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View allBusiness culture is changing and considerations for boards and their risk management are altering too. Environmental, social and governance (ESG) factors are rapidly becoming an important focus for how organisational functions are carried out, encompassing a range of concerns from environmental sustainability to employment practices, ethics and compliance issues. ESG factors can be used to evaluate companies on how far advanced they are with sustainability.
The concept isn’t new. The CEO of global investment leader Blackrock, Larry Fink, called out ESG exposures in 2018, asking in his annual letter to businesses that they respond to broader societal challenges, not just to maximising shareholder returns.“Companies must benefit all of their stakeholders and the communities in which they operate,” he wrote. “Without a sense of purpose, no company, either public or private, can achieve its full potential.”
Business purpose that involves ESG concerns also links to value creation, according to a recent McKinsey & Company report, Five ways that ESG creates value, through:
To achieve these outcomes purposeful commitment to ESG at board level works to deliver socially responsible risk mitigation and sustainable long-term outcomes.
Organisations are facing increasing scrutiny about ESG initiatives. The drivers for this accountability are stakeholders such as shareholders, employees and customers, as well as increased scrutiny by regulators and activists wanting to see regard for ESG factors demonstrated through strategy and actions such as choice of investments, supply chains and business partners, and consideration when making executive appointments. With ESG this responsibility also extends to the communities in which the organisation operates. We have seen an increase in D&O “event-driven litigation” in recent years, with plaintiffs and law firms eager to bring class actions or force a settlement, and ESG concerns have been a focus of a number of actions.
Business culture is shifting in response to stakeholder expectations of company boards, with the result that the actions of organisations and their leaders are under greater scrutiny. Directors and officers could face litigation or prosecution as a result of ESG factors if they fail in their duty of care to staff, shareholders or other stakeholders, if they ignore or don’t actively guide the company to manage its ESG responsibilities, including:
This ESG focus brings new risk exposures for organisations and their directors and officers to manage – this may not just result in a financial loss to the organisation, but the defence costs involved in managing an action can be significant. Directors and officers’ liability insurance underwriters want to see demonstrated ESG accountability and planning as part of the company’s ‘story’, or profile, through embedding ESG principles into their business purpose – underwriters want to see how ESG actions are being undertaken and measured in a practical way, rather than just organisational ESG policies being put in place. The KPMG Australia CEO outlook 2021 report, which canvassed 50 Australian business leaders among 1300 globally, found that:
The requirement for boards and senior management to actively manage internal risk management includes attention to employment conditions and the observation of diversity and inclusion principles, as well as truthful disclosures about governance, business relationships and the extent of their environmental activities. How a business observes ESG concerns is a significant factor in attracting and retaining employee talent, especially among millennials.
Another compelling reason for actively pursuing an ESG agenda at board level is that company boards that neglect to address the need for ESG transparency and commitment, or by greenwashing the work undertaken, could risk litigation or prosecution if, under increased scrutiny from investors, regulators, activist groups and other interested parties, they are seen to have failed in their duty of care to staff, shareholders or other interested parties. This is especially relevant to disclosure obligations.
The reputational fallout from liability claims based on ESG issues ranges from impact on profits, supply chain agreements, customer retention, potential litigation and regulatory investigations. The majority of CEOs surveyed also felt they would be held personally responsible for any failure to meet these rising expectations, and in the KPMG report Australian senior executives in particular – 46% compared with 30% globally – divulged that their remuneration was based ‘‘at least partly’’ on their company’s ESG performance.
ESG has become a focus for insurers when underwriting risks and offering policy terms and conditions covering directors and officers’ liability. To help businesses obtain adequate insurance for ESG risks Gallagher can assist by
Our financial lines and professional risks experts can guide our clients, including the organisation’s directors, officers and risk and insurance professionals, in how best to present their case to ensure they obtain the most appropriate and comprehensive directors and officers’ cover for the organisation.
Gallagher is proud to have been recognised as one of the World’s Most Ethical Companies by the Ethisphere®Institute for ten consecutive years from 2012-21. The Ethisphere®Institute is the global leader in defining and advancing the standards of ethical business practices and, as the only insurance broker to have won this award, the recognition underscores our commitment to leading ethical business standards and practices.
This commitment is central to our philosophy as a business – and always will be.