UK business leaders reporting rising concerns on risk of litigation regarding ESG targets

Published on Thu, 29/02/2024 - 09:22

Gallagher research reveals ESG litigation is now considered a significant and growing risk to businesses and their Directors & Officers, amid increasing scrutiny of businesses’ green ambitions.

Nearly two thirds (62%) of senior leaders at large UK businesses are concerned that their ESG targets put them at risk of litigation, with close to three quarters (72%) admitting they felt pressure to set the targets without being sure on how they were going to reach them, according to new research by global risk management and insurance broker, Gallagher.

The study of 600 senior leaders at UK companies with more than 500 employees found that over half (54%) believe legal action over missed ESG targets is far more likely now than it was 10 years ago. When ranking their concerns for their businesses should they miss their ESG targets, nearly a quarter (24%) said investor withdrawal, more than one in five (21%) said litigation and 14 per cent said shareholder activism.

These growing concerns are a result of senior leaders’ doubts over the substance and credibility of their ESG targets, with more than a third of leaders (35%) telling Gallagher researchers that their motivation when setting them was to fulfil investor and shareholder requirements, with a minority of 28 per cent saying their business set targets aligned with science-based targets.

The research by Gallagher comes amid increasing scrutiny of the environmental, social and governance ambitions of the UK’s largest businesses, and whether their published targets are attainable and grounded in practical strategies. The study found a variety of influences behind the development of ESG targets: according to the findings, nearly half (46%) say the CEO is directly responsible for setting ESG targets, with the majority of businesses (66%) naming external stakeholders as the key driver in influencing the targets.

Steve Bear, Executive Director of Financial and Professional Risks at Gallagher, highlighted the implications for businesses, saying: “ESG has been talked about as an emerging risk for some time, but it is clear from this research and our own claims experience that both social and environmental litigation has arrived, it is no longer simply on the horizon. The fact that more than one in five out of the 600 responders cited litigation from missed targets as their primary concern goes to show that companies and their directors do not simply need to believe in their own ESG strategy, but implement it successfully or face the consequences. A failure to meet desired ESG performance can lead to reputational damage, legal liabilities, and financial losses, which can be mitigated by good risk management measures and D&O insurance.

Delving further into this, 29 per cent of leaders said shareholders have an influence on the setting of ESG targets, while similar numbers said industry regulators (29%) and the Government (22%) impact their ESG strategy. One in 10 (11%) believed this extended to the general public, with eight per cent citing the influence of competitors.

Steve, added: “A growing number of publicly listed companies are also finding shareholder activists taking significant positions in their share register, and financial loss, once the key driver for D&O claims, is slowly being replaced by a drive and demand for social change for the better. The findings from this research further emphasizes the need for businesses to consider their risk model alongside their ESG ambitions and ensure that they are both comprehensive and robustly formulated to compliment risk transfer to insurers.

Although there are clearly concerns around the consequences of missing ESG targets, the majority of UK business leaders say they will be able to achieve them, with half (49%) very confident and 44 per cent somewhat confident. Four in five senior leaders (80%) said their targets were an important part of the country meeting its net zero targets, but that was not the only motivation. The same number (80%) said ESG targets are a requirement of trading today, with over three quarters (77%) agreeing that they contribute to their company’s overall commercial success.

Steve concluded: “To help avoid the negative risks associated with poor management of ESG, businesses should consider undertaking an independent ESG assessment. These provide data-driven insights into the perception of a company relating to material ESG matters and how this may give rise to legal or regulatory exposures affecting the company and its directors and officers.

“Looking beyond ESG factors, an independent ESG assessment will include clear guidance on actionable risk reduction measures. The resulting roadmap to improvement can drive a much better result when it comes to D&O insurance renewals, be it lower premiums, improved policy terms and conditions, or even bursaries and contributions from insurers to help implement positive change.”

The top five ESG targets respondents are most concerned about missing are:

•    Shifting to renewable energy sources (17%)
•    Net zero targets (16%)
•    Bridging the gap between executive remuneration and lowest wage (14%)
•    Reduction of Scope 3 emissions (13%)
•    Bridging the gender pay gap (11%)

Research source:
An online survey commissioned by Gallagher was conducted by Hanover Communications between 27 November and 6 December 2023 with a sample of 604 UK senior business leaders (defined as directors and above) from companies with over 500 employees. The survey consisted of 15 questions covering demographics and topics around ESG targets. Hanover is a member of the Market Research Society (MRS).