Corporations in the United States are coming under fire for their failure to implement adequate climate change policies and protections.
As regulatory pressures across the US gain momentum under the Biden Administration, and general public understanding of climate change grows thanks to widespread media coverage and publicized events like the 2021 United Nations Climate Change Conference (known as COP26), any inadequate sustainability plans or insufficient corporate disclosures could lead to costly litigation with financial and reputational consequences.
To help corporate clients strengthen their ESG (environmental, social, and governance) performance and mitigate risks associated with climate change, brokerage giant Aon has released a new report entitled ‘Directors’ and Officers’ (D&O) Update: The ‘E’ in ESG‘ – with separate ‘S’ and ‘G’ reports to follow.
The report details how large investors expect companies and their boards to be able to articulate strategy and oversight in disclosure and through engagement. It also highlights how investor litigation targeting boards and senior management of companies over environmental events or climate-related issues is already occurring, and could quickly become the next prominent D&O claims trend.
“We’ve been working on ESG initiatives for the past few years at Aon, and it’s been particularly focused and in line with our corporate mission of delivering our Aon United approach,” said Kristin Kraeger, managing director and national D&O and fiduciary product/practice leader within Aon’s financial services group.
Kraeger, who also heads up Aon’s ESG counsel, added: “Our counsel is multidisciplinary, interdisciplinary, and it is really bringing all of the groups that could weigh in on ESG into the fold, particularly as it relates to boardroom issues. [Together], we wanted to put together a comprehensive report that we felt reflected the interdisciplinary approach that we have with our constituents and team members from the human capital side.”
Aon’s D&O team globally has been focusing on ESG risks for several years, really reflecting that fact that most of the litigation risk that exists is driven by topics relating to ESG, whether that’s climate disclosure-driven lawsuits or disputes around diversity, equity, and inclusion (DE&I). All of these issues have now become top of mind for the C-suite and the board.
“From a D&O insurance standpoint, so much of an underwriter’s view of things really revolves around the litigation landscape,” Kraeger told Insurance Business. “Regarding the ‘E’ of ESG, there are a few pieces of litigation out there now around corporate disclosures and climate change in the US. And we expect that will be an area that will continue to develop. We are already seeing underwriters focused on [this issue] and asking questions around all three components of ESG – but more on the ‘E’ of recent.”
The US D&O insurance market has hardened quickly over the past few years, with insurers raising rates, reducing capacity, and tightening up coverage terms and conditions. ESG is one of the areas where D&O carriers are implementing stricter underwriting procedures. These corrective actions have helped to “stabilize” the marketplace, according to Kraeger.
Read more: How did D&O pricing fare in Q3 2021?
“We’re coming out of a tight D&O market - a market that we believe is stabilizing - and where underwriters are continuing to underwrite specific to the risks,” she said. “So, from Aon’s perspective, we’re spending a lot of time coaching our clients for those underwriting meetings to help them risk differentiate and highlight where they are in their ESG processes, what they have prioritized, what they have completed to date […] and I think that we’re seeing underwriters give consideration to companies that are addressing it proactively. We’re coaching our clients to tell their story in a clear and compelling way. That’s really beneficial in the D&O marketplace.
“At Aon, we’re also focused on things like enhanced coverage issues around ESG, really starting with the nuts and bolts of the contract. We hope that as the market progresses, we’ll see some benefits reflected ultimately in retentions or willingness to deploy capacity, or ultimately premium, but at the moment, all of that’s still evolving.”
Moving forward into 2022 and beyond, Kraeger expects the ‘E’ in ESG to remain a high priority issue for boards, directors, and D&O underwriters.
“I don’t see it dissipating any time soon, but rather increasing in awareness and focus both on the client side and the underwriter side,” she stressed. “We’ve got to continue to keep an eye on the plaintiff’s bar. Where does the creativity lie in the plaintiff’s bar to bring litigation, and how aggressively will they bring litigation around these issues? That will continue to drive the priorities from a D&O underwriting standpoint, so we’ll be focusing on that for the clients.”
