For some time, I have been arguing that climate change-related disclosure is going to be an increasingly hot button issue. Among other things, I have long believed that advocacy groups will attempt to use disclosure-related issues as a way to try to draw attention to climate change policies. On August 2, 2018, in the latest example of advocacy groups focusing on climate change-related disclosures, the non-profit legal group Client Earth filed complaints with the U.K. Financial Conduct Authority (FCA) against three different U.K. insurers. The legal group contends that the insurers’ annual reports failed to meet the requirements of the Disclosure Guidance and Transparency Rules due to the absence in the reports of any climate change-related disclosures.


The group’s August 6, 2018 press release about the complaints can be found here. An August 5, 2018 Financial Times article about the complaints can be found here. The three insurance companies targeted are Admiral, Lancashire Holdings Limited and Phoenix Group Holdings. The complaint against Admiral can be found here. The complaint against Lancashire can be found here. The complaint against Phoenix can be found here.


In the complaints, the Client Earth group contends that climate change is a principal risk or uncertainty affecting these companies and as a result they are legally obligated to report on this in their annual report. However, with respect to the three insurers, their 2017 annual reports make no mention of the risks posed by climate change.


The complaints allege that the insurers in fact face four different types of climate change related risks: first, the physical risk, as climate change results in more claims; the transition risk, as changing consumer preferences and governmental policy could affect investment portfolios; liability risk, as insurers could find themselves on the hook for third-party liability claims against their policyholders; and reputational risk, as the role they play as underwriters comes under public scrutiny.


The complaint alleges that the insurance sector is “particularly vulnerable to these climate risks, as they affect both sides of their balance sheets.” In its press release, a commentator from the legal group is quoted as saying that “By omitting financially materially climate risks from their annual reports, these companies are not giving the full picture. Without this information, how can investors make a fully-formed investment decision?”


The complaints themselves do make for interesting reading. The complaints contain detailed information about the general risks that climate change presents as well as the risks for the insurance industry in general and each of the three companies in particular. The complaints also detail specifically the specific provisions of the Disclosure Guidance and Transparency Rules that the legal group contends that the insurance companies’ omission of climate change disclosures violates.


Each of the complaints seeks to have the FCA fine or censure each of the target insurance companies or to require the companies to public information that rectifies the annual report omissions.


These new complaints are interesting to me in and of themselves but also because they reflect a concern I have had for some time about the possibility of climate change disclosure litigation. As I have frequently noted on this topic, any time company disclosures come into focus, the possibility arises that investors or others will claim that the disclosures are inadequate or misleading.


As these new complaints demonstrate, the possibility of this type of litigation is not mere conjecture. As I discussed here, last year, investors filed a lawsuit in Australian court against Commonwealth Bank, alleging that the company’s annual report did not adequately report on the company’s climate change business risk or its management of climate change risks. The obvious purpose of the lawsuit was to try to force changes to the company’s climate change disclosure practices.


Along with the activist driving litigation focused on corporate practices will be more traditional type litigation, focused on alleged damages. There is also already an example of the damages-type litigation. As I noted in a prior post (here), in November 2016, shareholders filed a climate change-related securities class action lawsuit against ExxonMobil, in which the claimants allege that the company’s did not adequately disclose the impact from climate change-related issues on its ability to realize the value of its hydrocarbon assets.


At a minimum, companies will continue to face pressure from shareholders and advocacy groups about their climate change-related disclosures. Along with pressures to alter or improve disclosures may come claims that prior disclosures were inadequate or misleading. The 2016 ExxonMobil securities class action lawsuit is an illustration of the form that this type of lawsuit might take. In addition, the possibility of future claims in this area includes the risk of a regulatory enforcement action as well, as underscored by the new complaints discussed above. The bottom line is that climate change and climate change-related disclosures likely will remain an area of concern for corporate boards.


Special thanks to Stephanie Morton of Client Earth for drawing my attention to these three new complaints.