Mitigating Environmental, Social, and Corporate Governance (ESG) Risks Through D&O Insurance

[Gunnar Larson]

In a recent post on the Nickel Report (“Environmental, Social and Corporate
Governance: What are the Risks, Really?”
<https://www.huntonnickelreportblog.com/2021/03/environmental-social-and-corporate-governance-what-are-the-risks-really/>),
our colleagues provide a thoughtful discussion of various risks, trending
issues, and emerging concerns arising from environmental, social, and
corporate governance (“ESG”). One key takeaway is that ESG-related activity
at the federal government is just getting started and that agencies have
already begun devoting substantial resources to ESG issues, like the U.S.
Securities and Exchange Commission’s recently-announced Climate and ESG
task force <https://www.sec.gov/news/press-release/2021-42> to “develop
initiatives to proactively identify ESG-related misconduct.”

In addition to traditional legal liability like lawsuits or enforcement
actions, ESG-related risks include risks to corporate reputation, risks
associated with project financing, risks associated with lack of diversity,
equity, and inclusion, risks based on lobbying, and from lack of corporate
ESG coordination. Given those emerging risks, this post looks at
insurance—particularly directors and officers liability insurance—as a tool
to mitigate at least some potential exposures a company and its executives
may face if an ESG-related issue arises.

The SEC’s Climate and ESG task force is one example of increased exposure
implicating D&O insurance. The purpose of the task force is to identify
ESG-related misconduct by market participants. Initially, the task force
will focus on identifying material gaps or misstatements in issuers’
disclosure 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 task force is in its early days, we foresee
companies and executives who come under scrutiny to seek protection under
their D&O liability insurance policies for the substantial costs in
cooperating with regulators during informal and formal investigations,
responding to subpoenas, and defending against and resolving enforcement
actions.

ESG issues are also giving rise to increased litigation, from shareholder
lawsuits accusing boards of failing to live up to their diversity
commitment disclosures to lawsuits focusing on sourcing and supply chain
risks implicating human rights and child labor issues. Other ESG-related
flash points will continue to emerge as regulators focus on particular
areas of concern and companies adjust corporate governance practices and
policies in response. Companies should assess what these developments mean
for their businesses and how they can protect themselves from potential
ESG-related investigations, enforcement actions, and litigation.
Unfortunately, even companies that are proactive at addressing their ESG
exposure may be unable to avoid regulator or shareholder scrutiny.

Accordingly, as part of their ESG strategies, companies should understand
what risks are covered under their D&O insurance policies and, if needed,
modify existing coverage or procure new coverage tailored to particular ESG
exposures. The list of potential D&O coverage disputes over ESG issues is
long, but the good news for policyholders is that D&O policies generally
provide some protection against enforcement actions or government
investigations. While private companies typically will enjoy broader
protection for defense and indemnity in ESG-related lawsuits, public
companies should ensure they are adequately protected for securities claims
focused on alleged misrepresentations or misstatements in ESG-related
disclosures. All policyholders, however, should understand the current
limits (and sublimits), exclusions, and other limitations placed on these
coverages to understand whether they are appropriately covered for emerging
ESG risks.

As the Biden Administration continues to develop its ESG agenda and
regulators provide further direction on enforcement priorities, companies
should have more guidance to tailor their ESG risk mitigation strategies.
In the meantime, companies should be proactive about addressing any
potential exposure internally and creating plans for dealing with scrutiny
from the task force, including whether they can seek protection under their
D&O policies.

https://www.natlawreview.com/article/mitigating-environmental-social-and-corporate-governance-esg-risks-through-do
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