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Aligning Board Accountability With Sustainability: D&O Insurance as a Catalyst for ESG Governance in India
Introduction
In the 21st century, corporate governance is shifting from being defined solely by financial performance to Environmental, Social, and Governance (ESG) outcomes. Boards of directors and senior executives have additional responsibilities to implement sustainable strategies, uphold ethical behaviour, and ensure transparent disclosures. There is growing importance in Directors' & Officers' (D&O) liability insurance with these additional responsibilities.
The intersection between D&O insurance and ESG performance has been a hot topic in recent years. On the one hand, robust ESG practices reduce litigation risk and improve firms' underwriting risk appetite. On the other hand, insurers increasingly incorporate ESG risks into their underwriting models, thus incentivising firms to raise their ESG standards.
D&O Insurance: Scope and Evolution
D&O liability insurance provides coverage for claims against directors and officers, and, in some cases, the corporation, for wrongful acts such as breach of fiduciary duty, misrepresentation, or failure to comply with regulations. D&O policies were traditionally intended to protect decision-makers from claims of financial mismanagement or shareholder disagreement. However, the landscape is changing due to:
• Rising ESG litigation: Increasing shareholder suits against companies for greenwashing, insufficient climate disclosures, or failure to address social risks.
• Regulatory activism: Frameworks such as the EU's Corporate Sustainability Reporting Directive (CSRD), the U.S. SEC's Climate Disclosure Rules, and SEBI's Business Responsibility and Sustainability Reporting (BRSR) in India establish additional transparency obligations for companies.
• Stakeholder activism: NGOs, institutional investors, and proxy advisors increasingly pursue accountability through litigation and reputational campaigns.
The implication is clear: D&O insurance has become both a risk management tool and a governance signal.
ESG Dimensions and D&O Risk:
• Environmental Risks
The rising trend of climaterelated lawsuits has led corporate boards to face accountability for poor climate-risk governance practices. In turn, insurers have begun requesting disclosures on emissionsreduction targets, transition plans, and oversight of environmental risk before issuing D&O policies.
• Social Risks
Social controversies such as workplace harassment and community displacement pose reputational risks and the potential for lawsuits. The #MeToo movement highlighted personal liability risks for directors and officers who ignored red flags.
• Governance Risks
Historically, weak governance, opaque disclosures, related-party transactions, or insufficient board independence have been the leading drivers of D&O claims. ESG frameworks also enhance governance expectations, with transparency expected in both financial and non-financial spheres.
While D&O insurance cannot eliminate reputational risk, it signals to investors that the board has acknowledged potential liabilities. This is especially relevant in the Indian market, where institutional investors use ESG metrics to allocate capital.
How D&O Insurance Influences ESG Performance
• Risk pricing as an incentive
Insurers are more frequently changing premiums based on ESG ratings and sustainability measures. Insurers offer lower premiums to companies with strong ESG practices, thereby incentivising strong governance through financial benefits.
• Screening and underwriting discipline
The underwriting process inherently requires more ESG disclosures; therefore, holding boards accountable for improving the quality of their reporting. This acts as a de facto regulatory driver with tremendous force.
• Claims function as a feedback loop
ESG-related claims are integrated into insurers' databases, eventually influencing underwriting standards. This feedback loop continues to reinforce ESG diligence by board and executive teams.
• Reputational protection
While D&O insurance cannot eliminate reputational risk, it signals to investors that the board has acknowledged potential liabilities. This is especially relevant in the Indian market, where institutional investors use ESG metrics to allocate capital.
The Indian Context
India's corporate governance reforms, starting with Clause 49 of the Listing Agreement and extending to the Companies Act of 2013, have prompted each successive reform to increase accountability with the board of directors.
The introduction of recent ESG frameworks adds momentum to this trend:
• SEBI's BRSR Core (2023): Requires ESG disclosure by the top 1,000 listed companies;
• Ministry of Corporate Affairs (MCA) ESG Guidelines: Established a policy framework for responsible business conduct, and
• Judicial Activism: Indian Courts have increasingly imposed liability on directors for negligence related to environmental and social issues.
In light of this, D&O insurance in India is moving from a niche product to a governance necessity. For example, renewable energy firms with clear ESG commitments typically get both capital market premiums and D&O terms that may be favourable. Conversely, firms with opaque ESG policies may face increased premiums or may be excluded altogether.
Challenges and Critiques
• Moral Hazard
D&O insurance may incentivise directors to undertake ESG-related risks, believing that the insurance will respond to the liability they incur.
• Greenwashing Risks
Companies may superficially enhance ESG disclosures to benefit from improved D&O terms.
• Limited Penetration in India
D&O insurance is not widely accepted in India, particularly for mid-size and non-listed companies.
1. Policy Suggestions
• Regulatory Coordination
Regulators should formally link ESG disclosure to D&O insurance, thereby facilitating a virtuous cycle of accountability.
• Uniform ESG Metrics
Standard ESG metrics are necessary to prevent insurers from using inconsistent data. In India, BRSR Core can be used as a standardised metric.
• Awareness of Boards
Boards of Directors should actively engage in capacitybuilding programmes that demonstrate how D&O insurance and ESG-aligned governance can strengthen corporate resilience. The Institute of Directors (IOD) has consistently supported this endeavour by facilitating such programmes through its conferences, conventions, webinars, and a wide range of initiatives over the years.
• Product Innovation
Insurers may introduce ESG-linked D&O covers, offering premium discounts conditioned on established ESG goals, in parallel with sustainabilitylinked loans.
Conclusion
D&O Liability Insurance and ESG performance are no longer parallel; they are now closely interconnected. D&O insurance allows directors to boldly embrace sustainability strategies while protecting them from the unknown risks of lawsuits. In contrast, strong ESG practices improve insurability, lower prices, and enhance investor confidence.
In light of increased regulatory and investor expectations for Indian corporates on ESG matters, embedding D&O insurance is an effective risk management and a vital strategy. As the regulators continue to advocate responsible governance, this intersection creates opportunities for innovation, resiliency, and long-term value.
It can be said, D&O Insurance, is the New Dharma of Corporate Governance in India.
Back to HomeAuthor
Mr. Om Prakash Prasad
He is the Senior Manager (Finance) at General Insurance Corporation of India, and has nearly 13 years of industry experience in Reinsurance/ Accounting/ Underwriting/Investment.
Owned by: Institute of Directors, India
Disclaimer: The opinions expressed in the articles/ stories are the personal opinions of the author. IOD/ Editor is not responsible for the accuracy, completeness, suitability, or validity of any information in those articles. The information, facts or opinions expressed in the articles/ speeches do not reflect the views of IOD/ Editor and IOD/ Editor does not assume any responsibility or liability for the same.
