In a recently published post on the Nickel report ("Environment, social and corporate governance: What are the risks really?"), Our colleagues provide a thought-provoking discussion on various risks, trend issues and emerging problems arising from the environment, social and corporate governance (“ESG”). An important takeaway is that ESG-related activities at the federal government have just begun and that agencies have already begun to devote significant resources to ESG issues, such as the US Securities and Exchange Commission's recently announced working group on climate and ESG to "develop initiatives for proactively identify ESG-related misconduct.
In addition to traditional legal responsibilities such as litigation or enforcement action, ESG-related risks include risks to the company's reputation, risks associated with project financing, risks associated with lack of diversity, equity and inclusion, risks based on lobbying and lack of corporate ESG. -coordination. Given the emerging risks, this post looks at insurance – especially board members and officer liability insurance – as a tool to mitigate at least some potential exposures that a company and its executives may face if an ESG-related issue arises.
The SEC's climate and ESG working group are an example of increased exposure that implies D&O insurance. The purpose of the working group is to identify ESG-related behavior of market participants. Initially, the working group will focus on identifying significant gaps or inaccuracies in issuers' reporting of climate risks under existing rules, but it will also examine investment advisers' and funds' "ESG strategies" and related disclosure and compliance issues. While the working group is in its early days, we predict companies and managers who will be audited to seek protection under their D&O liability insurance for the significant costs of cooperating with regulators during informal and formal investigations, responding to lawsuits and defending against and resolving enforcement measures.
ESG issues also give rise to increasing disputes, from shareholders' lawsuits accusing boards of failing to comply with their information on diversity commitments to lawsuits focusing on purchases and risks in the supply chain involving human rights and child labor. Other ESG-related hotspots will continue to emerge as regulators focus on specific problem areas and companies adapt corporate governance practices and policies in response. Companies should assess what this development means for their companies and how they can protect themselves from potential ESG-related investigations, enforcement actions and disputes. Unfortunately, even companies that are proactive in addressing their ESG exposure may not be able to avoid scrutiny by the regulator or shareholders.
Consequently, as part of their ESG strategies, companies should understand the risks covered by their R&D insurance and, if necessary,. , change existing coverage or obtain new coverage tailored to certain ESG exposures. The list of potential disputes over D&O coverage over ESG issues is long, but the good news for policyholders is that D&O policies generally provide some protection against enforcement action or government investigations. Although private companies will usually enjoy broader protection for defense and damages in ESG-related lawsuits, public companies should ensure that they are adequately protected against securities claims that focus on alleged misconduct or inaccuracies in ESG-related litigation. However, all policyholders should understand the current limits (and sublimits), exceptions and other restrictions placed on these coverages in order to understand whether they are adequately covered for new ESG risks.
As the Biden administration continues to develop its ESG agenda and regulators provide additional guidance on compliance priorities, companies should have more guidance in tailoring their ESG risk reduction strategies. In the meantime, companies should be proactive in managing any exposure internally and creating plans to handle review from the working group, including whether they can seek protection under their D&O policy.