Issues/allegations:

• A company’s valuation is reduced because of ineffective management of environmental or social exposures, violations of environmental laws, and/or greenwashing.*
• A company’s valuation is reduced because it places too much emphasis on ESG issues, which takes away from other investments and operational efficiencies that drive growth and profitability.
• A company’s board of directors breaches its duties by making misleading statements in securities filings about the company’s commitment to racial or gender diversity in its leadership and workforce.

Potential insurance implications involving directors and officers (D&O) liability insurance:

• Example #1: A securities class-action lawsuit was filed in 2022 against D&Os at Enviva, a wood products company that promoted itself as a growth-oriented ESG business. The lawsuit alleged that D&Os made false and misleading statements and/or failed to disclose that Enviva had misrepresented the environmental sustainability of its wood pellet production and procurement. Shareholders also claimed the company had misrepresented its business model growth capabilities to investors. The lawsuit alleged that the company’s public statements were, therefore, materially false and misleading.¹
• Example #2: In 2022, a shareholder suit against an electric vehicle company accused the D&Os of allowing a “toxic workplace culture” to grow, exposing the company to potential liability. The case stemmed from allegations of racial discrimination and harassment at a factory.²

Regulators open investigations or bring proceedings or litigation against D&Os and/or companies for potential violations of ESG-related regulations and disclosure requirements.

D&O liability insurance

Example: In June 2021, the Commonwealth of Massachusetts initiated an enforcement action alleging that an energy company’s communications with investors and consumers related to climate change constituted unfair and deceptive practices. The charges included allegations of a failure to disclose the company’s impact on climate change historically, and misrepresentations concerning future actions to reduce carbon emissions and solve climate change.³

Plan sponsors breach their fiduciary duty by committing investments to ESG-focused funds that underdelivered investment returns relative to peer funds — thus failing to satisfy fiduciary statutory duties to maximize financial benefits in the sole interest of the plan participants.

Fiduciary liability insurance

Example: In June 2023, a pilot filed an Employee Retirement Income Security Act (ERISA) class-action lawsuit against the airline, the employee benefits committee, the benefits plan administrator, and the benefits plan advisor. The pilot alleged that the defendants “breached their fiduciary duties in violation of ERISA by investing millions of dollars of the airline’s employees’ retirement savings with investment managers and investment funds that pursue political agendas through ESG strategies, proxy voting, and shareholder activism.” ⁴

This involves litigation brought by consumers of products that are advertised as environmentally friendly for alleged false advertising.

Errors and omissions (E&O) liability, D&O liability, and/or products liability

Example: Plaintiffs alleged that coffee pods described as “recyclable” were actually not able to be recycled due to their small size, and because consumers did not remove paper filters or foil lids. This case settled for $10 million in 2022.⁵

Issues/allegations:

• An employees feels discriminated against because of their companies’ limited diversity, equity and inclusion (DEI) policies.
• An employee feels discriminated against because of a perceived lack of opportunity, or alleges retaliation for questioning a promotion decision, due to the company’s newly implemented DEI policies.

Employment practices liability (EPL)

• Example #1: The U.S. Equal Employment Opportunity Commission (EEOC) settled a race discrimination case brought against a local newspaper for $375,000. The suit was brought on behalf of 10 employees who alleged they were discriminated against in the workplace due to their race.⁶
• Example #2: In a 2021 lawsuit, a male attorney — who held positions of interim vice president, general counsel, secretary, and compliance officer — sued because he was not promoted to general counsel permanently. He alleged “reverse sex discrimination” driven by the company’s strategic initiatives reflecting a preference for women in leadership positions.⁷

Investors allege greenwashing based on the naming of certain investment funds, or states bring litigation for breaching a fiduciary duty by using ESG factors in making investment decisions.

Investment advisor and fund D&O/E&O

Example: In 2023, the SEC alleged that an investment adviser failed to implement adequate written policies and procedures governing the selection of ESG investments. The adviser allegedly misrepresented the policies and procedures governing the selection of ESG-related investments in two mutual funds and a separately managed account. After incorporating “ESG” into the names of these products, the adviser represented in prospectuses and other materials that each security would be subject to a two-step review, which would screen certain industries and then apply proprietary research to eliminate investments that failed to meet ESG standards before making investment decisions.⁸