Companies should consider taking out insurance against ESG disclosures, says law firm

Companies should consider taking out insurance coverage to protect themselves and their executives from potential liability related to environmental, social and governance (ESG) disclosures, according to law firm Jones Day.

Its advice is that ESG disclosures present legal as well as reputational risks.

“Issuers [i.e. companies] should consider whether director and officer (“D&O”) or other insurance coverage can protect them as well as their directors, officers, and employees from potential liability related to ESG disclosures,” the fifth largest law firm in the US said.

It went on to say that standard D&O coverage should protect against alleged misrepresentations or omissions in securities filings and other public statements, but issuers “should investigate whether any special terms or conditions are necessary to ensure coverage for ESG misstatements or omissions claims.” (our italics)

Jones Day was an advisor to the syndicate of international and Brazilian investment banks involved in a recent bond offering by Brazilian meat company Marfrig Global Foods; its latest Climate Report is available here.

The memo was co-written by Jones Day partner David Woodcock, a former senior official at the Securities and Exchange Commission, and colleagues Amisha Kotte and Jonathan Guynn. Woodcock was director of the SEC’s Fort Worth Regional Office and chaired the SEC’s Financial Reporting and Audit Task Force.

The memo advises companies to use “aspirational language” in their ESG statements and “hedge or disclaim” where possible — and avoid committing to “concrete measurements”.

“From a litigation perspective, issuers should couch ESG statements in aspirational language,” goes the advice.

“Commitments to concrete measurements or achievement by certain dates could also lead to a duty to update investors when such goals are not achieved.“Where possible, issuers should not commit to concrete measurements and should avoid publishing commitments to achieve ESG goals by certain dates.”

“From a litigation perspective, issuers should couch ESG statements in aspirational language.”

The advice continues: “US courts scrutinize more closely statements made in response to investors’ concerns, particularly where those statements follow highly publicized incidents, such as an accident or a government investigation.

“A court is more likely to conclude that an ESG disclosure is material to an investor or customer if it is displayed prominently.”

And it adds that incorporating an ESG disclosure into SEC filings “or displaying it on product packaging” may increase the risk and potency of litigation — as it will be easier for a litigant to establish that it saw the ESG disclosure and relied on it in making an investment or purchase decision.

The document adds: “ESG disclosures present legal as well as reputational risks e.g., such as when a company’s disclosed efforts to address climate change turn out to be publicly questioned and open the company up to charges of ‘greenwashing’.”

Jones Day advises corporates to use internal and external sustainability disclosure experts to review ESG disclosures for “overstatements, misstatements, or concrete statements capable of becoming misleading or untrue by forces or circumstances outside of the issuers’ control”.