Looking at topics and developments that address climate change, there is no getting around the fact that we have not yet seen their peak. Our legal system requires a company’s management to exercise the diligence of a prudent – in case of a joint stock company: conscientious – businessperson.
Environmental protection and measures curbing climate change have not lost their geopolitical and socio-political relevance during the pandemic. On the contrary, from a legal point of view, the topic is more relevant than ever.
Civil lawsuits on the rise
In March 2020, the German Federal Constitutional Court confirmed that constitutional complaints against the climate protection law were, at least in part, legitimate. In April 2021, the City of New York filed a lawsuit against three large oil companies (Exxon, BP and Shell) for allegedly misleading consumers about the leading role their products play in climate change and for allegedly “greenwashing” their practices to make them seem more eco-friendly than they are. In May 2021, the Hague District Court held Royal Dutch Shell responsible for its CO2 emissions and ordered the oil and gas company to lower emissions by 45% by 2030, compared to 2019 levels. The Court stipulated that this obligation extends not only to Shell’s group operations but also to business partners, suppliers, and end users.
Although this judgement is not yet legally effective, its possible impact on future civil lawsuits in other European countries with differing legal systems can hardly be estimated. Nonetheless, it is a landmark decision
and, given the global focus on environmental protection, one will no longer be able to just rely on the fact that operating facilities have been properly maintained according to the latest technical standards.
Legal basis for claims
The Charter of Fundamental Rights of the European Union sets out environmental protection in Article 37. In terms of the Green Deal, the 27 EU member states have agreed to achieve climate neutrality by 2050. According to the principle of division of powers, each individual legislator is called upon to define the guidelines for corporate action. The Federal Constitutional Court found that the German legislator did not achieve this with the Climate Protection Law, dated 12 December 2019, and the Dutch judiciary had in fact been too quick off the mark. The advice is to focus on collaborative corporate action to achieve the 2050 climate targets, even if there is no specific legal basis yet. Because regardless of whether the decision made by the Hague District Court can withstand the scrutiny of an appeal, the respective company’s “excessive” emissions have long since attracted widespread public attention in social media news channels. The mere fact that the share price remained stable in this case should not blind us to the fact that such cases can quickly damage a company’s reputation. In this sense, reputational damage insurance is still under-exploited.
Obviously, an environmental damage does not automatically cause a damaged reputation, it can lead to pecuniary losses as well. Future cases will shed light on the extent to which companies or their representatives will be held liable for damages. Whenever a board member is held responsible due to a breach of duty, the question arises whether a pecuniary damage liability insurance is in place – in short, a D&O insurance. A textbook example for such environmental damages and their damaging corporate impact is Volkswagen’s dieselgate scandal. Insurers must pay out a combined total of 270 million EUR (328 million USD) in D&O claims to VW.
D&O Insurance and ESG criteria
Looking at topics and developments that address climate change, there is no getting around the fact that we have not yet seen their peak. Our legal system requires a company’s management to exercise the diligence of
a prudent – in case of a joint stock company: conscientious – businessperson.
The most effective way to safeguard oneself against breaches of duty and the resultant liability is a D&O
insurance, which would cover damages as well as legal costs should such a case arise. Despite increasing premiums, this insurance is a popular means because it enables heads of businesses to at least protect themselves against the consequences of their liability in case of an alleged breach of duty. Looking at common wordings used, a personal liability insurance protects individuals for the most part also in case of a claim against environmen-
tal damages. Like always, the devil is in the detail: Insurers tend to only grant insurance coverage for defence costs or in the case of damages based on liability standards as long as no accusation of a breach of duty has been made. The company’s management is therefore well advised to keep an eye on ESG criteria as well as on the development of jurisdiction in Europe and evaluate the scope of coverage of the D&O policy in case of environmental damages. The upcoming renewal phase in autumn 2021 presents an ideal opportunity to do so.
Although little knowledge seems to exist about environmental liability, this should not blind us to the fact that the number of legal proceedings regarding specific and relevant topics could pick up at any time. Prior to the onset of the current crisis no one would have thought that the Supreme Court would have to deal with two cases concern- ing a business interruption insurance due a pandemic within a very short time. However, this is precisely what happened in the first half year of 2021.
Ralph Hofmann Credner
Founder and Owner HOFMANN-CREDNER Rechtsanwalts GmbH
In the face of growing environmental challenges and climate change, insurance companies like UNIQA Group are taking significant steps to embrace sustainability.
If carefully designed and managed, a captive is a tool in the risk manager’s toolbox for large companies that can help build resilience to future transformation risks as a result of climate change, amongst other things.