ESG risk drivers | AGCS – Allianz Global Corporate & Specialty

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Despite the shock it inflicted across the globe, the Covid crisis does not appear to have halted the march of ESG activists and agendas into the boardroom. If anything, it seems to have accelerated it, as a concern for the collective wellbeing has been thrown into sharper relief.

Social justice protests took place during the pandemic and environmental activists took to the streets, reflecting ongoing disquiet about ESG topics like climate change and diversity.

But it’s not just citizens who are putting the pressure on. Investor and shareholder action is increasingly focused on ESG, and a raft of regulation and guidance in many territories is leading to tougher disclosure and reporting rules for companies and their directors and officers (D&Os). Growing concerns about social inequalities are also leading to new requirements for businesses around diversity, pay and supply chains.

Europe is leading the way in this area. The EU Taxonomy Tool is a classification system that establishes a list of environmentally sustainable economic activities (outside of Europe a similar standard will be adopted by the Institutional Shareholder Services) and the EU Non‑Financial Reporting Directive obligates companies to report on a variety of ESG‑related metrics. In Germany, the Supply Chain Due Diligence Act will obligate larger German companies – and foreign companies with branches in the country – to ensure suppliers abroad comply with certain ESG requirements from January 2023.

- Shanil Williams, Global Head of Financial Lines at AGCS.

Between 2018 and the end of 2020, over 170 ESG regulatory measures at the national and EU level have been introduced – more than in the previous six years combined – with Europe accounting for around two thirds of these. Although no global benchmark exists for ESG reporting, the regulatory environment is becoming tougher. What was once a voluntary expectation of transparency is evolving into legally mandated disclosures. At the same time, litigation or investor, shareholder and activist actions increasingly focus on ESG topics such as climate change, pollution, diversity, cyber security and CEO pay.

The impact of this on the role of risk managers and directors means that elevating and identifying ESG concerns through a business’ risk registers and committees, and making sure it is understood how they will play out in and out of the boardroom, is crucial.

“Legislation is evolving,” says Shanil Williams, Global Head of Financial Lines at AGCS. “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. 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. ESG topics can pose a significant D&O risk for companies and their insurers.”

Which areas of ESG are causing the most concern, and what is the role of the risk manager and board of directors in overseeing these? What are the consequences for companies that don’t meet ESG expectations or fail to live up to their own commitments?

Michael Bruch, Global Head of Liability Risk Consulting/ESG at AGCS, answers key questions.

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