporting regime, including in private members bills. In the current climate, this is an option which could gain traction.

Prediction authors: Tom Bowen, Alexandra Webster

We predict that in 2023 there will be a continued increase in ESG-related enforcement action and the first FCA greenwashing case.

Why?

• In May 2022, the SEC reached a US$1.5 million settlement with BNYM Investment Adviser for misstatements and omissions about ESG considerations in making investment decisions in relation to certain mutual funds it managed.
• The SEC also commenced an investigation against Goldman Sachs asset management division over certain ESG claims in relation to two of its funds.
• While the UK regulations are not identical to those in the US, the FCA has broadly similar powers to hold firms to account for not being clear, fair and not misleading. Given the direction of travel indicated in various of the FCA’s communications, such as the Dear Chair of ESG Funds letter (July 2021) and the FCA Portfolio Letter (August 2022), we predict the FCA will commence its first case against a firm for greenwashing based on existing legislation.

Prediction author: Emma Sutcliffe, Robert Allen, Chloe Morris, Frances Gourdie