As a director of a construction firm, could you be at risk of personal financial liability for ESG decisions you make on behalf of the company?
Firstly, what is ESG?
ESG stands for Environmental, Social, and Governance and are the three main pillars through which companies are increasingly expected to report on outside of their financials. The goal of ESG is to highlight an organisation’s impact wider than its bottom line and in turn identify and address potential risks and opportunities associated with the company’s day to day operation.
ESG in the construction industry
According to the United Nations Environment Programme (UNEP), buildings are responsible for around 40% of global energy consumption, a quarter of global water usage, and a third of greenhouse gas emissions, but they also offer the greatest potential for achieving significant reductions in emissions.
As a result, the social value and the green agenda have taken on ever-increasing significance in the building sector as we develop greater awareness of the environmental impact and opportunities for positive change. ESG policies that emphasise lowering the carbon footprint of construction projects and fostering social responsibility have been the first step.
Further ESG considerations for the construction industry include:
Environmental
- Material selection – use of components that are produced using less energy
- Water consumption – both during construction, as well as over the life cycle of the building
- Construction methods – less carbon-intensive and more environmentally-efficient
- Use of new and innovative technologies
- Waste management – reducing and reusing
- Future proofing design – anticipating future climate change and constructing a climate-resilient built environment
Social
- Community impact – transportation (public/private)
- Accessibility – economic, and in consideration of impairment/disability
Governance
- Procurement (including supply chain management)
- Stakeholder engagement
(Source – Allianz)
Benefits of adopting ESG strategies
Adopting ESG strategies can help construction companies manage risk and advance social value. Companies can avoid the expensive environmental lawsuits and bad PR by reducing their environmental impact whilst enhancing their reputations and ties with local communities.
The growing green exposures for Management Liability
Despite the well-meaning nature of these developments, they do come with increased risk exposures for management teams. Directors, officers and other senior leaders who fail to analyse and disclose climate risks are subject to increased exposure both personally and as a business given the increased public attention, regulatory scrutiny, compliance obligations, and investor scrutiny.
With public conscientiousness and the legal environment evolving at pace, initiatives to satisfy demands from investors, activist organisations, and society at large are becoming mandatory. Putting in effective strategies to protect a firm’s leadership has never been more important.
Understand more about what Management Liability is, here.
The impact of increasing ESG focus on directors’ and officers’ liability
In the medium term, directors will come under increased scrutiny of investors and authorities to disclose the actions they are taking to minimise environmental risks and lower their company’s carbon footprint. It is anticipated that there will be legal and/or regulatory action against directors who fail to make the necessary modifications or who overstate their company’s environmental credentials in the medium to long term.
For all directors, adequate protection in the form of a combination of risk management and management liability insurance should be a top priority. Regardless of a claim’s underlying cause, we advise our clients to purchase the widest available coverage, which is intended to safeguard both the company and the director against personal liability.
To understand more about the growing exposures facing directors and how to protect against them connect with one of our advisers today by phone +03300 940177, or by email contact@partnersand.com.
If you already have a dedicated Partners& adviser, feel free to reach out directly and they will be more than happy to support you with any questions you might have.
