Beazley’s Chris Illman Tells Us Why Environmental Legal Issues Should Be Top of Mind Heading into 2022

By: | February 4, 2022

Chris Illman is head of responsible business at Beazley. He is based in London. He can be reached at [email protected]

As we begin 2022, global climate action initiatives and events are poised to pick up where the COP26 Climate Change summit left off.

This event united 190 countries to phase down coal as part of the Glasgow Climate Pact and finalize the international rules for trading emissions reductions as part of Article 6 of the Paris Agreement.

After witnessing this global coordination and the effects of severe climate events that have devastated communities, it would be reasonable to expect environmental issues to be weighing heavy on the minds of business leaders right now.

So it is somewhat surprising to note that as recently as early 2021 the opposite was true; in fact, Beazley’s Risk & Resilience study, conducted at the beginning of the year, revealed that only 12% of business leaders in the U.S. and UK rank environmental risks as their most pressing concern.

As I consider the many reasons why this may have been the case, I realize, at least at that moment, some companies may have believed environmental risk is more a public or social issue than it is a concern for private enterprise; in other words, the corporate and social agendas were not in sync.

If we are to achieve the transition to a net zero economy in a way that minimizes the negative impact on infrastructure, livelihoods and entire economies, however, we will need a unified approach aligning corporate and social agendas.

COP26 represented a significant step in that direction with more critical conversations to follow, and it is clear this will be an important discussion for business leaders to engage in with key stakeholders. Accordingly, we hope and expect that future iterations of this study will reflect a change in executive perspective about environmental risk.

There is, after all, a lot for executives to consider when it comes to environmental risk in 2022.

The Current Landscape: Regulatory Changes Are Gathering Pace

Companies are currently staring down the barrel of new environmental reporting legislation. This regulatory change is coming thick and fast and impacts businesses in every sector of the global economy.

In the U.S., the Biden administration has recently proposed changes to the National Environmental Policy Act which, as part of the permitting process, would require the federal government to evaluate the climate change impacts of major new projects.

In addition, the Securities and Exchange Commission (SEC) — which recently hired its first-ever senior policy advisor for climate and ESG — is preparing a climate change disclosure rule proposal that will be informed by recent public comment and economic analysis. Although any such proposed rule may not be finalized until late 2022, it’s clear that regulatory change is imminent.

These changes and the new proposed rule represent a substantial increase in expectations and in corporate environmental responsibility.

On both sides of the Atlantic, this plethora of regulation is contributing to a complex landscape which will require a high level of corporate focus to ensure compliance and manage reputation risk.

Legal Threats Are Mounting

While expectations to deliver growth and investment returns remain undiminished, businesses are also operating in a world where stakeholders expect better in terms of environmental risk management. Activist shareholders and pressure groups around the world are demanding that boards behave differently.

In May of 2021, a Dutch court ruled that oil giant Royal Dutch Shell must reduce its greenhouse gas emissions by 45% prior to 2030. Climate change activists are hopeful that this landmark case may set the precedent for future litigation on the global stage.

But in the U.S. specifically, this has yet to come to pass. There have been attempts at climate litigation — municipalities filing suits against major oil companies on the premise that their product has caused emissions that have contributed to climate change, which in turn has caused property damage due to flooding and weather-related catastrophes, but nothing yet on the scale of the ruling in the Netherlands.

We are still in the early stages of this type of litigation, but we can already see how its potential impact could have far reaching impacts for many lines of insurance as well as companies’ reputations.

There is a paradox here: while litigation is driving a heightened focus on environmental risk, it could be diverting companies away from a more fundamental consideration of the risks themselves, particularly among businesses looking to defend the status quo, perhaps by utilizing the provisions of the Energy Charter Treaty (ECT) which provides a mechanism for companies to sue governments for compensation for lost profits due to policy changes.

Companies that get the balance wrong risk being tied up in lengthy legal cases and subject to substantial fines. Others may see legal pressure as a stimulus for meaningful change in how they operate.

Change Is Coming; Companies Need to Be Prepared

Although energy transition risk is a key feature of debate at a global level, it has been a business blind spot, failing to register on boardroom agendas of many of the firms we surveyed. But soon enough, companies that are slow to align their operational practices and are not alert to the new regulatory landscape will face new interconnected legal, reputational, and regulatory risks.

With a raft of regulations coming down the track, executives will be thinking about ESG, compliance, the processes they need to put in place to ensure adequate reporting, and the reputational impact of failing to do so. The time has come for businesses to follow suit.

Companies need to ask themselves searching questions about how their business is dealing with environmental concerns. At the same time, the insurance industry also needs to ask questions about how companies are monitoring and managing risk in these areas, and this should certainly be part of every D&O renewal meeting discussion.

Given the pace and scale of environmental change even in the months since we last surveyed executives, and the many global initiatives poised to drive it further forward in 2022, it is our hope that environmental risks will become more significant on corporate agendas over the coming year. &

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