How the ‘E’ in ESG Impacts Directors’ & Officers’ Liability (D&O) Insurance

“The growing emphasis from various stakeholders on material Environmental, Social and Governance (ESG) factors, including cybersecurity, climate and human capital, are driving companies and their boards to re-evaluate their disclosures and board practices,” says Angela Jack Business Unit Head of Aon South Africa’s financial Services Group.

A D&O Liability Update released by Aon highlights some of these important drivers as follows:

• An expectation exists for organisations to improve transparency around ESG matters that includes strategy, implementation and ongoing progress.
• Large investors also expect companies and their boards to be able to articulate their ESG strategy and provide an overview of developments in the space.
• Regulations are playing an increasingly prominent role from both a local and international perspective, requiring public companies to report on material factors that are driving and impacting its ESG strategy in both quantitative and qualitative terms.
• Human capital management - and Diversity, Equity & Inclusion (DE&I) more specifically - has been a primary focus for institutional investors and shareholders, including addressing DE&I in the boardroom.
• Continuous education on these evolving topics is key for directors and the C-suite alike to stay on top of material risks and demonstrate a level of sophistication during critical exchanges with underwriters, investors and the like.

“As global losses from natural disasters, cyber breaches/hacks and liability lawsuits continue to increase on an annual basis, the insurance industry is beginning to formalise its approach to incorporating ESG factors into the underwriting process across lines of business, particularly influencing outcomes in the Directors’ & Officers’ Liability (D&O) insurance market,” explains Angela.

Spotlight on the ‘E’ in ESG

Evolving stakeholder interest and new-pending regulations are triggering the need to develop and disclose climate risk/opportunity strategies.

“Underwriters are also looking for more transparency and accountability from current or potential policyholders, irrespective of industry classification or company size. Publicly traded companies may even experience negative consequences if not prepared to address the company’s climate impact and its risk management and disclosure plans,” Angela warns.

“Those entrusted to the leadership and direction of companies are expected to understand the impact of its operations on the environment and climate change, as well as how future climate change may impact the business overall,” she adds. As a result, there must be consideration of developing risk management strategies and establishing communication strategies that includes, but are not limited to:

• Understanding current carbon footprint/ emissions.
• The impact of climate change on the ability to do business.
• Setting a realistic value chain plan for greenhouse gas (GHG) reduction.
• Protecting against incidents that can be harmful to the environment.
• Water and land use.
• Waste or pollution from business operations.
• Biodiversity and impacts on sensitive habitats.

The cover that a D&O liability insurance policy provides is an absolute necessity when it comes to the protection of the personal assets of directors, officers and other employees that are charged with supervisory and managerial responsibilities, who can be held liable for wrongful acts which may occur in their day-to-day management activities of the business or entity – and CSR and ESG fall very much within the ambit of these management activities. The main purpose of a D&O policy is to offer financial protection for investigation and defence costs together with awards for a valid claim.  

“Every company is unique. In developing a robust ESG strategy, companies must understand the expectations of all stakeholders, applicable regulations and the risks deemed material to it business. Taking this approach will help enable your company and your D&O broker to better engage with insurers and seek to secure a strong and sustainable insurance programme.,” Angela concludes.