ESG moves into the mainstream

Allianz Global, Corporate & Specialty

The journey from a voluntary regime for companies around environmental, social and governance (ESG) topics to a more regulated and compulsory one involving transparency, disclosure and reporting is well underway. Although there are currently no global, standardized ESG reporting benchmark requirements, “hard” law measures with “teeth” are on the rise. D&Os beware…

According to law firm, Herbert Smith Freehills, there have been over 170 ESG regulatory measures since 2018 at the national and European Union (EU) level with Europe leading the way around the globe, accounting for around 65% of all ESG-related regulation. For example, the Non-Financial Reporting Directive has obligated companies to report on a wide variety of ESG-related metrics, while last year the European Commission published its final report on the EU taxonomy – a classification system, establishing a list of environmentally sustainable economic activities. Outside of Europe, the Institutional Shareholder Services recently announced it will adopt a similar standard based on the EU taxonomy. Ultimately, this changing landscape will influence how, and in which sectors, companies and funds invest, as they consider whether a particular asset fits within the taxonomy or ESG strategy, how they will report on it, and what shareholders and stakeholders will think.

As investment decisions are increasingly influenced by this new environment, so too will be the role of risk management and in particular that of the board of directors. Directors’ duties in many jurisdictions are already under growing scrutiny and this will only deepen given tightening regulatory frameworks. Questions and clarity about who is responsible for ESG topics, such as climate change, on the company board will not just be a matter of “nice to have” but essential if the duties of directors are considered to be adequately fulfilled in future. Such topics need to be right at the heart of company decision-making.

  • Over 170 ESG regulatory measures introduced since 2018 at the national and EU level. Europe accounts for around 2/3 of all ESG-related regulation
  • As investment decisions are increasingly influenced by this new environment, so too is the role of risk management and that of the board of directors.
  • Litigation or investor, shareholder and activist actions increasingly focus on ESG topics such as climate change, pollution, diversity, cyber security and even CEO pay
  • Elevating and identifying ESG risks 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

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