Environmental, social, and governance (ESG) agendas challenge corporate boards of directors and leadership with an intricate web of expectations. Many boards have embraced ESG to align with sustainable practices and address ESG concerns. However, recently, a wave of anti-ESG sentiment has been growing, challenging leaders with the unenviable task of balancing conflicting stakeholder priorities.

Investors and regulators seek transparency and accountability, particularly around public companies’ filings and disclosures regarding their environmental and social impact and commitments therein. This challenges boards to incorporate ESG considerations into their decision-making processes and oversight responsibilities, which can provide benefits such as reputation enhancement, attracting socially conscious investors and mitigating risks. ESG considerations can demonstrate a board’s commitment to long-term sustainability, risk management and responsible corporate citizenship. As a result, ESG-oriented goal have gained significant traction both operationally and as a performance metric.

Anti-ESG Developments and the Potential Impact on D&O Liability

While the ESG movement has garnered support, a countermovement that challenges its legitimacy and impact has also gained momentum. Critics argue that ESG initiatives prioritize social and environmental goals over shareholder returns, potentially hampering short-term profitability and economic growth. Anti-ESG sentiments contend that focusing on ESG metrics diverts resources from core business activities and adds unnecessary regulatory burdens. Opponents of ESG initiatives also highlight concerns regarding the subjectivity of ESG ratings, the lack of standardized frameworks and the potential for “greenwashing,” whereby companies engage in superficial sustainability measures without making substantial changes. Recently, multiple state attorney generals (AGs) have sent civil investigative demands (CIDs) or subpoenas to asset managers regarding their involvement in the ESG initiatives of Climate Action 100+ and Net Zero Asset Managers Initiative. These CIDs are on the heels of a letter from the state AGs describing how ESG support could potentially implicate and run afoul of areas of state and federal law, including antitrust, securities, deceptive trade practices, and fiduciary obligations. “Anti-ESG” liability claims are also materializing.

ESG Best Practices in the Boardroom

The rise of anti-ESG sentiment presents organizations’ board of directors with a balancing act. While ESG initiatives can attract some investors and address evolving stakeholder demands, they can also encounter resistance from stakeholders with opposing views. Here are some helpful best practices to keep in mind:

• Create ESG oversight within a key board committee to oversee ESG initiatives, monitor ESG goals and metrics and establish systems for reporting progress towards those goals. This allows the board to track the company’s ESG maturity and journey while providing a mechanism for accountability.
• Work with leadership to develop policies and procedures incorporating sustainability into various business decisions, including, but not limited to, reconsidering supply chain or resource usage and taking a closer look at compensation practices and the treatment of employees as part of a broader human capital management strategy.
• Communicate and engage stakeholders early and often to help ensure they understand how decisions are made, why they are necessary, and the potential impacts of those decisions. This kind of transparency can help to build trust with investors, customers and other key stakeholders.

Boards have the responsibility to partner with management to determine how to balance conflicting interests and satisfy stakeholders. With careful consideration and oversight, boards can ensure that their oversight helps companies prioritize long-term growth without sacrificing sustainable practices or putting too much emphasis on short-term profits. By taking some of the steps mentioned above, boards can help ensure ESG efforts and profitability develop harmoniously.

Aon can provide boards of directors with real-time insights and solutions that help navigate an evolving ESG landscape, prioritize relevant risks and focus on making better decisions by strengthening governance and oversight over key risk factors. Digital Business Insights (DBI) is a subscription-based platform that tracks ESG information on a real-time basis relative to industry peers. If you have questions about Aon’s ESG and Advisory solutions, please contact Laura Wanlass.

Related Insights

• ESG Risks: D&O Case Study
• How Companies Can Prepare for ESG Risks and Regulatory Changes Across the Globe
• Use These 5 Tips to Build a Compelling ESG Story in Today’s D&O Market
• Two Courts Defer to Boards’ ESG Decisions and Side with Defendants

Contact

The Financial Services Group at Aon can assist during a claim regarding ESG allegations in addition to preparing for insurance market discussions. If you have questions about your coverage or are interested in obtaining coverage, please contact your Aon broker. Discuss this article with Financial Services Group professionals Adam Furmansky and Stacy Parker.



Adam Furmansky
Senior Vice President, Deputy D&O Product Leader - East
New York


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Stacy Parker
Managing Director
New York


View Articles by Stacy Parker