In terms of practical business guidance there has been less said about the ‘S’ part.
The acronym ‘ESG’ (Environment, Social, Governance) has been around a few years to describe a benchmark standard of behaviour for companies. Reflecting wider societal attitudes, it now matters in the eyes of regulators, investors, and companies. The fact the FCA has appointed Sacha Sedan as “Director of ESG” is a clue. He has been named a ‘City Influencer’ by Financial News as one of the biggest 25 names who have been instrumental in shaping the UK's financial services industry.
The Good Business Charter (GBC) is another sign of the increasing importance of the ‘S’. It’s an initiative of the Good Business Foundation, a charity formed by, amongst others, Julian Richer of Richer Sounds who transferred his company into an employee trust. The CBI and the TUC both have trustee representation on the board of the GBC to ensure that the voices of business and employees are heard.
The GBC is a simple accreditation which organisations in the UK can sign up to in recognition of responsible business practices. It measures corporate behaviour over ten components: (1) real living wage, (2) fairer hours and contracts, (3) employee well-being, (4) employee representation, (5) diversity and inclusion, (6) environmental responsibility, (7) paying fair tax, (8) commitment to customers, (9) ethical sourcing, and (10) prompt payment.
Examples include:
All employers should pay directly employed staff and regularly contracted staff the real living wage as set out by the Living Wage Foundation and for those with over 50 employees, commit to becoming an accredited Living Wage Employer within a mutually agreed time frame.
There be a fair approach to zero hours contracts, including fair shift scheduling and cancellation policy, and proper consideration given to contracts with guaranteed hours.
Businesses should evidence how they monitor the diversity of their workforce and their commitment to close the gender, disability and ethnicity pay gaps.
Businesses should sign up to the government’s Prompt Payment Code.
For more detail on the ten components and how they are helpfully defined search online for the Good Business Charter website https://www.goodbusinesscharter.com/.
Not all companies will want to subscribe to the Charter, but studying the specifics set out in the GBC website will help companies to design, benchmark and measure the ‘S’ in ESG and there’s no doubt that employees, the regulator (FCA), and investors will be paying serious attention. Boards should do the same.
Implications for D&O?
It’s good news there is now guidance on how to implement the “S” in ESG. But beware, governance standards can be used by courts in assessing whether directors have “promoted the success of the company” or “acted with reasonable skill, care and diligence”. Now bodies such as the GBC have set out measures for companies, directors will not be able to say it was reasonable not to take them into account.
The key question is: will the changes lead to more, or fewer claims? Undoubtedly more, as we are starting to see in the US. Derivative claims in particular, perhaps against former boards. Many such claims will not get very far because of the high bar to bringing them. But the reputational impact will be greater. Brokers and carriers will need to focus on it more in the placement process – where again the GBC guidelines might come in handy.
Also, there is a suspicion, expressed by some in the media and also in a recent meeting of the House of Lords All Party Parliamentary Corporate Governance Group, that with increasing inflationary and interest rate pressures companies may be talking a better game than they are actually playing, and investment in the “S” in ESG is stalling, with budgets being cut. Where there is a disconnect between what companies are saying publicly and actually doing this runs the risk of securities claims.
The good news is that if there are "S" related D&O claims, as an “all-risks” product a D&O policy should, subject to its terms, provide cover. This doesn’t mean the D&O product can’t be more ESG “friendly”. If you’re a broker or carrier looking to make ESG enhancements for clients taking it seriously, drop us a line.