UK business leaders fear ESG targets expose them to litigation

Nearly two-thirds (62%) of senior leaders at large UK businesses are worried that their ESG targets put them at risk of litigation, according to research carried out by Gallagher. The broker also reported that close to three-quarters (72%) admitted they felt pressure to set the targets without being sure how they were going to meet them. The study was carried out with 600 senior leaders at UK companies of more than 500 employees. It found that over half (54%) believe legal action over missed ESG targets is far more likely now than it was ten years ago. The executives were asked to rank their concerns if they miss their ESG targets. Nearly a quarter (24%) said investor withdrawal, more than one in five (21%) said litigation and 14% said shareholder activism. Gallagher said these growing concerns are a result of senior leaders’ doubts over the substance and credibility of their ESG targets. More than a third of leaders (35%) said their motivation for setting targets was to fulfil investor and shareholder requirements. A minority (28%) said their business was aligned with science-based targets. The broker said the research comes amid increasing scrutiny over the ESG ambitions of the UK’s largest businesses, and whether their published targets are attainable and grounded in practical strategies. The study found a variety of influences behind the development of ESG targets. According to the findings, nearly half (46%) said their CEO is directly responsible for setting targets. The majority of businesses (66%) named external stakeholders as the key driver in influencing the targets. Twenty-nine percent of leaders said shareholders have an influence on setting ESG targets, while similar numbers said industry regulators (29%) and the government (22%) impact their ESG strategy. Despite concerns around the consequences of missing ESG targets, the majority of UK business leaders who took part in the survey said they will be able to deliver. Half (49%) are very confident in their ability to do so and 44% somewhat confident. Four in five senior leaders (80%) said the targets were an important part of the UK meeting its net-zero targets, but that was not the only motivation. The same number (80%) said ESG targets are a requirement of trading today, with more than three-quarters (77%) agreeing that they contribute to their company’s overall commercial success. James Bosley, head of climate strategy at Gallagher UK, said: “ESG has been on the radar of businesses for several years, but now more than ever it is front and centre of corporate strategy. ESG factors are now a key consideration for companies in attracting investors, customers and talent. Conversely, poor ESG performance can lead to reputational damage, legal liabilities, and financial losses.” “Increasing amounts of regulation relating to climate change, social goals and corporate governance present growing challenges for companies, compounded by increasing shareholder activism. These findings highlight the need for businesses to consider their risk model alongside their ESG ambitions and ensure they are both comprehensive and robustly formulated. The speed of change for ESG issues has resulted in a lack of standardisation and precedent, creating uncertainty for companies trying to address their specific needs,” he added. “To help avoid the negative risks associated with poor management of ESG risks, businesses can consider undertaking an independent ESG assessment. These provide data-driven insights into the perception of a company relating to material ESG matters and how this may give rise to legal or regulatory exposures affecting the company and its directors and officers. Looking beyond ESG factors, they also include clear guidance on actionable risk reduction measures,” Bosley concluded. The top five ESG targets that respondents are most concerned about missing are: Shifting to renewable energy sources (17%) Net-zero targets (16%) Bridging the gap between executive remuneration and lowest wage (14%) Reduction of Scope 3 emissions (13%) Bridging the gender pay gap (11%).

UK business leaders fear ESG targets expose them to litigation

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