Climate Contract Playbook Edition 3
149
[Archie’s clause] NEW
The Origin Story
Child’s name
Archie’s clause
Full name
Premium adjustment for D&O Climate-related financial disclosures
Practice Area / Sector
Insurance, Corporate
Often, companies’ activities contribute to climate change. Many businesses do not understand the climate risks their activities pose, or the climate impacts they cause. There is a corresponding lack of adequate information for insurers to price climate-related risks. This is exacerbated by the lack of a common language to define and quantify risks. Inconsistencies in disclosure practices add to the problem. Ultimately, this all leads to an increased risk of further climate impacts but also of litigation against companies and their directors for failing to take adequate steps to mitigate climate risk. Pressure on directors and companies has increased over the last few years, not least through the emergence of shareholder pressure groups and climate litigation. Incentivise companies to mitigate climate risk through a reduction in insurance premium for Policyholders who meet agreed disclosure standards. To avail themselves of the adjustment, the baseline standard Policyholders must meet requires disclosure of their climate-related financial risks in line with the TCFD global recommendations and in the four areas of governance, strategy, risk management, and metrics and targets.
Issue
Solution
D&O liability insurance offers cover for claims brought for alleged wrongful acts by Directors and Officers of the Policyholder. Insertion of Archie’s clause into D&O liability insurance will mean the clause is widely usable for all businesses, indirectly affecting change across business sectors and projects.
Context
Archie’s clause encourages Policyholders to achieve a baseline reporting standard. Policyholders will be financially incentivised to take action and improve internal reporting structure and reporting standards. This will lead to a change in the Policyholder’s behaviour, including by bringing climate risk analysis and considerations into the C-suite and another rung of pressure will be added to directors and officers of companies to mitigate climate-risks. The benefit to the Policyholder will be adequate disclosure of climate-related financial risks reducing director liability risk against claims and increasing transparency of climate risks within the Policyholder’s business/business operations. The benefit to the Insurer includes a corresponding reduction in claims. Receipt of fuller information on a Policyholder’s climate-related risks will allow the Insurer to adequately price climate risks. Creating a resilient legal framework works to protect our climate. The existence of a homogeneous legal and risk framework will allow Policyholders to not only assess their climate risks but also to take active steps to responsibly mitigate them.
Impact
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