Adopting an ESG framework is increasingly important to many businesses, as more and more customers, employees and regulators assess whether companies are taking their environmental, societal and governance responsibilities seriously.

It’s also something that is relevant to the D&O market. As well as fast-evolving legislation around issues such as climate change, the introduction of compliance disclosure requirements around the world increases the risk of directors facing regulatory or legal action.

Some UK businesses will already have ESG reporting requirements. As examples, all quoted companies must report details of greenhouse gas and energy use and the Task Force on Climate-related Financial Disclosures (TCFD), which requires information on climate-related risks and opportunities, currently applies to more than 1,300 of the largest UK-registered companies and financial institutions.

Even some smaller companies may find themselves having to make ESG disclosures. For example, any employer with a headcount of 250 plus must comply with gender pay gap reporting requirements and businesses with an annual turnover of at least £36 million must publish an annual modern slavery statement.

But while ESG reporting is not yet mandatory for all businesses in the UK, this is expected to change. Pressure from governments, environmental groups and activist investors is pushing ESG reporting on to the corporate agenda.

Being prepared for what this may entail is sensible. Understanding the organisation’s approach to ESG and whether it has the capabilities and data to report to a regulator can help. For some businesses, preparations may also involve the adoption of more environmentally friendly processes and packaging ahead of the introduction of any reporting requirements.

It’s also important to remember that embracing ESG is positive from a business perspective. Increasingly, customers and employees are seeking out companies that meet ESG criteria so taking this step now could benefit the business, as well as the environment and society.

As mandatory ESG reporting is adopted more widely, regulatory action due to ESG-related issues is a major concern for directors. A breach in regulations can trigger a D&O policy, subject to its terms and conditions.

Companies and their directors could also face the prospect of increasing litigation from environmental groups, activist investors, and even disgruntled employees. Although criminal fines and penalties are not covered under a D&O policy, it could pick up defence costs.

ESG-related liabilities could potentially become significant exposures for D&O insurance. This is likely to lead to insurers requesting more information about the steps a company is taking to manage its ESG risks.

As ESG becomes part of a company’s responsibilities, those with strong ESG frameworks and governance will likely find insurers more willing to offer cover.