January 3, 2019

Directors and officers will start to feel the heat from climate change risks

D&Os are likely to face scrutiny over their assessment of climate change risks during 2019.

There is growing concern about the physical, economic, social and political impact climate change will have in the near future.  As social and judicial attitudes harden, the perceived contributors to climate change face significant exposures, including liability risks that have major implications for businesses and their directors and officers (D&Os).

Today, many  companies are vulnerable to climate-related risks in some way, even if they are not operating in the energy sector or other carbon-intensive parts of the world economy. Their boards have responsibilities to shareholders and other stakeholders to understand, measure, mitigate and report on those risks. It will become increasingly important for D&Os to demonstrate that these risks have been considered, and actions taken to mitigate them where necessary, and crucially, that asset values are represented fairly on their balance sheets.

Asset managers could face claims if they have purchased stocks without fully considering the risks of a changing climate to their portfolios or who are deemed to have held onto assets too long, where climate change risks subsequently result in sharp price corrections. Even financial advisers and auditors could be vulnerable to lawsuits, if they are seen to have failed in their duty of care when carrying out due diligence prior to investments being made, or when audits are subsequently conducted.

Against this backdrop, 2019 is likely to see more regulatory and stakeholder scrutiny of disclosure of climate change risk and we have already seen litigation and regulatory action in the United States and Australia.

More broadly, the increasing D&O and E&O liability exposure will in turn pose a significant challenge for insurers, with traditional products and exclusions stretched and tested by this growing exposure.

You can read the rest of our insurance predictions here.