How will the SEC’s new climate regulations impact D&O strategies? | Insurance business America
The evolving disclosure landscape requires an additional level of preparedness
Occupational risks
By Kenneth Araullo
The recent adoption of new climate disclosure rules by the Securities and Exchange Commission (SEC) represents a critical paradigm shift for public companies that requires strict compliance measures. Given the potential for these regulations to significantly increase liability risks for corporate disclosures, D&O (Directors and Officers) insurance is proving to be a critical protective measure.
As companies navigate this evolving regulatory landscape, the role of D&O insurance will become even more important in protecting against the financial impact of disclosure breaches and ensuring organizational resilience.
Andrea Lieberman (pictured above), head of US financial services claims at Lockton, advises companies to start preparing immediately, as these regulations are currently on hold by the SEC due to ongoing legal challenges and may not be enforced until next year, but they are ready are to do so. Once implemented, they will have a significant impact on public companies.
“Director and officer liability insurance coverage purchased by public companies is intended to provide protection for governmental and private lawsuits seeking damages for disclosure violations and is intended to protect organizations from liability under these new rules,” she said. “However, D&O buyers should work with insurance advisors to carefully review language in their individual policies to ensure they respond as intended in the event of litigation or regulatory action.”
A change in climate regulations
On March 6, the SEC finalized climate disclosure rules for public companies that were originally proposed in 2022. According to SEC Chairman Gary Gensler, these rules are intended to “provide investors with consistent, comparable and decision-useful information and issuers with clear reporting requirements.”
“Under the new rules, public companies will be required to disclose a broad range of information, including: material climate-related risks and their potential impact on their business, operations and financial condition; any climate-related targets or objectives identified by them that have or may reasonably affect their business, operations and financial condition; and internal processes to identify, assess and manage material climate-related risks, including the roles of management and any board oversight,” Lieberman explained.
Although the SEC’s 2022 proposal required reporting of Scope 3 emissions from indirect activities such as those from suppliers, this requirement was removed from the final rules after significant opposition stemming from measurement and reporting issues .
The setting of the rules follows a trend in other regions, such as the United Kingdom, where climate-related disclosures have been mandatory for listed companies since the beginning of 2021.
“Disclosure laws in other jurisdictions vary significantly, but IFRS standards for disclosing sustainable information (IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-Related Disclosures) are increasingly becoming the standard,” said Lieberman. “In the US, California introduced its own climate emissions disclosure rules in October 2023. These rules, scheduled to take effect in 2026, apply to both public and private companies operating in California that meet certain revenue thresholds.”
Legal challenges to new disclosures
Despite the intent to standardize climate-related disclosures, the new rules have sparked legal challenges, with lawsuits filed by trade associations and state attorneys general in several states.
“Litigants and other opponents of the Rules have argued that in implementing the Rules, the SEC exceeded its statutory rulemaking authority, failed to adequately consider or analyze the significant public comments it received following its initial proposal of the Rules, and has not taken action on a proper cost-benefit analysis,” Lieberman explained.
As the litigation challenging the new rules has consolidated before the 8th U.S. Circuit Court of Appeals and the SEC is delaying their implementation pending the court’s decision, publicly traded companies are urged not to delay their compliance preparations.
“While the new rules include a safe harbor for climate-related disclosures (which are considered forward-looking statements), they are also likely to increase public companies’ exposure to securities and derivative claims as shareholders and plaintiff law firms review climate disclosures for adequacy and materiality. “said Lieberman.
Additionally, these rules could increase the risk of securities and derivatives claims as stakeholders consider the adequacy and materiality of climate disclosures. The SEC also retains the authority to enforce disclosure violations of securities laws.
“Given the potential risks posed by the new regulations, insurers are likely to ask insureds specific questions about their plans to comply with these regulations,” she said. “Public companies with upcoming D&O insurance renewals should work with their insurance advisors to prepare for this more comprehensive underwriting review.”
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2024-04-12 15:16:06
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