Climate disclosure obligations bring risk for directors: WTW report

Company directors in Australia and key Western economies such as the UK face potential liabilities in relation to climate change risk disclosure obligations, according to global brokerage WTW.

WTW flags the warning in its annual Energy Market Review 2022 report, which it released overnight from London. The in-depth report also explores several issues impacting the energy sector, including the possibility of higher premium rates because of the Russia-Ukraine war.

The brokerage says the last couple of years have seen a real change in the amount of legislation and regulation imposing obligations on directors in connection with climate change.

It says insurers and banks in Australia are seeing climate-related stress tests that are similar to ones their counterparts in the European Union have to comply with.

Additionally the Australian Securities and Investments Commission last year identified disclosing and managing climate-related risk as a key director responsibility.

The corporate regulator also released a tranche of material that reiterates the need for listed companies to specifically report in respect of climate related matters in order to comply with their disclosure obligations and to also disclose relevant and useful climate related information to investors.

“It appears that the position in Australia may also be similar to that of the UK insofar as there are existing laws under which claims could be brought against directors in connection with climate change risks,” the WTW report says.

WTW says the very fact that directors are going to have to sign off on statements being made in connection with climate change means that other people can examine and, if they are so inclined, seek to challenge those statements.

The resulting consequence is that it has the potential to give rise to director exposure.

“Many companies, particularly in the energy sector, will have been making statements in connection with climate change on a voluntary basis for many years,” the WTW report says.

“Now that they have to make statements in compliance with the [Taskforce for Climate-related Financial Disclosures] and/or in compliance with the mandatory disclosure rules once they come into force, that will offer potential claimants the opportunity to compare what is being said now with what has been said previously.”

But the prospect of climate change-related claims being brought against directors in the UK remains an “open question” despite all of these new and existing laws, the WTW report said.

WTW says the same goes for other jurisdictions with the position seen as “uncertain” but if someone can successfully bring a claim and establish a precedent, that may open the floodgates as that could get litigation funders interested.

On the Russia-Ukraine war, WTW says the conflict may have ramifications for rates in the energy premium sector.

Before the conflict broke out in February, the story was – and to a large extent still is – of a gentle easing of the previous hard market conditions.

“Indeed, in some lines of business we have finally seen actual rating reductions for the most sought after business,” the WTW report says.

The significant future loss of energy market premium income from Russian business may impact premium settings.

WTW says it “really is too early at this stage to predict with any accuracy” what effect the withdrawal of premium income from Russian business will have on market conditions.

“On the one hand, insurers may use this factor to insist on recouping lost premium by re-imposing stiff rating increases,” the report says. “On the other, they may be inclined to compete more aggressively for the remainder of the premium income pool.”