Directors’ and officers’ liability insurers are seeking more ESG information from their clients, as well as creating their own “proprietary” ESG analytics, according to new research.

The growing interest is explained by D&O insurers facing ESG risk from two directions, according to one US professor. She says insurers are exposed to liabilities arising from the insurance they sell, as well as to risk from managing investment funds.

Amelia Miazad argues that the predicament of insurers means they play an increasingly important role in monitoring corporate governance practices. This flies in the face of accepted opinion that D&O insurance may lower governance standards by reducing the “deterrent effect” of litigation.

For Miazad, the growing importance of insurers in governance is stark. “Through their ability to gather and analyse vast amounts of ESG information, and use that information to exclude or limit insurance for corporate directors, D&O insurers are uniquely positioned to encourage companies to reduce their environmental externalities and minimise ESG risks.”

Miazad’s conclusions are drawn from an analysis of publicly available documents, but also through interviews with insurers, insurance brokers, underwriters and law firms.

Can you be sure of Shell?

The research hits on growing evidence that ESG has become a major risk for D&O insurers. One of the most high-profile cases involves claims brought against Shell by the NGO ClientEarth, claiming company directors had breached their duties over its climate policies. This followed a ruling by Dutch courts the previous year, describing the energy giant’s climate transition plans as “rather intangible, undefined and non-binding”.

Last month, Allianz, one of the world’s largest insurers, published its top five risks for D&O insurance in 2023, in which ESG was third, beaten only by recession and cybercrime.

The report says ESG risk rests in business strategies, regulation requirements, governance arrangements and internal processes. Increasing pressure from rule makers for detailed disclosures will create further pressure from investors.

According to Lydia Miller, global underwriting and product analyst at Allianz, regulatory action has become a key concern for board directors, with a breach potentially triggering a D&O policy.

In addition to falling foul of government watchdogs, companies could face litigation from environmental groups, activist investors and “even disgruntled employees”.

Misrepresentation of ESG credentials or failing to meet publicly stated sustainability goals can make companies vulnerable to investor lawsuits and risk reputational damage. Climate is not the only issue that could trigger action. Diversity and inclusion could also be a cause.

“ESG-related liabilities can potentially become significant exposures for D&O insurance,” says Miller. “The setting of sustainability targets and action carried out to oversee progress towards achieving these goals, steps taken to ensure ESG-related disclosures, recognition of current ESG risks—and the management of them—are increasingly key checkpoints for insurers when it comes to the risk assessment of a company.

“Companies with strong ESG frameworks and governance will likely face insurers more willing to offer capacity.”

Weather front runners

The end of the year saw others issue their own warnings. Law firm Jones Day issued a paper claiming Europe had become the “centre of the action” for climate litigation against companies.

The firm says the pursuit of cases by activists and NGOs is not just about winning at trial: “Litigation is being used to attract publicity, obtain disclosure of documentation and information, and pressure businesses to change corporate behaviour.” And that includes influencing other companies and directors who watch the cases unravel.

Last year, research by business school INSEAD revealed that only 47% of directors responding to its survey believed they had “sufficient ESG competence and experience” on boards to challenge management on sustainability plans.

That suggests boards are still in transition. But that also means they remain vulnerable to litigation over ESG—and D&O insurers are on alert.