Directors And Officers: ESG And Litigation

Directors and officers (D&Os) now face a dramatically changed liability environment. Shareholder class actions and derivative actions, which were once rare, are increasingly used to hold company executives accountable.

An evolving risk landscape

Commentators had previously warned of a US-style litigation surge against D&Os, and in 2025 we now see clear signs of that trend materialising.

Group shareholder claims under sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA) are on the rise, targeting alleged misstatements in financial reports and market disclosures.

Institutional investors and claimant law firms, backed by litigation funders are more willing than ever to pursue claims against corporate executives for perceived governance failures.

Rise in shareholder actions

Notably, 2024 saw the high-profile ESG-related securities class action, whereby investors sued a UK retailer's directors (Boohoo Group) for failing to disclose labour law abuses in its supply chain.

This and similar actions reflect a broader trend that shareholders are expanding the scope of alleged wrongdoing by D&Os beyond financial misstatements to include climate risk, human rights, and other ESG issues.

While the predicted "litigation explosion" did not occur overnight, the steady rise in these claims confirms that the predicted D&O litigation risk is now a reality.

Minority shareholders are also turning to derivative actions to pursue directors for breach of directors' duties. Recent cases see activist investors alleging boards failed to prevent corporate misconduct or manage key risks (for example cybersecurity and climate change oversight).

Implications for D&Os

The practical impact on directors and officers is significant. Senior managers face not only personal financial exposure but also intense regulatory scrutiny and reputational harm.

The costs of defending shareholder and derivative litigation are high, often running into the millions, which can erode D&O insurance limits.

An increasing claims frequency has led to the hardening of the D&O insurance market in recent years, resulting in an increase in premiums, higher retentions, and insurers seeking to tighten policy terms.

For insurers, it will be even more important that they scrutinise corporate governance, claims history, disclosure controls and ESG practices, since weaknesses in these areas can often lead to costly claims.

D&Os should respond by strengthening corporate governance, diligently documenting board decisions and ensuring their D&O cover is sufficient.

The ECCTA 2023 factor

The Economic Crime and Corporate Transparency Act 2023 introduces a new wave of corporate crime offences (especially the "failure to prevent fraud" offence) and expands potential liability of misconduct to companies. While primarily targeting companies, these changes indirectly increase the personal risk for D&Os as well.

A corporate fraud or money-laundering incident can now result in a potential corporate liability claim, which in turn may trigger a potential derivative action or regulatory claim alleging that directors failed to prevent the wrongdoing.

Whilst the ECCTA's emphasis is on "reasonable prevention procedures", it is effectively a mandate for boards to further strengthen their corporate governance.

In our article, we consider the ECCTA in more detail.

Looking ahead

The rise in shareholder and derivative actions against UK directors appears set to continue. D&Os should treat this as a call to action. Focussing on proactive risk management and scrupulous attention to disclosure obligations are now more frequently parts of a director's job description.

For insurers, the challenge is to adapt policy wordings and capacity to a risk environment where large-scale shareholder claims are no longer an anomaly.

Both corporate boards and D&O insurers will need to be prepared to deal with the increased volume of legal actions.