Recent developments around the world have resulted in a testing few months for ESG
Recent developments around the world have resulted in a testing few months for ESG – the popular shorthand for measuring and managing a company’s environmental, social and related governance performance.
Contrary to what might be heard from some quarters, ESG reporting remains something that insurers must take seriously. Doing it badly could have serious consequences, but doing it well is no small task.
At what sometimes seems like breakneck speed, environmental and social issues and impacts (formerly viewed as lower priorities by most companies) have assumed significant importance.
Why the sudden change? Looking specifically at “E”, industry has known about climate change, but has not acted decisively, for many years. However, two things have happened relatively recently.
- First, in response to key international initiatives, key economies around the world have enacted laws aimed at moving to net zero in the next two to three decades. Significant regulation is affecting fossil fuel use (which underpins virtually every single human domestic and commercial activity) and the greenhouse gases they produce for the first time. As these changes take hold, the enormity of the consequences across all sectors is becoming apparent.
- Second, companies do not have the option of “seeing how it goes” from the sidelines. Increasingly, for commercial or regulatory reasons, they have to report to stakeholders who will then make business decisions based around what they hear. The desire to send a reassuring message to stakeholders is turbocharging companies’ efforts to grapple not just with the direct effect of changing climate and nature degradation on their business, but with the consequences of the worldwide regulation aimed at countering it.
Reporting requirements in outline
Reporting is therefore an important “stick” that is being applied to companies now to help address “E” and “S” concerns. The requirements are many and varied.
Larger companies have formal annual reporting requirements:
- On the “S” side, UK-based organisations even of modest size are required to publish annual modern slavery act statements, report their gender pay gap data each year, and report on their policies on employment and training of disabled people. Quoted companies must include D&I information in their strategic report.
- On the “E” side, reporting has been ramping up since 2013. A big change came in 2021, when Taskforce for Climate Related Financial Disclosures (“TCFD”) reporting started to emerge. This set up a framework for disclosures around climate risks and opportunities with associated governance, metrics and targets. More refinements to climate reporting are due soon. Nature reporting is following close behind, with its own detailed set of forward-looking requirements likely to emerge before too long.
- International reporting and disclosure obligations are also very much in play. In the EU for example (and leaving aside for the moment current proposals to water them down), reporting requirements under the Corporate Sustainability Reporting Directive (“CSRD”) and Corporate Sustainability Due Diligence Directive (“CSDDD”) have a wide application to companies doing business in the EU as well as companies based there.
Smaller companies are not immune. Whilst they may not have to formally report themselves, they might be indirectly swept up in reporting if they form part of a larger company’s supply chain. Larger companies are demanding information from the organisations in their supply chain to help inform their reporting, and if smaller suppliers want to retain their customers’ business, they will need to be able to respond accurately to these demands and be open to improvement.
Getting it wrong
ESG reporting and disclosure, whether formal or commercial, needs to be preceded by a company building solid foundations, i.e. growing its understanding of “E” and “S” challenges, recognising any opportunities and acting accordingly.
Where stakeholders perceive from what is reported that the foundations are not solid, they might “vote with their feet” and choose not to invest in, or do business with, the company.
Where stakeholders are reassured by reporting, but later feel that the reporting was inaccurate, claims against a company for “greenwashing” could follow – especially if a stakeholder can be shown to have suffered loss.
The position of Insurers
Insurers are no different to other businesses. They are subject to reporting requirements in connection with these rapidly changing areas across the jurisdictions where they operate.
To stand the best chance of it passing muster with regulators and stakeholders, insurers’ reporting needs to be built on solid foundations – as indicated above.
These foundations are not built overnight. It requires strict governance for “E” and “S” to be embedded within an organisation so as to enable it to gather and digest data and make informed decisions With these foundations built, the subsequent management decisions around ESG risks and opportunities will be felt far and wide across individual insurers. Underwriting, investment, claims and operations will all be affected.
To help insurers on their ESG journey, Weightmans’ team of lawyers and ESG consultants provides a comprehensive suite of ESG services. They include helping to lay the ESG foundation and extend through to helping manage the knock-on impacts for underwriting, investment, claims and operations.
