By Angus Duncan, Executive Director, Coverage Specialist, FINEX at WTW
A large part of this has been driven by the increasing formal disclosure requirements that companies are obliged to make regarding a company’s CO2 (or CO2 equivalent) emissions. Any time a company has to make a statement about anything, that is something a director or officer has to sign off on and climate change is another example. Exposure isn’t limited to potential misrepresentation claims, of course. There is also the potential for allegations of breach of fiduciary duty in failing to manage the company’s exposure to climate change or for failing to sufficiently aggressively reduce the company’s own emissions or otherwise pursue goals of moving away from dealing with high emissions industries.
Regulators have been very active in many jurisdictions in pursuing companies for alleged greenwashing and various Non-Governmental Organisations (NGOs) have brought actions (some successful and some not) against companies in relation to how they are managing these matters.
A shift in risk priorities
For a few years, we saw an increased interest from Directors and Officers Liability (D&O) insurers in relation to the potential exposure for directors and officers to climate-related litigation. However, having surveyed a lot of WTW colleagues around the world who are involved in the placement of D&O insurance policies, it seems like insurers’ interest in this area is dropping off.
For people working with Financial Institutions, we saw one insurer, in particular, impose a significant questionnaire a couple of years ago. However, it appears that is rarely seen in recent placements. There are some sectors in some regions where formal questionnaires may still be required, but they appear to be the exception, rather than the rule.
So why do we think the initial focus from insurers on climate change-related exposures has dropped-off?
So why do we think the initial focus from insurers on climate change-related exposures has dropped-off? The burden of regulation relating to climate change in many countries around the world has increased over the last few years, not fallen away, so one might expect the focus from insurers to have heightened rather than lessened.
We can suggest a few possibilities
First, so far there have been few climate change cases publicly targeting directors and officers. While there have been cases against companies (and as mentioned, many regulatory actions), we have seen few actions targeting individuals. Perhaps the most public case targeting directors is a derivative claim brought in the High Court in London and that claim was dismissed.
Climate change did not appear in the top seven risks overall of our Directors’ and Officers’ Survey 2023/24.
Second, even where people may still consider climate change to be a significant risk for directors and officers, they may be more focussed on other risks. This is suggested by the results of our Directors and Officers Survey which we reported on in March 2024. Climate change did not appear in the top seven risks overall, although it did appear in the top seven risks for the Middle East, Australasia and Asia. In GB, climate change went from being the number one risk in 2023 to falling out of the top seven entirely. However, the proportion of respondents saying that climate change was at least an important risk for directors and officers actually increased – just not by nearly as much as other risks.
Third, the insurance market for D&O insurance is incredibly soft at the moment. Rampant competition means that many insurers are reluctant to ask challenging questions or to take strong positions regarding climate change exposures for fear of losing an account. Some insurers we have spoken to were clear that it isn’t that they aren’t interested in climate change exposures, it is just that they don’t feel able in the current market to change the terms they are offering whether a client is managing their climate change exposure well or not.
Obviously, the situation may vary depending upon each client’s particular position, but these are the messages we are getting from insurers at the moment.
Approaching 2030
Some insurers are offering additional capacity for clients who manage their climate change or ESG risks particularly well. However, in the current soft market, finding sufficient capacity at reasonable rates for most of our clients is not generally a challenge, so there is little need to call upon such additional capacity as may be available.
One note of caution is that the closer we get to 2030, the more likely it is that companies may need to revisit their 2030 climate change targets. This may lead to an increase in claims against directors and officers, particularly for directors and officers of public companies.
Nonetheless, for now, the positive news is that we are not seeing climate change exclusions in D&O insurance and many insurers, at least in the London market, are open in stating that they consider that greenwashing claims or breach of fiduciary duty claims relating to climate change exposures are the types of matter they would expect a D&O policy to respond to.
This is clearly an area to keep an eye on as and when claims develop. However, for now, the position is positive for directors and officers and their insurance.
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