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How climate-related risk is impacting organization’s D&O insurance

Companies are under increasing pressure to consider how their business practices affect people, profits, and the environment.
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Companies are under increasing pressure to consider how their business practices affect people, profits, and the environment. Robust corporate governance has never been more important to help organizations manage their climate risks in order to ensure future success and comply with regulations.

Climate-related risk is a significant financial and reputational factor for directors and officers, especially amidst a more stringent regulatory landscape that focuses on detailed disclosures. Directors and officers liability (D&O) insurance affords coverage to directors, executive officers, and, in some cases, employees of a company for personal liability arising from claims made against them in their capacity as fiduciaries. This type of insurance is available to private and publicly traded companies, which can have different exposures.

In the past, D&O insurers tended to focus on underwriting a company’s operational and financial risk. More recently, the focus has shifted to include how organizations address climate risks as part of a holistic underwrite. In addition, many insurers are considering climate-related disclosures, particularly in the case of publicly traded companies. Companies should take a robust approach to assessing their climate risk exposure.

Regulatory obligations

Climate-related disclosure requirements vary across jurisdictions. These requirements can also vary by industry, listing, location, and size, which can pose a challenge to companies that work in multiple jurisdictions. Moreover, a considerable amount of new legislation and regulatory developments are emerging for climate-related matters. Following the international trend and focus on climate-related risk, several initiatives have been introduced in Canada, including:

  • The Canadian Securities Administrators has proposed disclosure obligations of climate-related matters for public issuers.
  • The Office of the Superintendent of Financial Institutions (OSFI) has published guidelines on climate-related risk management by federally regulated financial institutions. 

Impact on D&O Insurance

It is important that boards understand and consider the potential impacts of climate change on their company's operations, reputation, and financial performance, so they can allocate appropriate capital and plan strategically. These considerations, and the way companies discuss them publicly, can create additional disclosure risks for boards — whether by acts performed or omitted. In the absence of mandated disclosure rules, companies may have to decide whether to make voluntary disclosures and risk allegations that these might be misleading or remain silent and risk allegations for breaching/oversight of fiduciary duty with respect to climate-related risk.

D&O insurers want to know that the actions implemented by the insured are feasible and viable and that they align with the stated long-term strategic direction of the company. Above all, these insurers want to ensure public statements or disclosures by companies are accurate and attainable.

While D&O insurers consider publicly filed disclosures, private companies are not free from scrutiny. D&O insurers specializing in private company risk are equally concerned about the nature of the statements made by private companies on their websites and elsewhere. Claims could relate to a product advertised as “environmentally friendly” or statements regarding business practices related to climate change (for instance, emission-reduction targets).

Three actions for boards to respond to climate risk

Climate change is a systemic risk and a driver of financial risk and opportunity for companies. As a company’s actions and decisions can slow or accelerate climate change, it is important that its board and executives take appropriate action to improve the long-term viability of a company, including:

  1. Contemplate the long-term sustainability of your organization. It is important to review current and future business practices. For instance, consider the board structure: Is there a separate committee focusing on the impact of climate change on your organization? Have you identified the physical and transition risks you are exposed to? Creating a separate committee on climate change risk could lead to a more focused approach and appropriate risk mitigation strategies. A summary of discussions can be presented to the board for their review and possible implementation.
  2. Host discussions to promote stakeholder engagement. Do your stakeholders have expectations regarding how the company should be addressing climate change? An initial discussion with key stakeholders could help you draft a roadmap or identify some areas of concern for your business partners. Nurturing these relationships and involving stakeholders can help build trust, enhance reputation, drive innovation, and promote social and environmental responsibility.
  3. Remain informed about the latest regulatory changes and disclosure requirements. You can do this on your own or by consulting a trusted advisor. One approach is to establish a dedicated regulatory monitoring process to track relevant regulatory bodies, industry-specific regulations, and changes in legislation. A more informal approach could involve subscribing to regulatory news alerts, monitoring government websites, and engaging with industry associations that provide updates on regulatory changes.

As companies across every industry move forward with their climate change and sustainability strategies, they will encounter new risks and opportunities that must be managed. One of the board’s most important responsibilities is to oversee the management of risk, but an increasingly complex and fast-evolving risk landscape makes this task harder than ever.

At Marsh, we can assist you to understand and mitigate your climate-related risks. Our risk advisory team can help you measure, manage, and minimize your total cost of risk, and provide assistance in anticipating future challenges and seizing opportunities. Marsh’s award-winning ESG Risk Rating tool can also assist in identifying your most critical sustainability and climate-related risks and opportunities. Please reach out to us to help develop your strategies and place the appropriate risk transfer insurance solutions.

Our authors

Carolina Alvarez-Rey

Carolina Alvarez Rey

Assistant Vice President, FINPRO Canada

  • Canada

Robyn Campbell

Robyn Campbell

National FINPRO Leader