On August 2, 2018, ClientEarth, a nonprofit environmental law organization based in London, Brussels, Warsaw and Beijing, filed three separate complaints with the UK Financial Conduct Authority (FCA) against three different UK insurance companies: Admiral Group plc1, Lancaster Holdings Limited2 and Phoenix Group Holdings3.
An earlier 2017 shareholder class action4 was brought against the Commonwealth Bank of Australia alleging failure to make appropriate disclosure of climate-related risks to its investments. However, this case was withdrawn before judgment.
The ClientEarth complaints are substantially similar and allege that these insurers face four different types of climate change-related risks: first, physical risk, as climate change results in more claims; second, transition risk, as changing consumer preferences and governmental policy could affect investment portfolios; third, liability risk, as insurers could find themselves on the hook for third-party liability claims against their policyholders; and last, reputational risk, as the role they play as underwriters comes under public scrutiny.
The complaints allege both the general failure to make appropriate disclosure of these risks as well as failures specific to each insurance company. The complaints claim that these failures are in violation of requirements under the Transparency Directive5 and the Disclosure Guidance and Transparency Rules (DTRs) contained in the FCA Handbook6 and request that the FCA impose a financial penalty in an amount considered appropriate and a requirement that the related insurance company publish information rectifying the claimed deficiencies or, in the alternative, a statement by the FCA censuring such insurance company.
While disclosure requirements are potentially different, many cases have been brought in the United States making similar claims against energy companies7 as well as financial institutions, and the US' National Association of Insurance Commissioners (NAIC) has been providing its own guidance for insurance companies regarding Climate Change and Risk Disclosure8. In addition, a recently ended investigation by the SEC of Exxon Mobil Corporation's climate-risk disclosures commenced in 2016 and involved more than 4.2 million pages of related records. Climate change disclosures are therefore likely to be an ongoing concern for boards on both sides of the Atlantic.
The specific DTRs referred to in the complaints are:
- DTR 1A.3.2 R, which states that "an issuer must take all reasonable care to ensure that any information it notifies to a [Regulatory Information Service] is not misleading, false or deceptive and does not omit anything likely to affect the import of the information."
- DTR 4.1.5 R states that "an issuer's financial report must include:… (2) a management report…"
- DTR 4.1.8 R states that "the management report must contain: … (2) a description of the principal risks and uncertainties facing the issuer" (emphasis added).
Acknowledging that the DTRs do not define "principal risks and uncertainties facing the issuer," the complaints state that this requirement is synonymous with that under section 414C(2)(b) of the Companies Act 2006, which requires companies to disclose "a description of the principal risks and uncertainties facing the company" in the "strategic report." The complaints then cite, as secondary guidance for the meaning of this expression, the FRC's 2014 Guidance on the Strategic Report, which (and as the complaints note) includes the following persuasive (and not mandatory) guidance:
- Paragraph 5.1 states that "Information is material if its omission or misrepresentation could influence the economic decisions shareholders take on the basis of the annual report as a whole."
- Paragraph 5.3 states that "Materiality is an entity-specific aspect of relevance based on the nature or magnitude (or both) of the actual or potential effect of the matter to which the information relates in the context of an entity's annual report. It requires directors to apply judgement based on their assessment of the relative importance of the matter to the entity's development, performance, position or future prospects."
- Paragraph 5.4 states that "Materiality in the context of the strategic report will depend on the nature of the matter and magnitude of its effect, judged in the particular circumstances of the case."
- Paragraph 5.7 states that "the terms 'key' … and 'principal' … refer to facts or circumstances that are (or should be) considered material to a shareholder's understanding of the development, performance, position or future prospects of the business."
- Paragraph 7.24 states that "The risks and uncertainties included in the strategic report should be limited to those considered by the entity's management to be material to the development, performance, position or future prospects of the entity."
- Paragraph 7.25 states that "Directors should consider the full range of business risks, including both those that are financial in nature and those that are non-financial. Principal risks should be disclosed and described irrespective of how they are classified or whether they result from strategic decisions, operations, organisation or behaviour, or from external factors over which the board may have little or no direct control."
The rules and guidance around the disclosures required in the United Kingdom are necessarily vague, open to interpretation and place a large amount of discretion on the board of UK plc's to evaluate and disclose risks that they see relevant. Boards in both the United Kingdom and the United States are increasingly conscious of litigation and investigations by regulators; therefore, the increasing pressure from organizations such as ClientEarth are likely to increase the likelihood that the UK boards start to at least consider climate change disclosures in order to head off potential criticism from its investors and regulators.