Industry pushing companies to recognise ESG impact on D&O risks

There are growing concerns that companies are facing a rising tide of claims against their directors and officers (D&O) over their environmental, social and governance (ESG) performance.

The issue has been highlighted by the ongoing case in which activist shareholders of energy giant Shell have lodged a claim with the UK High Court to be allowed to sue the company’s directors personally for alleged failures by the firm to meet its climate promises.

This has led to concerns that company directors need to push their oversight of ESG activities higher up the agenda – or potentially leave themselves open to new claims.

Steve Bear, executive director for financial and professional risks at broker Gallagher, said: “Environmental, social and governance exposures have never been higher on the risk agenda for D&O insurers.

“Whilst good governance has always been at the epicentre of traditional D&O perils, the emergence of environmental and social considerations has underwriters shifting away from the more commonly reviewed financial health of a company and instead performing deep dives into the culture and tone from the top that a company and its boardroom sets.”

He added: “It is vital for clients to be ready to field difficult questions from underwriters and show how they are progressing towards a greener future and leaving a positive social impact.”

Greenwashing? 

Rob Smart, chief technical officer at claims dispute consultant Mactavish, explained that while the Shell case has grabbed the headlines, there have been increasing numbers of cases where directors were facing claims over their ESG performance and credentials.

This increase partially comprises claims that certain firms have been greenwashing their businesses by making statements that were not accurate, or were failing to deliver on the ESG targets they had made.

Richard Palmer, partner at law firm Horwich Farrelly, said the issues around ESG for directors and officers are in their infancy, but it is a risk that senior managers must have on their radar.

“Of the six core duties of a director, two can be seen to be of particular interest,” he explained.

“Directors have a duty of care around a business’ impact on the community and environment and there is also the duty to maintain a high level of business conduct.

“We are not seeing a large number of claims at present, but it is certainly something which needs to be high on directors’ and officers’ agendas.”

For years to come

Despite reports that these claims were not making a large impact yet, Adrian Jenner, head of specialties at Zurich Insurance, told Insurance Times that the issue was on the agenda in discussions with clients and brokers.

“We believe the E in ESG will be an issue for the market for the next decade,” he explained.

“We think the environment will be a major concentration in the D&O risk areas in the years to come with legal, regulatory and litigation risks. The issue we have at present is that there is no legal framework in place with which companies can understand the risks and the performance criteria.”

Jenner added that 2025 and 2030 will be the years when companies that have set targets around ESG performance will likely to be held to account on their progress.

“Those will be when the next wave of pledges around ESG will come to fruition,” he explained.

“Therefore, we have a window of opportunity, but we need a legal framework on which we can understand the risks.”

Smart said companies should be looking to their D&O policies to ensure they cover the threat. He highlighted the example of silent cyber, where insurers sought to put cyber exclusions into policies to remove any coverage ambiguity.

“If addressing the issue means removal of the cover then it is not in anyone’s interest,” he explained.

“Companies need to think about their insurance cover as not all D&O policies are created equal.”

Francis Kean, partner in the financial lines team at broker McGill and Partners, added that companies need to understand the coverage in their policies.

“D&O policies are not as standardised as, say, public liability coverage,” Kean explained.

“D&O policies vary a lot. Some insurers will offer a very broad range of coverage, whilst other may look to put in say 10 or 15 extensions, which might look very positive, but when you get into the detail they are not a generous and as useful as had been thought at first sight.

“The environmental aspect has been generating all the headlines, but both social and governance come with significant risks which need to be understood and recognised.”