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CFC on why it's time to sort out D&O 'washing'

CFC on why it's time to sort out D&O 'washing' | Insurance Business UK

CFC on why it's time to sort out D&O 'washing'

A phrase can swiftly evolve to become a universally understood and utilised catch-all. The term ‘greenwashing’ is a great example of this, becoming a ubiquitous catch-all for the gulf between how companies present themselves on environmental issues and how they actually behave.

But as highlighted by Ralph Banbury (pictured), management liability underwriter at CFC Underwriting, the potentially misleading claims being made by companies are not limited to environmental credentials. Rather they can also cross the bounds of ‘social washing’ wherein business’s come under fire due to their treatment of their employees, communities or pledges to social causes.

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It’s an interesting time to be in the market, he said, as ESG is currently occupying a top slot within all D&O underwriters’ and brokers’ mindsets. Generally speaking, D&O has always been subject to event-driven litigation but high-profile incidents across a broad range of industries are leading companies to consider their emerging risk exposures in a new light.

“Companies can be alleged to over promise and under deliver, so that’s going to be very much part of the underwriting analysis and thought pattern for D&O underwriters,” he said. “Particularly with so many stakeholders looking to come down incredibly heavily on companies that are allegedly not taking their ESG responsibilities seriously enough.”

In response to this, several regulatory bodies are being created across the globe and these are setting new ESG requirements and establishing task forces to enact them. This is very much a worldwide responsibility, he said, while on an individual level every company can be affected by all three pillars of ESG.

Recently, high-profile examples of companies being accused of presenting themselves in a way that appears disingenuous have opened up further debate about this responsibility. Alongside claims of greenwashing (of behaving in a less ecologically friendly way than publicised), allegations of pinkwashing (of approaching events such as Pride Month as a box-ticking PR exercise) and bluewashing (of overstating commitments to responsible social practices) are coming to the fore.

Examining whether the pressures facing companies are coming internally or externally, Banbury highlighted that the answer is really a blend of both.

“You’ve got so many stakeholders,” he noted. “To take a quasi-comparison with a company projecting revenue and profits – they have their investors who are listening in very closely, and their board, and their employees. But with regards to ESG statements, and just generally how a company is doing its bit with regards to ESG, you won't just have the investors and the employees looking in.

“You have governments, you have regulatory bodies, you have climate action groups which are often very well-funded, and you have plaintiff environmental attorneys who will often look at what can be done with regards to bringing about a lawsuit,” he said. “But then you also have societal pressures and the media as well, which I do believe also encompasses social media as that’s something the world looks at every day when they open up their smartphones.”

These pressures are pressing down on every company, he said, and are operating against a backdrop wherein news is disseminated very rapidly – whether it’s good or bad – but when it’s bad, that’s when you see the potential for claims. Given the spotlight on such claims, it is understandable that everyone in the insurance market, as well as the directors and officers of companies themselves, will be looking to the outcome of ongoing, high-profile cases.

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These could potentially open the floodgates to further claims, he said, and companies should be looking with a very detailed eye internally but also externally to third parties to see how they can help them mitigate any oncoming risks. For Banbury and the team at CFC, the universal nature of this concern has ensured that underwriters and brokers alike are very aware of the exposures their clients may face.

“Brokers are very much in the process of advising clients,” he said, “But when it comes to underwriters and their approach to the ‘washing’ [issue], what they will inevitably want to see is engagement with ESG consultants… Underwriters will want to see action plans being implemented.

“What will also be an advantage is seeing directors being put into a position of accountability with regards to all things ESG. [For example], perhaps directors’ and officers’ remuneration will be contingent on hitting ESG-related milestones. Also, ESG in general is very fluid - so with regards to underwriters gaining comfort around a company’s approach, they want to see that the company is constantly tracking ESG regulations and legislation – and that they are aware of how the legal environment is unfolding.”

A constant tracking of ESG exposures will be seen as highly advantageous by underwriters, Banbury said. And the key to getting this ESG piece right is authenticity. Companies should look to implement meaningful, measurable actions around ESG. Ideally, internal ESG task forces will be created and will meet regularly, and these will operate alongside consultants and legal firms and auditors who will help firms navigate the entirety of the ESG process.

“And with this, the hope is that the ‘washing’ so to speak, will be squeaky clean, which will lessen this risk,” he said. “And the role of the broker in this is to do with instilling [in clients] the importance and the gravitas of declaring and providing information about all things ESG as and when asked. I believe it’s likely inevitable that these questions will be asked, whether it’s part of the initial pack or whether it’s further down the line from underwriters. So, it’s all about brokers instilling the importance of a company’s transparency on social objectives.”