On March 21, 2022, the Securities and Exchange Commission (SEC) proposed climate disclosure rules addressing five topics:

• Climate-related risks and materiality
• Climate governance and risk management
• Greenhouse gas emissions
• Climate-related financial information
• Climate-related targets, goals, and transition plan

If adopted, the proposed rules could, while providing investors with “consistent, comparable, and decision-useful information,” increase board exposure, liability, and litigation. Plaintiffs’ firms, especially those fueled by activist shareholders, may pursue litigation against companies and their boards, alleging violations of securities laws and general breaches of fiduciary duty regarding the board’s failure to manage, prepare or report on climate risk. While climate change litigation is not new, the SEC's role in releasing its significant disclosure requirements is, and so is the potential impact on C-Suite leaders.

A board’s expectation may be that a typical D&O policy would cover any losses arising from the above allegations. However, many D&O policies have some form of exclusion for direct pollution-related exposures, including clean-up costs that, if broadly worded, could impact coverage for a D&O claim arising from climate-related issues. Additionally, other policy issues may be affected, such as the breadth and scope of the investigation and claim definitions, the definition of loss, and more.

Increased preparation and discussions of these proposed rule changes are recommended to help mitigate liability for Directors and Officers. Underwriters are likely to ask climate disclosure questions as part of the underwriting process - specifically, inquiries about a company's direct exposure (greenhouse gases) (Scope 1), indirect exposure (Scope 2), and supply chain/consumer exposure (Scope 3). The process a company undertakes to formulate the newly required disclosure statements will also be a focus area, for example how underwriters inquire about the methods a company uses to develop its risk factors. Additionally, shareholder feedback to the disclosures will be of interest to underwriters as more investors focus on ESG as part of their overall investment criteria.

Governance and ESG professionals at Aon review the SEC’s proposed rules in detail here.

The Financial Services Group and Governance and ESG professionals at Aon recently reviewed the harmonization of climate disclosure frameworks in the U.S. and the global climate litigation landscape in: “Implications for D&O Litigation From Climate-Related Risk - Aon.”