ESG to drive future D&O terms and conditions

Companies that demonstrate robust ESG frameworks are more likely to attract better terms and conditions when they buy D&O cover, experts have told Commercial Risk.

ESG-related topics are increasingly expected to shape D&O risks and losses in coming years as pressure mounts from growing regulation and more litigation in areas such as climate change, sustainability, diversity, biodiversity and human rights.

Disclosure requirements are rising, while investors, consumers and regulators are more willing to challenge false or misleading environmental and sustainability claims, known as greenwashing.

Simon Konsta, partner at law firm Clyde & Co, believes that greenwashing could become a significant exposure if companies do not keep abreast of national and global ESG policies and regulations.

“D&O insurance is likely to be one of the business lines most affected by climate litigation in the future. Directors’ duties around climate risk are evolving and standards of care are rising. There are already examples of climate claims being made against fiduciaries for investment decisions, disclosures or climate risk management,” he said.

The attention paid by underwriters to ESG has increased on the back of rising reporting requirements and potential for claims, according to Rebecca Lowe, senior underwriter, commercial financial lines at QBE Europe.

“D&O is typically broad in the coverage being offered, so exposures related to ESG and greenwashing are definitely an issue for the D&O market. Senior leaders are increasingly being held to account across all areas. Falling short of ESG targets and governance will lead to litigation or regulatory action,” she said.

QBE is engaging with its customers to understand their ESG goals and how they will be achieved, said Lowe. “Being able to demonstrate the tangible steps that will be taken provides comfort that targets are realistic and achievable. In addition, customers’ compliance with the reporting requirements further demonstrates good corporate governance, which is crucial to the D&O risk exposure,” she said.

And insurers are increasingly looking at ESG risks in addition to traditional governance as part of the underwriting process, according to Adrian Jenner, head of D&O and cyber in London for Zurich Insurance. The ability to demonstrate good ESG risk management will be reflected in terms offered to insureds by D&O underwriters, he said.

“There should be a connection between good ESG risk management and fewer and less severe D&O losses and this may lead to preferential terms for clients with strong ESG frameworks and commitments. What is important is that, once companies make ESG-linked targets and disclosures, they have a realistic plan in place and take the appropriate steps to meet these goals,” Jenner said.

Insurers are trying to innovate around ESG, said Alex Davies, deputy head of management liability, London Market Insurance at Sompo International.

Marsh announced a new global D&O insurance initiative in June that allows companies with “superior ESG frameworks” to receive coverage enhancements. Marsh said the move signals a “greater willingness” among D&O underwriters to recognise organisations with strong ESG risk management.

“The [Marsh] initiative, that a number of leading D&O insurers including Sompo International are participating in, signals a greater willingness among underwriters to recognise organisations with strong ESG risk management as better risks,” said Davies.

Sompo International has also signed up to an initiative for UK-based listed companies that will offer to cover defence costs if firms obtain a certain ESG rating from the Marsh ESG tool.

“This is all about encouraging good actors, being innovative around the wordings they offer. If we can use some sort of methodology to compare companies, we can encourage good ones with better terms and conditions,” Davies said.

ESG disclosure comes on top of an already heightened compliance burden for directors and officers, he continued. “The whole market has seen such an influx of claims over the last 10 years – many related to disclosures – so underwriters have learned from that and are being more careful around disclosure obligations,” he said.

“This means ESG is now an agenda item at every client meeting and broker conversation. Underwriters need to be aware that there is not a one-size-fits-all solution for some of these issues; there are nuances between different countries and different sectors,” he added.

Brokers are now asking about underwriters concerns over ESG issues, particularly greenwashing, said Davies.

“Every single client meeting now will have some sort of acknowledgement of the issue. Directors and officers want to be showing that they are considering ESG risks, that they are on their registers. And this is cutting across all sectors. I recently saw a publishing company looking at their environmental impact – where their paper and inks come from and their carbon impact,” he said.

And there is mounting scope for litigation as disclosure rules rise internationally and regulatory agencies become more joined up, said Davies.

“One interesting development for US businesses comes from the Supreme Court ruling on abortion in America. In response, some companies are taking it on themselves to enhance their benefits for their employees. They may think they’re trying to do the right thing but will shareholders agree? If they don’t believe that’s a good investment or disagree with the principle, there is potential for litigation,” he said.


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