Ignoring ESG means ‘significant’ D&O risk to insurers and business: AGCS

Businesses and insurers ignore environmental, social and governance (ESG) issues at their peril, an Allianz Global Corporate & Specialty (AGCS) report released this month suggests.

“If an ESG issue is not handled or disclosed appropriately by the company or board, it can result in ‘bad news’ in their market, ‘bad news’ for the company share price and ‘bad news’ in the form of regulatory and legal action,” said Shanil Williams, global head of financial lines with AGCS, in the company’s ESG risk drivers report.

As a result, “ESG topics can pose a significant D&O risk for companies and their insurers.”

Investor and shareholders alike are increasingly focused on ESG, with “a raft of regulation” leading to tougher disclosure and reporting rules for companies and their directors and officers (D&Os), the report said.

“Growing concerns about social inequalities are also leading to new requirements for businesses around diversity, pay and supply chains,” said the report.

Although there’s no global benchmark for ESG reporting, “legislation is evolving,” Williams wrote. “Regulators are becoming more active, as are many other stakeholders. Companies, their D&Os — and current and future D&O insurance underwriters — need to be aware of ongoing global ESG matters in order to adequately assess potential perils and how they can manifest in terms of potential liability.”

The report outlines five ESG risk drivers to watch:

1. Climate change and pollution actions
   A series of extreme weather events has seen climate change return to prominence this year.
2. Board diversity
   Businesses are coming under increasing scrutiny in the wake of Black Lives Matter protests and ongoing diversity-related litigation. D&O litigation risk is expected to further increase.
3. Greenwashing
   Amid pressure on businesses to improve their carbon credentials, concerns are mounting over greenwashing — when businesses exaggerate their ESG credentials to improve their public image. Directors should avoid setting unrealistic ESG targets.
4. CEO pay
   Several large companies have announced they’re linking executive pay to ESG- and climate-related outcomes, such as greenhouse gas reductions.
5. Cybersecurity
   A data breach can cripple a company financially and reputationally. High-profile cases have raised ESG concerns, particularly surrounding business sustainability.

Advising clients on risk mitigation

Identifying and mitigating risks is not limited to the risk‑management function in a company, said Michael Bruch, global head of liability risk consulting and ESG with AGCS.

“ESG risk topics should be integrated into enterprise risk management and all relevant operational processes,” Bruch said. “What we are noticing in many of the industry sectors of our client community — and in particular the power and utilities sector, which is heavily challenged by the transition of its own business model into a more green energy‑related power supplier — is that ESG and sustainability are having a high impact on virtually all functions within the company.”

Bruch said in order to successfully identify and mitigate ESG risks, a strong commitment to ESG is needed “at the management and board level, setting specific targets from the top down.”

ESG information can also help to improve the underwriting process, to the benefit of insurers and companies, Bruch said. “We have statistically modelled a lot of ESG data points against claims and public litigation, and we do see some predictive power there,” he said. “From an insurer’s point of view, conversations around ESG‑related topics, in addition to financial topics, are becoming much more important.”

Feature image by iStock.com/Blue Planet Studio