Companies are coming under an ever increasing scrutiny from shareholders, regulators and Governments, employees and the public at large in relation to their response to a range of issues  relating to Environmental, Social and Governance (“ESG”). In this article we take a look that what this presently means for Directors and Officers, and for Underwriters.

What is ESG?

By way of recap, ESG is a collective term for a business’s impact on the environment and society and includes its own corporate governance practices. What is apparent is that it is no longer sufficient for a company to simply exist to make profits for shareholders, but it must be transparent in how it achieves success and be accountable for the wider impact that it has on society. These issues can range can range from climate change, net zero transition, cyber security, ethical supply changes and modernising the workplace.

ESG related legislation

Several pieces of ESG related legislation currently being implemented on an EU wide level, will mean that Directors and Officers will have to pay more attention in complying with directors’ duties and regulatory obligations:

• The Corporate Sustainability Reporting Directive (known as “CSRD”) is due to be adopted in October 2022. CSRD introduces duties for the directors of the EU companies covered. These duties include setting up and overseeing the implementation of the due diligence processes and integrating due diligence into the corporate strategy. In addition, when fulfilling their duty to act in the best interests of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions.

• The CSRD also lays down the rules on disclosure of non-financial and diversity information by certain large companies. This will be implemented in a 3 phase approach for 1 January 2024, 1 January 2025 and 1 January 2026.

• The Sustainable Finance Disclosure Regulation (“SFDR”) partially came into force in March 2021, with further provisions coming into force in 1 January 2023. SFDR imposes ESG disclosure obligations in the financial sector for asset managers and other financial market participants.

• The EU Taxonomy Climate Delegated Act came into force from 1 January 2022. This aims to support sustainable investments and is a classification system which establishes a list of environmentally sustainable economic activities in order to provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable.

Why are Directors & Officers in Ireland at Risk?

Globally there has been a significant increase in ESG related litigation, particularly in the US in the form of shareholder class actions and activist claims in relation to climate change. Ireland does not has a formal mechanism permitting shareholder class actions, and it remains to be seen whether there will be a significant uptick in the number of ESG related claims being made in Ireland.

Reported decisions in the Irish courts are limited but this could change in the future as companies are increasingly necessitated in reporting on ESG practices. Any disclosures made by directors in annual reports in relation to environmental and social initiatives will inevitably come under scrutiny, especially if they are not followed through or are inaccurate. Directors of Irish companies are also exposed to ESG related claims due to the various directors’ duties set out in the Companies Act, for example as at S228(1)(g) which requires the exercise of reasonable care, skill and diligence by the Director.

This leaves directors exposed to claims being brought against them personally for breaching duties of care owed to the company for the failure by the board of directors to consider and mitigate the impact of climate change or other ESG related issues. 

One English law example of this is ClientEarth has recently issued a Letter of Claim against the Board of Directors of Shell arguing that their failure to properly prepare the company for net zero puts them in breach of their legal duties. DACB has written further on this case here.

We would expect that the Irish Courts would be sympathetic to claimants bringing ESG related claims such as in the decision of Friends of the Irish Environment CLG v The Government of Ireland & Ors which quashed the Irish Government’s National Mitigation Policy as it failed to specify the manner in which it was going to achieve the objective to transition to a low carbon economy by 2050.

What does this mean for D&O Underwriters?

An potential increase in claims against directors in Ireland is a concern for Underwriters, in terms of cost of insurance claims, and Insureds in terms of ensuring coverage for ESG related issues. D&O policies will cover a director for allegations of a “Wrongful Act” which typically broad in its definition and therefore may cover an ESG type claim made against a director.  An exclusion for pollution is often included which may limit cover for some environmental claims.

Also covered the D&O policy is costs and expenses (i.e. defence costs) and financial losses if the director is found liable. There will be exclusions for conduct i.e. deliberate fraud and any deliberate acts.  

There is a particular concern for Underwriters that there will be an increased exposure to claims relating to the costs of defending investigations and also investigating policy response. Underwriters and Insureds will therefore be watching closely to see whether ESG related litigation catches on in Ireland.