Allianz Sounds Latest Warning on ESG Driving D&O Risk

According to Allianz Commercial’s D&O insurance report, regulatory action or litigation risks due to ESG-related issues are another major concern for boards, driven by increasing reporting and disclosure requirements around such topics, which could trigger claims in case of an inadequate response or non-compliance.

The number of countries introducing ESG-reporting mandates has grown considerably in recent years, exposing directors to costs of responding to investigations, enforcement actions, and potential fines and penalties, for suspected non-disclosure or misrepresentation.

Such requirements also expose directors to claims by private litigants, not only for alleged misrepresentation but also due to dissatisfaction with what the required disclosures reveal about a company’s commitments to ESG issues. Recent examples of claims have included allegations of failure to manage climate risk to alleged breach of duties by investing in underperforming funds that actively pursued ESG strategies.

“Not every stakeholder holds the same view on an issue or the same view as to what actions directors should take,” says David Ackerman, Head of Global Financial Lines Claims, Allianz Commercial. “In a world that is becoming increasingly polarized, politically and socially, the very need for directors to evaluate and address the impact of various ESG factors on corporate value creates risk that claims will be made, by activist shareholders or other motivated stakeholders, on either or both sides of any given issue.”

Allianz's findings track with a recent report from Gallagher Re that urged insurers to monitor a growing number of cases that could set important legal precedents for how companies and directors may be held liable for climate related damages or failure to disclose risks and impacts - and how such legal actions could drive Directors & Officers (D&O) or Errors & Omissions (E&O) claims, and related disputes with insurers over coverage terms and exclusions.

As of December 2023, the Sabin Center for Climate Change Law at Columbia University was tracking 1,522 cases filed in the United States and 987 filed in all other jurisdictions combined.

According to the London School of Economics, the number of climate change-related legal cases doubled globally between 2015 and 2022. Moreover, 80% of cases were "filed with the aim of influencing the broader debate around decision-making with climate change relevance".
Such cases present new territory for insurers as litigants seek changes in corporate practices rather than compensation for losses and monetary damages, and companies face resulting expenses beyond defence costs.

Source: Allianz, https://commercial.allianz.com/news-and-insights/news/key-risk-trends-DandO-2024.html