Part 2: Environmental, social and governance

ESG disclosures and exposures

Adopting an ESG framework is increasingly important to many businesses, as more and more customers, employees and regulators assess whether companies are taking their environmental, societal and governance responsibilities seriously.

It’s also something that is relevant to the D&O market. As well as fast-evolving legislation around issues such as climate change, the introduction of compliance disclosure requirements around the world increases the risk of directors facing regulatory or legal action.

ESG disclosures

Some UK businesses will already have ESG reporting requirements. As examples, all quoted companies must report details of greenhouse gas and energy use and the Task Force on Climate-related Financial Disclosures (TCFD), which requires information on climate-related risks and opportunities, currently applies to more than 1,300 of the largest UK-registered companies and financial institutions.

Even some smaller companies may find themselves having to make ESG disclosures. For example, any employer with a headcount of 250 plus must comply with gender pay gap reporting requirements and businesses with an annual turnover of at least £36 million must publish an annual modern slavery statement.

But while ESG reporting is not yet mandatory for all businesses in the UK, this is expected to change. Pressure from governments, environmental groups and activist investors is pushing ESG reporting on to the corporate agenda.

“We're moving to an environment where managing ESG exposures is becoming more and more prevalent,”
says Joe Roberts, Speciality Lines Underwriting Manager, Allianz.  

Being prepared for what this may entail is sensible. Understanding the organisation’s approach to ESG and whether it has the capabilities and data to report to a regulator can help. For some businesses, preparations may also involve the adoption of more environmentally friendly processes and packaging ahead of the introduction of any reporting requirements.

It’s also important to remember that embracing ESG is positive from a business perspective. Increasingly, customers and employees are seeking out companies that meet ESG criteria so taking this step now could benefit the business, as well as the environment and society.

ESG exposures

Even without regulatory reporting requirements, businesses are increasingly finding themselves with potential ESG exposures. Polluting the planet, using child labour or discriminating against employees and a company and its directors could find themselves in court and in the press.

As an example, companies that do not comply with international agreements such as the Paris Agreement, which sets out long-term goals on tackling climate change, could find themselves falling foul of activist and investor action. Failure of directors to assess the impact of climate change in their business could lead to claims they have breached their duty of care to the company.

A rise in social, diversity and inclusion issues is also being observed. Employees who feel they have been discriminated against or constructively dismissed, especially during the Covid-19 pandemic, may pursue directors, as well as the company, for damages.

esg wind turbine next to sea
In addition, directors who are perceived as not taking enough action to stamp out discrimination, or are regarded as enabling such a culture to develop, could also find themselves exposed to litigation.

Insurer reaction

As mandatory ESG reporting is adopted more widely, regulatory action due to ESG-related issues is a major concern for directors. A breach in regulations can trigger a D&O policy, subject to its terms and conditions.

Companies and their directors could also face the prospect of increasing litigation from environmental groups, activist investors, and even disgruntled employees. Although criminal fines and penalties are not covered under a D&O policy, it could pick up defence costs.

ESG-related liabilities could potentially become significant exposures for D&O insurance. This is likely to lead to insurers requesting more information about the steps a company is taking to manage its ESG risks.

As ESG becomes part of a company’s responsibilities, those with strong ESG frameworks and governance will likely find insurers more willing to offer cover. 

Climate change litigation

Globally, the cumulative number of climate change-related litigation cases has more than doubled since 2015. Just over 800 cases were filed between 1986 and 2014, and more than 1,200 cases have been filed in the last eight years1 – of which nearly three quarters were filed before courts in the US.

Although many of these cases don’t make it to court, this is expected to change in 2023 as a group of children and young people take a case against the US state of Montana. They will argue that the state is failing to protect their constitutional rights, including the right to a healthy environment.2

The bulk of cases may still be in the US, but The European Court of Human Rights is dealing with a number of climate cases too. These include a group of Swiss women – Senior Women for Climate Protection Switzerland – who are bringing a case against the government, arguing that climate change and especially heat waves affects their health and human rights.  

The outcome of these cases is being watched closely. Success could trigger further claims, against private companies as well as governments.

[1] LSE’s Grantham Research Institute on Climate Change and the Environment, Global trends in climate change litigation: 2022 snapshot
[2] Why 2023 will be a watershed year for climate litigation (