Environmental, social and governance (ESG) challenges are growing ever more important for boards of directors and the companies they serve today. ESG issues have been bubbling under the surface for many years, but corporate boards have tended to focus more on delivering shareholder returns.
That all changed in 2018, when global investment management corporation BlackRock took a stand on sustainable investing. BlackRock CEO Larry Fink published an annual letter in January 2018, in which he urged the private sector to make societal impact a goal, in addition to maximizing shareholder value.
He wrote: “The public expectations of your company have never been greater. Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”
Two-years-later, BlackRock doubled down on its ESG commitments, announcing that environmental sustainability would now be a cornerstone of its investment approach. In January 2020, Fink wrote: “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
This is important because it highlights how boards of directors really need to start considering ESG challenges and implementing ESG strategies on behalf of their shareholders. They need to disclose the actions they’re taking and accept accountability for them. If not, they could find themselves on the wrong end of a breach of fiduciary duty suit.
Woodruff Sawyer’s eighth-annual edition of the ‘D&O Looking Ahead Guide’ highlights ESG and politics in the boardroom as one of the hot topics to watch in 2021. It ties into the phenomenon of social inflation, which author Priya Cherian Huskins (pictured), SVP, Management Liability at Woodruff Sawyer, described as something happening in society – separate from changes in the law – that causes D&O litigation settlements to go up.
By mid-October 2020, there were eight breach of fiduciary duty lawsuits filed by shareholders against the boards of major corporations for failing to live up to their diversity commitment disclosures. Huskins commented: “Those cases are a great example of social inflation in D&O litigation, because without what’s happening in the broader societal conversation [around Black Lives Matter, and diversity and inclusion more broadly], we wouldn’t have seen that legislation.” She also said companies should expect to see more of these suits in 2021.
Another vector of social inflation that is impacting diversity disclosure lawsuits is the #MeToo movement. Huskins told Insurance Business: “When you look at those diversity suits, I see two vectors of social inflation. The first is the rising awareness of racial inequality in the United States, which has been the focus of those lawsuits. And the second is the #MeToo suits that are settling right now – specifically the Alphabet settlement for $310 million.”
In September 2020, it was revealed that Google parent-company Alphabet reached that settlement following accusations of sexual misconduct, harassment and discrimination. As part of the agreement, Alphabet pledged to introduce new diversity, equality and inclusion measures, with CEO Sundar Pichai stressing the firm will not go “back in time”.
“While that #MeToo suit is different to the diversity suits we’ve seen, it still rhymes in the sense that it’s a very ESG-focused suit that caused a very big company to make a substantial financial commitment,” said Huskins.
As Huskins wrote in a Woodruff Sawyer D&O Insights blog entitled ‘Politics in the Boardroom: Which Side Are You On?’ now is the time for boards of directors to have a discussion about ESG issues and politics in the boardroom. She wrote: “[Boards] will want to be sure [they] have a shared understanding between management and the board as to who is making these decisions and what that decision-making process looks like.
“The worst risks are those you don’t see coming, and therefore have not addressed. When it comes to politics and companies, the risk is here. Boards serve their shareholders well by taking deliberate steps to determine how they will handle this issue.”