How the SEC’s Climate Disclosure Proposal May Trigger Insurance Coverage

Public companies and their stakeholders often struggle to implement effective environmental, social and governance (ESG) programs in the absence of clear and common standards and regulations. But the landscape is rapidly changing in ways that can impose new risks and costs on businesses.

In a dramatic expansion of previous obligations, the United States Securities and Exchange Commission (SEC) released a nearly 500-page proposal on March 21, 2022, requiring publicly traded companies to disclose their greenhouse gas emissions. and business risks imposed by climate change.

The proposed rule requires public disclosure of Scope 1 and 2 company emissions – emissions from owned or controlled sources and purchased electricity, steam, heating and cooling generation. In contrast, Scope 3 emissions – indirect emissions from their supply chain – must be disclosed if they are deemed “material” or if there is a substantial likelihood that a reasonable investor would consider them material when makes an investment or voting decision.

The SEC’s proposal attempts to mandate a more “consistent, comparable and reliable” climate reporting standard to enable investors to make informed judgments about the impact of climate-related risks on current and potential investments. Although described as the product of investor demand, the proposed rules are quite controversial. In fact, the SEC has extended its comment period to June 17, 2022, as many believe it falls outside the SEC’s authority.

The SEC seeks to prevent misrepresentations through “greenwashing”

Many SOEs seek investment and reputational benefits by pursuing “clean,” “green,” or “net-zero emissions” development strategies. But the meaning of these terms is not well defined and can be manipulated to paint too rosy a picture of a company’s ESG efforts.

As a result, shareholders may need to carefully scrutinize climate-related disclosures to find evidence that management is underestimating the company’s environmental impact or over-promising about the steps it is taking to minimize impacts. contributions to climate change, a practice known as “greenwashing”.

Stakeholder activists and environmentalists view greenwashing on the same level as misrepresentation of financial performance, and they have sued public companies based on alleged ESG-related disclosures. Examples abound and multiply. In Jochims v Oatly Group AB (SDNY, #21-CV-6360) Investors in a Swedish oat milk company alleged the stock price was inflated by overstating the company’s commitment to responsible business practices. of the environment. In In re Vale SA Sec. Litigation (EDNY, No. 19-CV-526), ​​shareholders alleged that a dam collapse demonstrated that a Brazilian mining company’s sustainability and safety disclosures were misleading. Shareholders of oil and gas companies continue to raise similar claims regarding representations regarding the long-term effects of climate change on their businesses and indirect carbon costs.

If passed, the SEC’s proposed rule would increase the risk of shareholder litigation by requiring environmental disclosures and setting standards that companies might unwittingly miss. Public companies should consider whether their insurance policies provide coverage in the event of potential litigation, such as failure to publicly disclose to potential investors and shareholders information required by the SEC.

Insurance Coverage Tied to Proposed SEC Rule

Companies trying to mitigate the risks of the SEC’s proposed rule should review their existing coverage portfolio, and in particular their directors and officers (D&O) insurance policies. These policies provide coverage for claims against companies and their officers, directors and staff for “wrongdoing,” which is often defined to include securities claims brought by investors and often defined to include investigations of public entities.

Lawsuits from investors alleging misrepresentation by management caused a decline in stock value are routinely covered by D&O policies. However, each policy has its own exclusions and conditions, which must be assessed annually upon renewal. Recognizing the heightened risks of ESG litigation, some insurers are seeking to include new exclusions that would limit coverage for these types of claims in certain circumstances. Policyholders should be careful when renewing to ensure they are purchasing the correct coverage for these litigation risks.

Even if investors are happy, the SEC itself has the power to investigate and enforce its own rules. Responding to an SEC investigative subpoena imposes significant costs, including internal audits, document collection, and attorney fees. Many insurance policies include coverage to compensate for these costs.

The most important factor in evaluating insurance coverage for SEC investigations is the language of the policy. Some policies expressly include entity investigation coverage up to certain limits, which may or may not be sufficient to cover the full cost of responding to the investigation. Other policies include coverage for a non-monetary relief claim, including an SEC subpoena, so long as the claim relates to wrongdoing, as in Patriarch Partners, LLC c. AXIS Ins. Co.(SDNY, #16-CV-2277).

The SEC’s proposed rule suggests that greenwashing is wrongdoing, and an SEC investigative subpoena regarding disclosure of climate risks and emissions reduction efforts may trigger insurance coverage. Public companies should take steps to maximize this potential coverage and resist industry pressure to exclude greenwashing investigations from coverage.

Preparation for ESG Securities investigations and litigation

Now more than ever, ESG matters in insurance. If the SEC’s proposed rule is enacted, public companies can expect insurance companies to review their ESG strategies, as these strategies may affect litigation risks and SEC enforcement actions.

In the event that a company receives a claim or subpoena regarding its environmental disclosures, it should actively seek coverage. Most policies have notice requirements that prohibit how and when companies must provide notice of a potential claim.

Policy portfolios need to be reviewed early and often. When renewing, the proposed changes to the cover must be analyzed in order to avoid a later misunderstanding as to the extent of the cover.

The true costs of litigation and enforcement of ESG securities will be uncovered over the next few years, with public companies bearing most of these costs. But insurers collect these costs across the industry by charging premiums that reflect these risks. Public companies should understand the extent of their coverage for these losses as a result of the SEC’s proposed rule.


David Halbreich is president of the Reed Smith Insurance Recovery Group. He represents policyholders in various industries in coverage disputes and legal claims. He can be reached at [email protected].

Ben Fliegel is a partner in the Reed Smith Insurance Recovery Group and a member of the firm’s global environmental, social and governance practice. He can be reached at [email protected].

Kya Coletta is a partner in the Reed Smith Insurance Recovery Group. She can be reached at [email protected].


Since: Corporate legal advisor


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Justin D. O'Neill