There has undoubtedly been greater scrutiny on how companies deal with Environmental, Social and Governance (ESG) issues in recent times. Indeed, in many jurisdictions it is now a leading issue for shareholders, regulators, investors and the wider public. The heightened focus on ESG poses challenges for the asset management industry. Like all companies, asset managers need to respond to the ESG concerns of their shareholders and regulators. In addition, asset managers also need to consider the ESG priorities of their investors, including the marketing of investments within an ESG framework.

From a financial lines insurance[1] point of view, we see the greater scrutiny on ESG resulting in two areas of insurable claims for asset managers and the funds they manage. First, directors and officers may face claims from shareholders and regulators for actual or perceived ESG failures, including greenwashing, i.e., unjustified claims about environmental practices. Second, it seems asset managers are now more vulnerable to claims by investors and regulators for alleged misrepresentations in respect of investing within an ESG framework (including greenwashing).

Directors and officers insurance

There have been several recent ESG related claims against directors and officers. For example, in the USA a major suit has been brought by the shareholders of Cisco Systems against its directors in relation to the absence of any African-Americans on the company’s board[2]. In the United Kingdom, recent reports suggest the board of directors of Royal Dutch Shell could face a derivative shareholder claim in respect of allegations that they failed to prepare properly for the net zero transition[3].  

An increase in claims has been coupled with greater regulatory oversight around ESG. From April, thousands of large UK-registered companies and financial institutions are required to disclose climate-related financial information on a mandatory basis, in accordance with The Companies (Strategic Report) (Climate related Financial Disclosure) Regulations 2021[4]. It is likely that within the next few years that requirement will be extended to apply to the majority of UK registered companies. Similarly, in March, the Securities & Exchange Commission proposed rule amendments that would require US public companies to include certain climate-related information in their registration statements and periodic reports[5].

How can D&O insurance assist?

When faced with ESG related claims and regulatory investigations, directors and officers will naturally look to their D&O policy for coverage.

Claims

Core D&O coverage typically applies to claims against the directors or officers for actual or alleged acts, errors or omissions committed in their directorial or official capacity. A claim against a director or officer alleging ESG related failures is likely to fall within that category.

Regulatory investigations

D&O coverage for regulatory investigations typically applies for costs incurred by the directors and officers in responding to non-routine regulatory investigations into the company’s affairs or the conduct of the director or officers. Again, a regulatory investigation in respect of ESG issues is likely to fall within one of those categories.

Other considerations

Modern D&O policies tend to have a small number of exclusions. However, most policies will have some form of pollution exclusion. Consideration should therefore be given to such exclusions in the context of potential claims and regulatory investigations involving environmental issues.

Given that the incidence of ESG related claims and regulatory investigations are on the rise, the increased risk should be considered in the context of determining the correct limit of liability under a D&O policy. In some cases, it may be appropriate to purchase increased limits, particularly for publicly listed entities, and dedicated ‘Side A’ coverage (which only applies where the company is unable to indemnify its directors and officers).

Many D&O insurers now ask specific questions around ESG at renewal as it is now viewed by many as a major risk area. If companies are able to demonstrate robust ESG policies, implementation and reporting, it will undoubtedly assist in making the risk more attractive to insurers. Unfortunately many companies struggle to understand and manage the evolving ESG landscape, and fall-short in being able to demonstrate well-structured and transparent corporate sustainability practices. Here is where having the right consultative partner is key to helping mitigate against greenwashing risks and regulatory pitfalls.

Professional indemnity insurance

To date we are not aware of many significant claims against asset management companies relating to alleged ESG failures. However, last year saw two notable developments. First, investigations by regulators in Germany and USA began into German asset manager DWS in respect of its ESG investing. It has been reported that the investigations were triggered by allegations made by DWS’s former global head of sustainability that it made misleading statements in its 2020 annual report, where it claimed more than half of its US$900bn in assets were invested using ESG criteria[6]. DWS’s offices were recently raided by German federal police and BaFin in connection with the investigation. Second, in July 2021 the UK Financial Conduct Authority wrote to asset managers to highlight concerns about applications to launch new funds with an ESG or sustainability focus, warning that these “often contain claims that do not bear scrutiny”[7].

How can professional indemnity insurance assist?

When faced with ESG related claims and regulatory investigations, asset management companies will naturally look to their professional indemnity policy for coverage.

Claims

Core professional indemnity insurance typically applies to claims against the insured asset management company for actual or alleged acts, errors or omissions committed in its provision of professional services. If claims allege misrepresentation around ESG investments, it seems to us that there is a good prospect that professional indemnity insurance will respond, although much will hinge on how certain policy terms are defined – particularly the definition of ‘professional services’.  

Regulatory investigations

Professional indemnity coverage for regulatory investigations typically applies for costs incurred by the insured asset management company in responding to non-routine regulatory investigations into its provision of professional services. Therefore, if a regulatory investigation focuses on alleged misrepresentations around investing within an ESG framework, it seems that there is a good prospect that professional indemnity insurance will respond, although as per the above, much will hinge on how certain policy terms are defined.

Other considerations

Coverage for regulatory investigations described above is by no means a standard feature of professional indemnity insurance for asset managers. Indeed, in the last few years many insurers in the London market have attempted to remove such coverage (where it exists) or to amend it so that it only applies to costs incurred by employees, as opposed to the insured asset management company itself. Accordingly, this is an area of coverage that should be reviewed.

The comments above in the D&O section in respect of pollution exclusions apply equally to professional indemnity policies as most policies include such exclusions. The issue of increased limits of liability and increased insurer scrutiny are also relevant to professional indemnity insurance, although perhaps to a lesser degree than for D&O insurance.