Why D&O insurers need to focus on the ‘S’ in ESG

The ‘S’ pillar of environmental, social, and governance (ESG) practices should be an increasingly important area of focus for D&O insurers, a specialist insurance provider said recently.

While ESG is clearly a hot topic, the environmental and governance pillars have traditionally been focal points. But the social pillar should be of importance for insurers writing directors and officers liability insurance, and not just because of well-publicized issues around diversity and inclusion. There is also the likelihood of increasing litigation relating to ESG, which in turn leads to more D&O claims.

“Generally speaking, you are seeing a bit of an uptick in D&O claims across the social pillar,” said Ralph Banbury, management liability underwriter with CFC Underwriting. “Social encompasses so much. For example, it looks into employee welfare, it looks into the supply chain, and [extensively into] cybersecurity. These three points are hugely important to companies and the C-suite and directors will be incredibly focused on ensuring that these three points are top of their agenda.”

The first point — employee welfare — encompasses not only a safe working environment, but one that is free from fear of harassment and discrimination, Banbury said in an interview with Canadian Underwriter last week. With the worldwide movements of #MeToo and Black Lives Matter, employees, shareholders and shareholders expect action from directors and the C-suite.

“Boards of directors have been sued for lack of diversity,” Banbury noted. “Board directors and their officers are very much expected to heed what is being said and what these movements represent. Otherwise, you can see, and we have seen in the D&O market, litigation with regards to those issues.”

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Some jurisdictions, such as California, are even requiring a certain number of women or minorities on boards.

From a sexual harassment standpoint, it’s important to consider what the board has done regarding ensuring there are protocols, procedures and policies in place so that employees are protected. “Is there a channel through which employees can report sexual harassment either anonymously or safely?” Banbury asked.

“And when that sexual harassment is reported, what are the next steps? Are people listened to appropriately? Are there formal procedures in place? With some of these sexual harassment actions, there are allegations of inaction, heel-dragging, turning a blind eye.”

Corporate culture is another consideration. For example, backers of private equity firms or venture capitalists who are investing in companies will want to know that the fund is investing in firms that have good policies, procedures, and protocols in place regarding the social pillar and culture.

“From a D&O underwriting perspective, when you know that a firm has private equity or venture capitalist backing, you know that there is a huge amount of due diligence that goes into place,” Banbury said. “When a private equity firm does its due diligence, it will traditionally request a bespoke ESG application form or questionnaire.”

While the private equity firms won’t expect “absolutely perfect ESG measures,” they will expect the company to have thought about it and have it on their agenda. Millenial and Gen Z workers are also more focused on ESG than other generations and more likely to voice frustrations with companies if ESG principles are not up to scratch, Banbury said.

From a cybersecurity perspective (the second consideration), organizations can also quickly lose reputation by experiencing a large cyber breach. “So not only will you get angry consumers, angry owners of that data, you also get shareholders who will be aggrieved about that fact that the company reputation has taken a hit, the share price may well have taken a hit,” Banbury said. “These aggrieved shareholders may want to then bring a lawsuit.”

The final social pillar aspect is supply chain. For example, what about a company whose supply chain involves modern slavery and below minimum wage pay? Think about an exposé on batteries made of cobalt, where child miners in the Congo were mining the cobalt.

“That in particular is going to be something that investors and stakeholders are going to be keen to want to know that companies are doing their due diligence and constantly reviewing, examining, scrutinizing the supply chain,” Banbury said.

“For a D&O underwriter, that’s key as well,” he added. “When you’re looking at the social pillar, I think it’s important to really get a sense of how a company or how an organization is constantly reviewing and maintaining its standards, and what it’s going with regards to all of these aspects of the social pillar. How deep is the dive?”

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