The importance of ESG and its role in Directors & Officers insurance

While the primary reason for making Directors & Officers cover (D&O) a central part of your business’ insurance is to protect directors, officers, and managers from claims made against them personally, and the losses that may occur as a result, there are several other factors and issues that make this particular insurance a necessity.

If you or one of your leadership team falls foul, then you may need to claim for legal fees, compensation payments, and investigation costs.

In this article we look at one particular area – ESG (environmental, social, and governance). We’ll define what it is, how it’s affecting our business world, and the part it plays in D&O insurance.

ESG – what’s it all about?

ESG is the collective umbrella for how a business or organisation approaches these three areas and the impact of these standards and measures on society and the environment. Sometimes sitting under the same or a similar banner to corporate social responsibility, ESG concerns itself with how a business acts responsibly, transparently, and its accountability to employees, customers, and regulators. 

In addition, under the governance pillar, an ESG strategy or manifesto accounts for how a company is led, executive salaries, audits, shareholder rights, and internal business practices. Before we move on to the role of D&O insurance and ESG, we recommend you read our essential breakdown of the key considerations for each area.

1.    Environmental: 
This pillar focuses on how a business with robust ESG guidelines can minimise any negative impact on the environment, implementing sustainable, ethical practices. This encompasses products and services, as well as the supply chain and operations. This includes adapting to renewable energy sources or aiming to become net zero, or by reducing carbon emissions, manufacturing greener products, and boosting recycling programmes to reduce waste. While a company is likely to be sued for a wrongful environmental action or outcome, this is less likely to be against an individual or group of individuals within the business.

2.    Social 
How a business impacts wider society and workplace culture underpins the social pillar. Principles for this include the fair, equal, and ethical treatment of all touched by the work of the business – from local communities to those across the supply chain to those who are based at the final stop in a shop or office. The main touchpoints here include a lot of ‘P’s’: to ensure the safety of products; security of data; prevention of abuses; provision of health & safety, training, and wellbeing services; and promotion of workplace equality, diversity and inclusion. This pillar is also about how a business invests and authentically involves itself in local community and educational initiatives.

3.    Governance 
Moving along to the sharp end of the three pillars – and the one where you may see the most obvious connection to a D&O claim, there is governance. This is all about the ‘how’ of decision-making, reporting, and the logistics of running a business, but also its ethics and how open it is with stakeholders about activities. 

When governance is performed well, there is accurate and regular financial reporting, openness on business strategy, operations, and pay (especially Executive bonuses) and accountability for risk and performance issues and management. There should also be measures to make sure leadership and management teams are diverse and inclusive.

While all pillars should be of equal value, it can be argued that a good governance record is the one that will make potential investors sit up and take notice – and it’s also the one that when something goes wrong, an individual or group of people may well need to claim on D&O insurance.

Let’s be clear on how this comes together.

How D&O insurance helps with ESG

When a business ignores or underestimates the importance of ESG as part of its wider strategy, there may be legal, financial, and reputational consequences – and this culpability may well fall at the feet of directors and officers. 

While there might be reason for a class/group action regarding a chemical spill, or investigation into supply chain failures, it’s the area of governance that is most likely to present an unwanted challenge for those occupying space at the management table.

Discrepancies in accounting, charges of bribery, or questions on fair practice are all too commonplace. With prevention being a better option than cure, D&O insurance is both the safety trigger on your parachute and the necessary backup to a well-crafted ESG set of standards and procedures.

And this doesn’t just apply to large corporates – SMEs and start-ups are equally vulnerable to falling short of ESG standards, which is why being in a strong position to report and respond to regulatory requirements means many situations are, on the whole, avoidable.

Find out more on how you can better protect yourself and your wider business with D&O insurance by talking to our specialist team today via the buttons below.