From Risk Mitigation to Responsibility:

In alignment with earlier research by Yang, Wu, Yang, and Albitar (2024), the study further concludes that D&O insurance has a more pronounced impact on the Environmental and Social dimensions of ESG, while improvements in Governance are statistically weaker.

When combining results from both studies, the factors that either enhance (+) or diminish (-) the positive relationship between D&O insurance and ESG performance can be summarised as follows:

Introduction

The Sustainable Investment Products subgroup of the Swiss Actuarial Association’s Sustainability Working Group not only examines the implications of sustainable investment markets on insurers’ investment activities but also considers the role insurers play in supporting these markets through insurance provision.

This includes D&O insurance, a product designed to limit the personal liability of corporate managers while providing investors with confidence that their assets are protected in the event of mismanagement or management misconduct. Yet, there is no overall consensus as to the effect of this protection on company behaviour. While the insurance underwriting process provides additional third-party oversight, limiting the legal exposure of managers may provide incentives to both underinvest in sustainable longer term initiatives, as well as contrary behaviour - to pursue such initiatives more confidently.

In addition to understanding potential behavioural impacts (both positive and negative) of purchasing D&O insurance, it’s also important from commercial and societal perspectives to explore how these effects change depending on internal and external factors. Furthermore, examining how D&O insurance affects a firm’s ESG performance can also reveal how it shapes corporate governance and managerial behaviour more generally, not limited to ESG considerations alone.

Difficulties in Causal Inference Despite an “Ideal Experimental Setting”

Using a panel dataset, the authors employ fixed-effects, which remove the impact of all unobserved, time-invariant firm characteristics and in some models, also year-specific characteristics. The relationship under question is therefore identified using within-firm variation, that is, how ESG performance changes when an individual company decides to purchase D&O insurance, rather than differences in that decision between firms.

Due to the relatively low but increasing penetration of D&O insurance in China, as well as the increasing ESG scrutiny of Chinese companies by investors and regulators, the authors describe the Chinese market as an “ideal experimental setting” for examining this relationship.

However, determining causality in non-randomised experiments is challenging due to hidden determinants. To mitigate against reverse causality, the study observes ESG scores after D&O purchase decisions, strengthening the case for predictive directionality. Yet, unobserved confounders may still affect both D&O purchase decisions and ESG outcomes, and reverse causality may remain even after the above consideration.

To address this and test other assumption violations, the authors apply a number of econometric techniques, including:

• Instrumental variables to isolate the exogenous portion of D&O purchase decisions, that is, the part which correlates with an additional variable unrelated to ESG.
• An approximation of random assignment through Propensity Score Matching (PSM) creating comparable treated and untreated firms for each year, with each year representing a unique external environment.
• Placebo tests and clustered standard errors.

Theoretical Basis

The study proposes that D&O insurance enhances ESG performance through two core effects:

1. Reduced personal legal risk, aligning managerial incentives with long-term corporate interests.
2. External supervision by insurers, exerting governance pressure and signalling credibility to investors.

These effects are theorised to operate through three mechanisms:

• Green innovation
• Fintech investment
• Enhanced internal controls

By decreasing personal liability, it’s suggested that executives can more confidently make strategic investments which, like green innovation, often involve higher risks, costs and longer timelines. Insurer oversight not only creates external pressure but also provides a signal of responsible management to long-term capital providers who fund green projects. As green innovation may improve a company’s social interactions, as well as necessitating sound governance and strategic planning, the authors argue that through this mechanism, D&O insurance should improve all three ESG dimensions.

Similarly, reduced liability exposure allows leaders to invest more confidently in fintech innovation and internal control systems, which may otherwise result in higher compliance and legal risks when introducing new technologies, while insurer evaluations encourage continuous improvement in these governance-related areas.

Conclusions: A driving force on E, S or G?

The authors conclude that D&O insurance significantly improves ESG performance, and this effect withstands a broad range of robustness tests. They summarise these results demonstrate D&O insurance as “a driving force... in promoting corporate social responsibility and sustainability commitments”, countering the hypothesis that risk transfer would ultimately deteriorate ESG performance through promoting opportunistic behaviour.

Extending their models, the authors use decomposed ESG scores to demonstrate the effect on the Environmental dimension shows strongest evidence (significant at the 1% level), followed by Social, while evidence of the effect on the Governance dimension is weakest (significant at only the 10% level).

Further, to validate the proposed mechanisms, the authors introduce measures of green innovation via patent filings, fintech adoption through text-mined annual reports, and internal control quality using the Bodi Internal Control Index. Empirical evidence supports all three mechanisms, though effects on internal controls appear weaker, with the authors arguing this is possibly due to their long-term and complex nature.

Implications

While being cautious about the generalisability of these outcomes, they nevertheless have actionable implications supporting the insurer’s role as an active, informed governance partner:

• Insurers may monitor mechanisms such as green patent filings to supplement traditional ESG ratings.
• Insurers may reward ESG and related mechanism improvements, which demonstrate that risk transfer is underpinning increased managerial responsibility and sustainable decision making.
• Enhanced underwriting diligence may identify when firms underdevelop through these mechanisms compared to expectations, signalling increased potential risks of opportunistic behaviour.
• The identified moderating factors allow insurers to better understand the ESG contribution of insurance provision, predict client outcomes and design products that address customers’ specific internal/external challenges.
• With access to rich client datasets, insurers are uniquely positioned to replicate such analyses, track evolving relationships, and identify emerging drivers potentially disrupting the positive influence of purchasing D&O insurance. By acting on this data, insurers can solidify their role in supporting sustainable investment markets through insurance provision.

References

Li, H., Cheng, Q., Su, M. & Zhang, K. (2025) ‘Empowering ESG: The pivotal influence of directors’ and officers’ liability insurance on corporate sustainability’, International Review of Economics & Finance, 101(C), Article 104140. doi:10.1016/j.iref.2025.104140.

Yang, R., Wu, J., Yang, C. & Albitar, K. (2024) ‘Far-sighted through mitigating risk: Directors and officers liability insurance and corporate ESG performance’, International Review of Financial Analysis, 96(PB), Article 103719. doi:10.1016/j.irfa.2024.103719.