Will the new sustainability reporting standards impact Directors’ and Officers’ liability insurance coverage and premium?

New mandatory climate-related financial disclosure obligations will serve to complement the financial reporting regime under Chapter 2M of the Corporations Act 2001 (Cth) (the Act). This article discusses the extent to which these obligations may have an impact on insurers offering cover for directors’ and officers’ liability.

Intent of the obligations

The Federal Government’s policy position statement says:

The Government is committed to improving the quality of climate-related financial disclosures, providing Australians and investors with greater transparency and more comparable information about an entity’s exposure to climate-related financial risks and opportunities and climate-related plans and strategies.

The disclosure obligations will impact large businesses and financial institutions from July this year. The intention of the obligations is to provide investors clarity of financial implications of the disclosing entity’s climate-related risk, mitigation plans, and how it proposes to improve the quality of ongoing climate-related financial disclosures. Sustainability reporting comprises the more general concern that underwriters have in respect of climate risk and directors’ liability.

Bellrock’s Marc Chiarella presented on elements of this last year – see here. The new legislation materialises risk that the directors’ and officers’ liability (D&O) insurance market has concerns about. This, in particular, following the recent decision in ASIC vs Vanguard[1] handed down by the Federal Court on 28 March 2024. The judgment can be found here. The decision marked ASICs first win in a greenwashing civil penalty action which found Vanguard contravened the law by making misleading claims about certain environmental, social and governance (ESG) exclusionary screens applied to investments in a fund.

The new reporting obligations apply from 1 July 2024 for large companies and financial. Those required to report in respect of the new legislation first will need to file their reports by 1 July 2025.

[1] Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308

Insurance market response

On current renewals there have been no specific questions asked by insurers regarding risk management, disclosures, and procedures in respect of the new reporting regime. We anticipate that this is likely to change from early 2025.

One would presume that entities who have taken steps to ensure robust reporting and taken the appropriate steps will be looked upon favourably by insurers. Those who have not taken any steps or who cannot comply with the requirements may face onerous terms and express exclusions.

Otherwise, given that liability for any breach of the new obligations sound after 1 July 2027, D&O rating and coverage is likely only to change after.

The Australian Financial Review outlines that between 1 July 2024 and 30 June 2027, entities will not be financially penalised for inaccuracies in relation to a statement in a sustainability report for the purpose of complying with a Sustainability Standard and which concerns scope 3 emissions or scenario analysis (s1705B).

However, ASIC may take action for misleading and deceptive conduct or where it seeks an injunction or declaration if ASIC considers that a statement in a sustainability report is incorrect, incomplete or misleading (by way of example to amend an incorrect statement). Failure to comply with an ASIC direction may result in 60 penalty units (s1705C).

Nature of risk and liability

While the formal reporting obligations won’t result in immediate regulatory exposure for damages, the act of formal reporting will increase risk associated with other types of claims from shareholders, consumers, and competitors. There is already a range of claims in Australia and overseas that illustrate the risk of reporting on ESG, whether it be voluntary or mandatory forms of disclosure:

In Australia we have seen a range of claims with respect to ESG representations to markets, investors, and consumers:

  1. Late last year ASIC was successful against Mercer Super in respect of a 'sustainable investments' investment product that was shown to be anything but (underlying investments including carbon intensive companies, gambling and alcohol). Mercer has agreed to pay a fine of $11.3m

  2. In August last year, a group of parents sued EnergyAustralia in the Federal Court for marketing statements made about its 'Go Neutral' product claiming that the statements about the product were misleading and deceptive.

  3. We are continuing to see more and more shareholders, including shareholder activist groups, challenge listed companies and boards to change course on ESG matters. The most recent example was seen earlier this month when Rio Tinto was forced by shareholders to start reporting underlying sustainability efforts. This substantially increases the ongoing disclosure reporting risks to companies like Rio who decide to voluntarily report over and above the formal requirements.

The above suggests that it won’t be long until claims are made against companies, and in some cases against directors and officers directly, seeking damages for non-disclosure and or misleading and deceptive conduct in reporting or marketing sustainability, whether formally or informally.

Coverage considerations

At this stage there are no express exclusions that the market has applied to preclude claims being indemnified for breaches of the new legislation. That said, in respect of liability of directors for misleading investors (including the following exclusions may operate):

  1. Inquiry costs: the company may be liable for allegations of wrongful acts against it as distinct for directors and officers

  2. Reckless disregard and or wilful/intentional acts exclusions: intentionally or not disclosing could result in penalties

  3. Notably where a declaration or injunction is sought, some policies may exclude defence costs for these types of actions

  4. Compensatory penalties against the company (and in some instances, the directors) will ordinarily be excluded under a D&O policy

Coverage in respect of each of the above will turn on the language of your policy wording. Bellrock would be happy to review same and provide independent advice.

Coverage considerations

Bellrock recommends that boards seek guidance from external experts on the extent to which they are appropriately prepared for the new obligations. Bellrock has a panel of experts who can assist boards and their directors comply with the disclosure requirements and if not where they need to focus their attention to ensure that they do.

We consider an independent maturity assessment by a third-party expert will assist directors and companies in procuring appropriate, adequate, and competitively priced directors’ and officers’ liability coverage.

For more information about D&O insurance, contact our team via the form below.

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