ESG claims under D&O policies will increase significantly in 2023

Implementation of new ESG rules to bring more regulatory actions

In 2023, there will be a significant increase in regulatory and shareholder actions against companies and their directors and officers (D&Os) relating to environmental, social and governance (ESG) risks as new regulations come on line and political debate around ESG intensifies. 

Sweeping ESG regulatory changes are expected next year. In 2021, the Securities and Exchange Commission (SEC) formed a Task Force and solicited input on ESG disclosures. In May 2022, the SEC proposed ESG disclosure rules for funds and investment advisers. The EU Banking Authority issued a report in October 2022 regarding ESG risks and investment funds.

The SEC is focusing on improving climate change disclosures. On March 21, 2022, it proposed comprehensive rules for all registered companies, which will require “consistent, clear, intelligible, comparable and accurate disclosure of climate-related financial risk.” On March 9, 2022, the SEC proposed similar amendments to its cybersecurity disclosure rules.

The SEC has already targeted companies’ ESG disclosures. For example, an April 2022 SEC enforcement action alleged that Brazilian mining company Vale, S.A. misled investors in ESG disclosures. In May 2022, the SEC fined Bank of New York $1.5 million for misleading clients about ESG investments. In November 2022, the SEC fined Goldman Sachs $4 million for failing to implement ESG investment procedures. There will be more ESG-related regulatory actions in 2023, particularly after implementation of the new ESG rules.

Shareholder lawsuits arising from ESG disclosures will also increase. In recent years, activist shareholders have closely scrutinized whether boards sufficiently addressed ESG issues and brought cases regarding board diversity and positions on racial inequality. A recent action alleges that Pfizer is discriminating against white and Asian-American applicants for fellowships, and the Supreme Court is expected to rule in 2023 on the use of race and ethnicity in college admissions.

Even companies that actively engage on ESG face increasing litigation and regulatory risk. There has been a political backlash against ESG, and some states have taken “anti-ESG” measures, including divestment policies and “anti-boycott laws” limiting business with companies that prioritize ESG. A recent securities class action complaint alleges that wood products company Enviva is the “latest ESG farce” and engages in “textbook greenwashing” by misrepresenting the environmental sustainability of its wood pellets. 

As a result, there will be a significant increase in D&O insurance claims for regulatory and shareholder actions against companies and D&Os relating to ESG issues.  

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