Almost daily there are reports of new environmental, social, and governance ("ESG") claims being brought against public companies with no end in sight. Within the arena of ESG issues, climate change disclosures are an emerging focus. Corporate policyholders should ensure that their insurance programs—especially their directors and officers ("D&O") program—are keeping pace with these emerging risks.
The Climate Change Disclosure Risk. The U.S. Securities and Exchange Commission ("SEC") is pursuing new disclosure rules regarding climate change. Observers have opined that the SEC could issue a rule proposal by October of this year. Currently, only about 16% of S&P 500 companies make climate-related disclosures in regulatory filings, and any new SEC rules are likely to have an impact well beyond this small percentage of companies currently making climate-related disclosures.
Adding to the challenges that new disclosure rules may present, the SEC has created the "Climate and ESG Task Force" in the Division of Enforcement. The task force is responsible for "develop[ing] initiatives to proactively identify ESG-related misconduct," including the use of "sophisticated data analysis to mine and assess information across registrants, to identify potential violations." Explaining the need for the task force, former acting SEC Chair Allison Herren Lee said, "Climate risks and sustainability are critical issues for the investing public and our capital markets," and the task force "will play an important role in enhancing and coordinating the efforts" of several parts of the agency. Initially, the task force will focus on identifying any climate-related disclosures that violate existing rules.
Beyond the SEC, some private asset management firms are pushing for companies to make more climate disclosures. And, of course, the plaintiffs' bar will likely attempt to use climate disclosures—or the lack thereof—as litigation opportunities, with lawsuits already filed alleging that companies have misled the public by failing to disclose the actual proxy cost of carbon used when making business decisions.
Insurance and ESG. Corporate policyholders should review how their insurance program will respond to these emerging ESG risks, including the increased focus and soon-to-be potentially required climate change disclosures. Consider the following three steps:
First, before reviewing the insurance program, identify the company's ESG risks, including as they relate to climate change disclosure. What are the top risks? Where does climate change, including related disclosures, rank on that list of ESG risks?
Second, review the insurance program to see how it will respond to the ESG risks. The review should include all policy lines that the company's identified ESG risks implicate. With respect to potential disclosure obligations, special focus should be directed to the company's D&O insurance program. For example, some D&O policies may have some form of a pollution exclusion—how could such an exclusion, designed to address traditional property damage/liability issues, be potentially misapplied by an insurer to adversely impact coverage for climate change disclosures?
Third, beyond policy terms, corporate policyholders should continuously assess their policy limits. The increased focus on ESG issues may represent a new—and increased—risk for the company. Many insurance brokers can help provide guidance on insurance limits, including through benchmarking against similarly situated companies. The terms of any new insurance should be carefully reviewed to make sure the policy covers the identified risk.