Earlier this year, a new listing rule was introduced which requires commercial companies with a UK premium-listing to include a compliance statement in their annual financial report stating whether they have made disclosures consistent with TCFD or provide an explanation if they have not done so. The UK Financial Conduct Authority has recently launched a consultation proposing to extend the application of this listing rule to issuers of standard listed equity shares and to introduce TCFD-aligned disclosure requirements on asset managers, life insurer and FCA-regulated pension providers. This news follows an earlier proposal from the Government that TCFD disclosures should become mandatory for all publicly quoted companies, large private companies and LLPs for accounting periods commencing on or after 6 April 2022. The potential implications of this are significant.
However, as it stands, many companies do not understand, actively monitor or report on the extent to which their business impacts on climate change. This was reflected in the Financial Reporting Council's November 2020 review, which found that the disclosure of climate risks in listed companies was insufficient and lagged behind the narratives that companies present about their climate initiatives.
At the same time, there is now an increasing number of climate change court actions afoot across the world, including the recent Dutch court judgment against Royal Dutch Shell, under which the company was ordered to reduce its net CO2 emissions by 45% compared to 2019 levels by 2030. In light of this, the issues of climate-change related liability are becoming more of an underwriting and claims-handling challenge for D&O insurers.
The problem for insurers is that whilst climate claims are increasing there is a corresponding lack of adequate information disclosure to allow insurers to accurately appraise and price climate-related risks.
Inserting a clause into a D&O insurance policy which provides a reduction in insurance premium in the event the insured meets a baseline standard disclosure of their climate change risks in line with TCFD global recommendations may help address this issue. To secure the reduction, the policyholder will have to make a declaration about the scope of its climate change disclosures. Although such declaration cannot be a substitute for bona fide disclosure to the insurers of the climate-related and other risks faced by the company, its directors and officers in line with the applicable obligations on an insured to disclose information to its insurer, a premium adjustment clause may incentivise policyholders to proactively focus on and disclose their climate risks, which in turn should assist insurers to more accurately price such risks, thus leading to a reduction in exposure.
The benefit to the policyholder will be a financial reward for meeting obligations which will nevertheless have legal effect for large companies, asset managers and others soon.
Clyde & Co is proud to support clients interested in adopting this clause into their contracts. Please reach out to me or one of our climate change experts if this clause is of interest.
This post is part of a series of short updates summarising the precedent clauses drafted in the course of collaborative hackathons organised by The Chancery Lane Project. Clyde & Co held its own hackathon in partnership with The Chancery Lane Project in July 2020, and has taken a leading role in the Big Hack, another hackathon organised centrally by The Chancery Lane Project throughout autumn 2020.