Climate risk, corporate liability and the role of insurance
The liability exposures facing directors, insurers and the broader business community are intensifying as countries finalise their climate change legislation.
For brokers and corporate risk managers assessing special risks, understanding the emerging legal landscape is essential, especially in complex liability classes like D&O insurance. This challenge took centre stage at a recent discussion on the evolving role of liability insurance in the climate change context, hosted by ITOO Specialist Risks.
Climate-linked courtroom dramas
In her introduction to the discussion, Nadia Shiba, Specialist Claims Manager at ITOO, noted a growing trend in climate liability litigation, with countless climate-related court actions brought against governments, corporations and individuals over the past few years. “Claims range from breach of regulation to breach of contract to human rights violations to securities fraud, with defendants from a variety of economic sectors,” she said.
Legal actions are shaping the discourse on liability for climate change, pushing businesses to meet their corporate environmental responsibilities or pay up. “The jurisprudence for the legislation in this space, particularly in South Africa, is still novel … [yet worldwide] there are cases that are coming through that seek to hold directors liable for their commitments to climate change and / or their failure to disclose certain elements in terms of their environmental pollution and contribution,” said Tatton Bouras, a director at law firm, Garlicke and Bousfield.
The discussion unfolded in the context of a climate-aware world born out of the Paris Agreement, whose country signatories pledged to reduce carbon emissions. Their unified mission: to protect and hand over the planet to the next generation. Bouras hinted that South Africa’s emerging climate change legislation would introduce changes in business practice in much the same way legislation like FICA and POPIA has. From an insurance perspective, the focus remains on how climate change-related perils such as drought and flood affect assets and supply chains.
On King IV, ESG and environmental law
There have been progressive shifts in terms of how local businesses conduct themselves. For example, listed companies that follow King IV must meet certain environmental, social and governance (ESG) implementation and reporting commitments.
Companies must also comply with a wide range of environmental laws such as the National Environmental Management Act (NEMA) and the National Environmental Management Waste Act. Another law worth mentioning is the Carbon Tax Act, which allows government to place a price on carbon emissions, creating a financial incentive for emitters to reduce their carbon footprint.
“As a country, we have a constitutional right to a free and not harmful environment,” Bouras said. This right is evidenced by the country’s Climate Change Act, No. 22 of 2024, which was assented to by the President on 23 July 2024. The stated objective of this Act is to provide for a coordinated and integrated response by the economy and society to climate change and its impacts, in accordance with the principles of cooperative governance. In this sense, all stakeholders in the domestic economy need to work together to tackle the challenge.
According to Bouras, this is the first piece of domestic legislation that deals specifically with climate change, allowing the Minister to impose certain targets that businesses have to meet in terms of their carbon emissions, although it does not as yet allow for penalties to be imposed. “South Africa has a wonderfully progressive Constitution, we have amazing legislation, and we are a leading light here in respect of our Climate Change Act,” said Patrick Forbes, another director at the law firm.
Climate legislation is already top of mind at large firms, especially banks and insurers, and will swiftly filter down to smaller businesses. As the law beds down, insurance industry stakeholders are eager to learn how climate change targets will be set and implemented, and to what extent their liability and risk exposures evolve as the frequency and severity of extreme weather events rise. “We have these parallel processes, the legislation on the one side and climate change on the other, alongside the risks associated with extreme weather as we have seen in KwaZulu-Natal and the Western Cape,” Forbes said.
Directors’ responsibilities
Turning to the Companies Act, which sets out directors’ responsibilities and is therefore relevant in the D&O insurance context, Bouras hinted that the Act could evolve to encompass environmental compliance failures. This could expose directors to liability where companies breach environmental laws, prompting a broader rethink of D&O insurance and other liability-focused covers.
Bouras then outlined the three key categories of risk businesses face in the climate change context: physical, transitional and liability risk, with the latter cutting across both of the former. Physical risks arise from extreme weather events, such as floods or storms, which can lead to operational disruption, property damage and, in some cases, liability claims. Transitional risks relate to the cost and complexity of adapting to new environmental laws and compliance obligations. These include the financial burden of implementing legislative requirements, as well as the risk of penalties or litigation for non-compliance or disclosure failures.
Insurers will need to assess climate-related risks on a sector-by-sector basis, given the uneven impact across industries. Bouras noted that there are guidelines for insurers to follow insofar disclosing how they evaluate exposure to physical, transitional and liability risks. The implication is clear: underwriting practices, product design and policy wordings will all need to adapt to a more climate-aware regulatory and risk environment.
A R6.5 billion indemnity to liability swing
There are many notable examples of the intersection of climate change, insurance and the law. The KZN floods were highlighted as a case study in how climate-linked disasters can evolve into complex liability disputes.
Toyota’s insurer, Tokio Marine, paid out R6.5 billion for damages and business interruption losses consequent the floods, and is now pursuing claims against various government entities including the Department of Transport, the local municipality and state-owned enterprise Transnet. The insurer argues that authorities failed in their duty to maintain infrastructure, anticipate risks and mitigate damage.
As Patrick Forbes noted, while municipalities may not be to blame for climate change itself, they are still expected to take reasonable steps to prevent or minimise foreseeable harm. “Cases like these get very difficult because [it is hard to know] at what stage the infrastructure would have managed the flood, or not,” Forbes said, pointing to the challenge of defining accountability in a climate change scenario.
A growing focus of climate litigation is the role of corporate directors. Bouras outlined how directors could increasingly face liability if they failed to account for environmental risks, particularly under South Africa’s Companies Act and NEMA. Although South Africa’s Climate Change Act does not yet impose specific obligations on directors, precedent-setting cases like Minister of Water Affairs and Forestry v Stilfontein Gold Mining Company Ltd & Others show that courts can hold individuals personally liable for environmental failures.
The corporate veil can be pierced
“You cannot hide behind the board’s decision; if you acted in bad faith, you can be held liable,” said Bouras, explaining how the corporate veil can be pierced. International examples, from Brazil’s Vale mining disaster to Volkswagen’s emissions scandal, were used to show how non-compliance can trigger reputational and financial fallout, even when statutory frameworks are evolving.
Insurers are increasingly being recognised as key actors in managing climate risk. Bouras pointed to guidance from the South African Reserve Bank (SARB) urging insurers to assess and disclose how they classify and price climate-related risk. Forbes added that while such guidance may seem abstract, “those guidance notes will translate into underwriters’ thinking and policy wording” with potential impacts on exclusions, conditions and premiums.
As cover becomes harder to secure in climate-sensitive sectors, insurers and government may need to explore pooled solutions. “Insurers cannot suffer the losses alone; there should be a fund co-funded by industry and state,” Bouras suggested, positioning insurance as both a financial buffer and a behavioural driver.
Brokers take centre stage
The closing message was clear: brokers must deepen their understanding of clients’ businesses and evolving risk environments. As Forbes observed, unless you understand the client’s business really well, it is difficult to know what the risks are. “Some things are only clear by the passage of time,” concluded Bouras. But one thing is certain: climate risk is no longer theoretical. Brokers, corporate risk managers and their insurance partners will have to adapt now or pay the price later.
Writer’s thoughts:
The Climate Change Act and other environmental laws introduce obligations that affect how businesses operate, and the compliance risks they face. How do you ensure that your legal knowledge is adequate to identify, mitigate and transfer your clients’ risks. Please comment below, interact with us on X at @fanews_online or email us your thoughts [email protected].
