The Nickel Report

In a recent post (“Environmental, Social and Corporate Governance: What are the Risks, Really?”), we discussed the 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 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.