Strong environmental, social and corporate governance (ESG) business policies are critical to address the fluctuating, unprecedented risks in this changing climate. Any company planning to expand and thrive in the next few decades must evaluate its collective conscientiousness for social and environmental factors, including preparing for the social and market upheavals resulting from greenhouse gas emissions, gender and diversity policies, and shareholder interest in income equality. Implementing forward-looking ESG policies is vital to a modern company’s success, and its retention and management of a socially conscious workforce and investor pool.

Obtaining insurance coverage in this climate of activist shareholders

The evolving ESG landscape requires companies to plan for claims that did not exist just a few years ago. Shareholders are actively requiring boards to be more transparent and responsive to ESG issues, and regulators are enforcing new disclosure requirements. Sometimes disclosure alone is not enough: businesses are scrutinized by shareholders and regulatory entities for underestimating their environmental impact, or over promising their efforts to minimize climate change contributions, known as greenwashing.

Even companies doing their best in ESG governance face the risk of shareholder and regulatory litigation. These risks can be addressed by directors and officers insurance coverage, which generally protects companies, their directors, managers and employees against claims for a “wrongful act.” Unless excluded as a specific type of claim, companies routinely look to their D&O policies to address shareholder claims and defray the costs of regulatory investigations.

New issues with purchasing D&O insurance coverage

D&O policies will also typically reimburse defense costs for covered claims. This is because the costs of litigation can be high even if the company ultimately wins the lawsuit. Plaintiffs bringing environmental litigation have not yet been successful in holding companies liable for climate change losses; but defending against these claims is not cheap. Since the risks are new, and the cost of litigating ESG cases can be high, insurers are looking to reduce their risk as well.

Businesses should be prepared for insurers to take a more guarded approach to D&O policy placement. Rather than just renewing existing policies, insurers are seeking more information about a company’s current and future ESG strategies. Insurers are also attempting to shield themselves by raising premiums, increasing deductibles and moving away from covering specific types of ESG claims that an unwary policyholder may have expected to be covered.

Fortunately, insureds can combat the uncertainty of ESG litigation by understanding and leveraging the risks of D&O insurance as much as possible. Insurers generally encourage businesses to take ESG seriously and obtain D&O coverage as a risk-reducing factor in corporate governance. In particular, insurers facing a claim will look for any misleading or inaccurate representations and warranties by the policyholder during the D&O underwriting process to avoid coverage.

Understanding which types of claims are covered

Current and future policyholders should understand their policy limits, exclusions and other restrictions placed on these coverages to holistically understand whether they are appropriately covered for emerging ESG risks. Policyholders should also obtain coverage that includes defense costs for ESG-related actions. Those seeking coverage for shareholder or regulatory actions about climate change or adherence to a climate change policy should make sure that such actions are not excluded by the language of a pollution exclusion, for example.

In the face of the rising risk of ESG-related litigation, companies should take active steps to bring their ESG policies in line with the law and their shareholders’ interests to reduce the risk of litigation. Knowing that it is impossible to entirely foreclose that risk, companies should make sure that their most likely litigation exposures are adequately insured in line with their expectations. ESG litigation is likely to remain an extant risk for the foreseeable future.