New report: Directors’ risks gather pace as challenges for insurers look set to increase

The global risks to directors and officers (D&O) continue to gather pace, meaning D&O insurers must step-up their efforts to monitor this fast-evolving claims environment, a new report issued by Kennedys today warns.

Top of the growing list of challenges are exposures associated with ESG (environmental, social and governance), as litigation in this area continues to gain momentum, especially in relation to climate change.

Unsurprisingly, given the increased global scrutiny, the number of global litigation cases has more than doubled since 2015 to over 2,000, with a quarter of these being brought between 2020 and 2022. Compensation is often sought from company directors, with any losses falling on D&O insurers.

A growing number of these cases have centred on greenwashing, where a business has made misleading claims about the environmental impact of its products, services or brand.   

The report points to the world’s first case seeking to hold company directors liable for failing to prepare their company for transition to net zero, which saw directors of global oil giant, Shell, facing charges from environmental law charity and Shell minority shareholder, ClientEarth.

The case in the High Court of England & Wales last month ruled that the law does not impose specific climate change duties on directors of Shell, yet that doesn’t mean the issue is going away.

Nicola Pangbourne, partner at Kennedys, says: “D&O insurers and their insureds should be comforted by the court’s insistence that the alleged duties specific to climate change brought against the Shell directors were found to be misconceived because they would impose specific obligations on how to manage the company. This was contrary to the principle that it is for directors themselves to determine, acting in good faith, how best to promote the success of a company for the benefit of its members as a whole, not the court.”

The court has granted ClientEarth’s request to reconsider the decision. 

Yet, Nicola says that the scrutiny will continue and points to another shareholder case for D&O insurers to monitor, namely the 2022 decision in McGaughey & Davies v the Universities Superannuation Scheme where the High Court dismissed a claim alleging climate related breaches of directors’ duties. The claimants’ appeal was heard yesterday, with judgment expected in the coming weeks. She says: “Given that the UK’s current environmental laws allow regulators to prosecute directors where offences by a company are committed with their consent, connivance or neglect, we could also see similar offences created for individual directors.

“As such, D&Os and their insurers should not only focus on climate governance but take a proactive approach in monitoring and dealing with these risks amongst their insureds. It is a good idea to work in collaboration with brokers to promote mutual understanding of the potential risks amongst their insureds to get the best possible outcome for all parties.”

Nicola says that while some of the most significant cases have been in England & Wales, the issues highlighted are global and points to the FCA’s virtual Greenwashing TechSprint initiative, which over the summer, will bring together 13 international regulators and interested firms “to develop a tool or solution that can help regulators and the market effectively tackle the risks of greenwashing in financial services”.

“It’s clear that while the laws may differ by country, interest in the issue of ESG is growing exponentially across the globe,” says Nicola.

As such, the report, Directors’ and Officers’ liability report 2023: trends and future risks, offers a must-read global digest of the biggest issues businesses and their insurers are facing.

Other challenges highlighted from around the globe include:

• The risk of global business insolvencies - with many more expected in the near future - as a result of the volatile geopolitical landscape, may expose management shortcomings leading to claims by liquidators and regulators against former directors, exposing D&O liability policies.
• In the US, the Securities Exchange Commission (SEC) in 2021 announced the creation of a Climate and ESG Task Force to develop initiatives and identify ESG-related misconduct. The Task Force is now using data analysis to assess information and identify potential misstatements related to climate risks, as well as disclosures related to ESG.
• The SEC is expected to issue its highly anticipated rule regulating climate-related disclosure soon, which will require businesses to provide certain climate-related information in their annual reports. The proposed rule will apply to all US public companies and foreign issuers who report to, or file registration statements with, the SEC.
• The FCA sustainability disclosure requirements could take effect from as early as next month and may include greater mandatory disclosures and an anti-greenwashing rule.
• In Ireland, legislation enacting the Individual Accountability Framework (IAF) & the Senior Executive Accountability Regime was signed into law in March 2023, bringing in significant changes to the oversight of persons with decision making power in regulated financial service providers. A similar regime is being mooted in the UK, following a call for evidence from HM Treasury to its Senior Managers & Certification Regime. A policy response is expected by the end of the year, which could result in new regulatory powers being granted and increased exposures for D&O insurers.
• In Hong Kong, ESG disclosures by directors of listed companies are now regulated under two complementary regimes: the Companies Ordinance, and the Environmental, Social and Governance Reporting Guide issued by the Hong Kong Stock Exchange. As such, directors must prepare an annual report, which should include the company’s environmental policies and performance. A director’s failure to take all reasonable steps to comply may attract criminal consequences and the guide introduces “comply or explain” provisions, where directors must report on policies and compliance with relevant laws and regulations in respect of various environmental and social aspects, or explain if otherwise.

“Accepting that society’s demands on corporations to address climate change around the globe are unlikely to wane, firms will be mindful that global regulators will be eager to find new ways to enhance climate governance. D&O insurers should, therefore, be aware of the effect that this will have on their exposure and consider whether firms with impressive ESG credentials actually present a greater risk” concludes Nicola.