ESG (Environmental, Social and Governance) continues to be a “hot topic”. The phrase is an umbrella term for a variety of what have historically been viewed as non-financial factors (albeit it is increasingly the case that some are seen as having tangible financial impacts) relating to the structure, operation and performance of corporate entities and other enterprises and organisations and the relationship of the business with various interested stakeholders and the environment more generally. While the broad thrust of ESG is generally understood, crucially there is no agreed definition as to the constituent elements of the “E”, the “S” or the “G”, their overlap or interaction. Further, ESG factors will differ amongst companies dependent on issue such as industry, jurisdiction, size and listing (to name but a few variables).
A significant amount of this is changing investor, societal and consumer interests and demands, but we are increasingly seeing governmental and regulatory developments as drivers. At its crux, however, is the imperative to focus more on companies’ long-term sustainability with reference to a group of stakeholders other than simply shareholders.
For the purposes of the Directors’ and Officers’ Liability Survey, this year, we reorganised our risk questions to fit within an ESG framework as follows.
As may be expected, Climate Change, which has had so much public attention, is seen as the highest of the Environmental risks. In GB, Climate Change has also been the subject of considerable new legislative and regulatory obligations. New disclosure rules were introduced by FCA in late 2020 and 2021 requiring (on a comply or explain basis) disclosures in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and the UK Government also passed the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 requiring all large companies to make disclosures broadly in line with the four pillars of TCFD.
Mandatory climate-related disclosures consistent with TCFD recommendations have also come into force in New Zealand and in Australia, both the Australian Securities and Investments Commission and the Australian Prudential Regulatory Authority have identified managing climate risk as key responsibilities for companies and their directors.
In these regions, climate change features in the top 7 risks. However, it doesn’t feature in the top 7 for any other region. This is particularly surprising for the EU region, as the EU has been particularly active in imposing new climate-related disclosure obligations including with the 2019 Sustainable Finance Disclosure Regulation and, more recently, the Corporate Sustainability Reporting Directive which expands the number of companies caught from around 11,700 to around 50,000.
The position is perhaps less surprising in North America, as the proposed new disclosure rule from the SEC still has yet to be passed and, of course, there is open opposition in many states to ESG-related issues as a whole. However, one should of course, be cautious about treating the US as a single jurisdiction. California is taking a very different stance, with two proposed new laws imposing climate-related disclosures. 
What is unsurprising is that litigation risk is ranked as the highest climate-related risk for directors. 2022 saw a significant increase in climate-related claims (there were 2,284climate litigation cases as of 03 April 2023) including derivative claims against the board. In one particularly significant case which was commenced in GB earlier this year (although publicised previously in 2022), directors are being sued for allegedly failing to manage climate risks to the company that could harm its future successes, failing to adopt an energy transition strategy aligned with the Paris Agreement, and failing to be on track to deliver a 45% reduction in the group-wide emissions by the end of the decade all in breach of their duties under the Companies Act 2006. Personal responsibility of directors will be a particular trend of climate litigation going forward and there is already proof that climate-related considerations are increasingly shaping agendas for trustees of funds, through the use of litigation if necessary.
The High Court last year made a declaration (Butler-Sloss v Charity Commission for England and Wales  EWHC 974 (Ch)) allowing charity trustees to adopt an investment policy, which excluded investments that did not align with the 2016 Paris Agreement, with the trustees questioning how they should reconcile financial risk and return with investments that conflict with the charity's mission and purpose. Further, in Ewan McGaughey v. the Universities Superannuation Trust Limited  EWHC 1233 (Ch), Mr McGaughey filed a complaint against the Trustees of the Universities Superannuation Scheme, the largest private pension fund in the UK, alleging mismanagement of the fund on several grounds including over-investment in fossil fuel assets with inflated valuations. Although dismissed at first instance, the case is coming before the Court of Appeal in June 2023.
It is interesting to note how few people rated Biodiversity and Per- or poly-fluorinated alkyl substances (PFAS) as very or extremely significant. 2023 is likely to see the publication of the recommendations from the Taskforce on Nature-related Financial Disclosures which many governments are supporting. PFAS has been the subject of current litigation and the European Chemicals Agency (the ECHA) is consulting on a wide-ranging ban, so again, another topic which may get more attention in the results of our next survey.
Even from this list, it can be seen how potentially wide the remit is for what amount to Social risks. Many of these risks have been the subject of legal requirements for many years with human rights within business operations seeing more recent attention for example under the Modern Slavery Act 2015 in GB. Employment claims focussing on sexual harassment have of course also seen a great deal of attention since the #MeToo movement brought them into greater focus.
While environmental risks tend to be most people’s focus when talking about ESG, what we can see from the Survey results is that some other ESG-related risks are ranked above Climate Change in many of the regions. Health and safety prosecutions are ranked in the overall top 7 risks for directors, which Climate Change is not. In 2018 and 2021, employment claims were ranked in the top 7 risks as well, although they have fallen out of the top 7 risks overall now and do not appear in the top 7 risks for any region this year.
The EU legislation requiring climate-related disclosures often actually goes further and also requires disclosure in connection with social matters as well. An example of this can be seen in the incoming Corporate Sustainability Due Diligence Directive (CSDD), aiming to foster sustainable and responsible corporate behaviour throughout global value chains. Under the Directive, in-scope companies will be required to identify and, where necessary, prevent, terminate or mitigate adverse impacts of their activities on human rights, such as child labour and exploitation of workers, and on the environment, for example pollution and biodiversity loss. They must establish appropriate complaints procedures, assess the implementation of their due diligence measures and report on the due diligence matters covered by the proposed Directive, including public communications.
Social matters have also seen some attention in GB, with the FCA imposing an obligation on boards of listed companies to make a “comply or explain” statement about board diversity. Nonetheless, it is notable that diversity, equity and inclusion remain fairly low down on the ranking of business risks by our survey respondents, with only 31% saying that diversity, equity and inclusion is a very or extremely significant risk for the business (compared to 63% for economic risks and 62% for cyber risks).
31% say that diversity, equity and inclusion is a very or extremely significant risk for the business
The UK also has relevant disclosure obligations under the Companies (Miscellaneous Reporting) Regulations 2018 which (depending on the company’s size) introduced requirements including mandatory reporting on employee and stakeholder engagement, pay ratios and s172(1) statements for larger companies.
Governance risks form the mainstay of D&O exposures and, indeed, management of the “E” and “S” risks is part of governance, so there is a great deal of interrelation. It is notable that Bribery and Corruption is a top 7 risk overall and is in the top 7 risks for Europe and Asia in particular. Systems and controls was also a top 7 risk for Asia and North America. It should be noted that for the purposes of the survey, we separated out cyber-related risks for directors as they have historically been so highly rated that they warranted their own focus. However, management of cyber-related risks is a significant governance obligation which many people would include within the “G” of ESG. On that basis, 4 of the top 7 risks overall are governance risks and 5 are ESG risks. On a regional basis, we can potentially also add in cyber crime and “sufficient cyber expertise at board level” which also make it into the top 7 risks regionally.
So, whilst not every ESG risk is ranked highly, what we can see is that many of them are now at the top of many of the survey respondents’ lists. Perhaps an unsurprising situation given how many risks come within the ESG umbrella.