UK business leaders report rising concerns on risk of litigation regarding ESG targets

Nearly two thirds (62%) of senior leaders at large UK businesses are concerned that their ESG targets put them at risk of litigation, with close to three quarters (72%) admitting they felt pressure to set the targets without being sure on how they were going to reach them, according to new research by global risk management and insurance broker, Gallagher.

The study of 600 senior leaders at UK companies with more than 500 employees found that over half (54%) believe legal action over missed ESG targets is far more likely now than it was 10 years ago. When ranking their concerns for their businesses should they miss their ESG targets, nearly a quarter (24%) said investor withdrawal, more than one in five (21%) said litigation and 14 per cent said shareholder activism.

These growing concerns are a result of senior leaders’ doubts over the substance and credibility of their ESG targets, with more than a third of leaders (35%) telling Gallagher researchers that their motivation when setting them was to fulfil investor and shareholder requirements, with a minority of 28 per cent saying their business set targets aligned with science-based targets.

The research by Gallagher comes amid increasing scrutiny of the environmental, social and governance 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%) say the CEO is directly responsible for setting ESG targets, with the majority of businesses (66%) naming external stakeholders as the key driver in influencing the targets.

Delving further into this, 29 per cent of leaders said shareholders have an influence on the setting of ESG targets, while similar numbers said industry regulators (29%) and the Government (22%) impact their ESG strategy. One in 10 (11%) believed this extended to the general public, with eight per cent citing the influence of competitors.

Although there are clearly concerns around the consequences of missing ESG targets, the majority of UK business leaders say they will be able to achieve them, with half (49%) very confident and 44 per cent somewhat confident. Four in five senior leaders (80%) said their targets were an important part of the country 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 over three quarters (77%) agreeing that they contribute to their company’s overall commercial success.

James Bosley, Head of Climate Strategy, 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 that 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.

“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.”

The top five ESG targets 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%)