By Leo Tootell, Senior Management Liability and Financial Institutions Broker at New Dawn Risk
The Directors’ & Officers’ (D&O) Liability space has seen significant shifts over the past 4 years. Company boards have had to adjust to various trends in litigation including drastic changes in regulation and worldwide social movements which have drawn significant attention to their companies’ ESG policies.
Moving into 2024, we predict these trends will continue to evolve, shaping the corporate risk environment for the year ahead. Key areas of concern include geopolitical risks, the impact of AI and emerging technologies, inflationary pressures, and the looming challenges associated with climate change.
As geopolitical strains continue, corporations are bracing themselves for potential disruptions to business and operating activities. Unrest in the Middle East, friction in the South China Sea, and trade disputes between major global players have all contributed to heightened risks. Upcoming elections across key nations, including the U.S., Mexico, Indonesia, South Africa, Canada, the U.K., India, and Taiwan, further amplify geopolitical uncertainties.
These geopolitical stressors can potentially cause supply chain issues and business interruption in 2024 and beyond. Companies will need to navigate these adjustments carefully and prioritise their risk management strategies to prevent this from translating into litigation.
AI & Emerging Tech
The rise of generative artificial intelligence (GenAI) is transforming business processes, with 177 companies in the S&P 500 citing the term “AI” in their second-quarter earnings call, well above the 5-year average of 60 (reference). While the potential for AI to create competitive advantages is exciting, it comes with challenges. The first problem is that of “AI washing”, where companies overpromise their artificial intelligence capabilities, which could very well be happening in these Q2 earning calls. Even if this is not the case, there is then a multitude of other possible issues, including threats to cybersecurity and increased regulatory risk which corporations need to address.
Legal and regulatory bodies are fully aware of these issues, which has led to Executive Orders being released such as the National Institute of Standards and Technology’s AI Risk Management Framework. This order requires federal agencies to assess AI risk by mitigating potential issues such as discrimination and bias, unfair competition, and labour-force disruption through heightened AI abilities. Rather than being a change in litigation, this represents guidance to agencies that will likely impose requirements in the future and reflects how this space could create “noise” in the D&O space over the coming years.
Economies around the world have struggled to recover from a detrimental cocktail of events spanning over the last few years. Remnants of the pandemic, the Ukraine War and unrest in the Middle East have contributed to labour shortages, supply chain issues and higher energy and transportation costs, which in turn have translated into worrying trends in inflation.
These pressures are expected to persist, putting further burden on the balance sheet for businesses. Companies that, for years, have been able to justify their liabilities with familiar debt restructuring plans will now be held to stricter standards to mitigate their chances of insolvency in the face of uncertain inflation trends.
Whilst the “E” of ESG (Environmental) isn’t necessarily an emerging D&O litigation trend, there are several important regulatory shifts expected to happen in 2024 which could significantly increase the claims we see in this area. The awaited release of the U.S. Securities and Exchange Commission’s (SEC) final climate change disclosure guidelines is anticipated to occur in April 2024. These guidelines will be in place to impose significant disclosure requirements on reporting companies concerning greenhouse gas emissions and climate change-related risk management.
Meanwhile, other regulatory bodies, including the European Commission and California legislation, have already moved forward with extensive climate change and ESG-related guidelines. The European Sustainability Reporting Standards (ESRS) will soon become law, requiring EU and non-EU companies to file annual sustainability reports. These standards go beyond the SEC’s proposed guidelines, requiring companies to report on a broader set of sustainability topics.
Despite alarm bells over lithium shortages quietening down over the past year, there is still a huge industry space that could be affected if supplies take a hit. Technology companies rely on lithium for the batteries which are used in day-to-day products like our mobile phones, computers and power tools; the frequency of production and use for such devices has caused an increase in demand. On top of this, lithium is a crucial part of electric vehicle battery production, and, if more shortages occur, there could be huge implications for environmentally conscious industries as well.
As the corporate landscape evolves, directors and officers must proactively address these emerging trends, implementing robust risk management strategies to navigate the uncertainties that lie ahead in 2024. Moreover, brokers should be aware of how these tension points could affect the clients they work with, and ensure that these are underwritten to at the beginning of the procurement process.