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Climate change is the number one priority for D&O market

The article below, by Nicky Stokes, Head of Management Liability and Financial Institutions at New Dawn Risk, was originally published in Insurance Day in July 2021.

It is a tough time to be a di­rector or officer. Few can remember an operating en­vironment characterised by quite such a level of uncertainty and array of emerging risks. At the same time, for those looking to transfer some of that risk, the directors’ and officers’ (D&O) lia­bility insurance market has been going through a long overdue pe­riod of price corrections, coupled with restrictions on coverage.

The full impact of Covid-19 has yet to be felt and is unlikely to be until governments begin to wind back the unprecedented levels of financial support they have put in place. With the near-term eco­nomic and political outlook still uncertain, D&O liabilities linked to company insolvencies are like­ly to increase.

Of course, the pandemic has by no means been all doom and gloom. Pent-up capital has been seeking an outlet, which has re­sulted in a wave of transaction activity, driven in no small part by the rise of special-purpose ac­quisition companies (SPACs). This has brought its own set of risks. A SPAC has just two years to deploy investor capital, which puts the onus on swift action. Rushing to market brings with it the risk of bad deals being negotiated and we should expect claims to be brought against directors and of­ficers as a consequence.

Company executives must also contend with the rising cyber threat, which has been exacerbat­ed by the shift to remote working. Additionally, environmental, so­cial and governance (ESG) issues are climbing up the agenda. With more personal accountability, changing attitudes and the rise of social media, directors and of­ficers are increasingly exposed to claims related to employment­related risks, ethics and culture.

Looking ahead, though, the big­gest threat over the coming years will be claims that result from cli­mate change and other environ­mental issues. These are already behind a number of D&O claims, a trend that is only going to accel­erate, driven by a combination of three groups of actors: activists, regulators and investors.

Activist efforts

The recent case brought by Greenpeace, five other environ­mental organisations and more than 17,000 individual claimants against Royal Dutch Shell in the Netherlands has brought this issue sharply into focus. Dutch judges ordered the oil and gas major to implement stringent carbon dioxide emissions cuts within the next few years.

On the same day, a tiny hedge fund – Engine No.1 – mobilised by a dissident shareholder group dealt a major blow to Exxon Mo­bil, unseating a number of board members in a bid to force the company’s leadership to reckon with the risk of failing to adjust its business strategy to match global efforts to combat climate change.

Given mounting public concern about the environment, activism is only going to increase and it will not just be oil and gas companies that are targeted. They may be first in the firing line as some of the world’s biggest polluters but firms across agriculture, industry, manufacturing, transportation, the list goes on … should expect to come under scrutiny as well.

Climate change is also being tak­en increasingly seriously by regu­lators. In 2019 the UK’s Prudential Regulation Authority applied new rules that require certain finan­cial services firms to nominate a senior manager responsible for identifying and managing finan­cial risks from climate change.

In the US, the Securities and Exchange Commission (SEC) is expected to require public com­panies to publish data on a whole range of new areas, including greenhouse gas emissions, work­force turnover and diversity, as its new chairman looks to enhance the SEC’s disclosure regime.
Gary Gensler, SEC chair, has already said it plans to introduce new climate-related and human capital rules as it steps up ESG disclosures and earlier this month closed a public consultation on a potential new rule, which is likely to be proposed in October.

Investor behaviour

But it is investors that probably hold the strongest hand when it comes to forcing companies to change their behaviour concern­ing climate change and, by exten­sion, raising the level of risk facing directors and officers should they fail to do so.

Last year, BlackRock – the world’s largest investor – an­nounced it was making climate change central to its strategy for 2021, putting environmental and social priorities at the forefront of its investment approach. With as­sets under management of more than $7trn, BlackRock has signifi­cant influence on most of the com­panies in the S&P 500.

Interestingly, BlackRock and fel­low investors Vanguard and State Street gave powerful support to Engine No.1 in its case against Exx­on’s leadership. These huge invest­ment companies rarely side with activists on such issues, so this marks something of a sea change.

Investor pressure is building elsewhere. Launched last year, the Net Zero Asset Managers initiative saw 30 of the world’s largest asset managers commit to supporting investing aligned with net zero emissions by 2050 or sooner. Just last week Amundi, Franklin Templeton, Sumitomo Mitsui Trust Asset Management and HSBC Asset Management an­nounced they were among the latest big investors joining the ini­tiative, bringing the total on board to 128, which means $43trn in assets are now committed to a net zero emissions target.

This is a now a one-way street. Companies across the board need to understand that failing to un­derstand and take seriously their exposures to climate change will have significant ramifications for them and, ultimately, their direc­tors and officers too.

The original article can be viewed here