Human rights, cyber risks, climate change, and heightened geopolitical tensions are among some of the key risks perceived by directors and officers in various industries across the globe. Based on a survey of directors and officers (“D&Os”) and risk managers in an array of industries, including retail, across more than 50 countries, Clyde & Co. found that all environmental, social, and governance (“ESG”)-related risks are of more concern to D&Os than they have been in the past and that social risks, in particular, have grown in importance, with each risk perceived as “much higher than in previous years.”
Social Risks: Delving into its 2024 Global Directors’ and Officers’ Survey Report, Clyde & Co.’s survey reveals that social risks – including human rights, supplier business practices, employment claims, etc. – have become “increasingly important” to D&Os in recent years thanks to: “(i) increased concern among consumers about how companies’ operations impact society; (ii) more attention to social issues as a result of highly publicized cases involving inequality and human rights; (iii) regulatory pressure to improve corporate behavior and increase board accountability for their impact on their workforce and the broader community; and (iv) increasing demand from investors [about] how social factors are incorporated into investment decisions.”
There is also “greater awareness of studies that have indicated that compan[ies] that invests in good, responsible social practices results in better financial performance,” according to Clyde & Co.
Environmental Issues: While companies’ D&Os are broadly demonstrating that social issues are of increased concern, Clyde & Co.’s survey showed that those at larger companies are more concerned with environmental issues compared to smaller companies, which “likely reflect[s] the greater regulatory burdens these companies face.” In fact, the London-headquartered law firm found that “the potential impact of climate change and particularly, the potential impact of all of the new international reporting initiatives around climate change related matters” was a focus for “many directors and officers” in 2023. As such, the firm states that “the regulatory space is driving the risk for D&Os.”
In terms of new reporting initiatives across “many jurisdictions,” Clyde & Co. states that the United Kingdom, for instance, has brought in specific climate-related disclosure rules (which are a mix of mandatory or “comply or explain” depending on the size of the company and whether it is listed) and is consulting on DEI issues. Meanwhile, in the European Union, there is the Corporate Sustainability Reporting Directive, which expands the scope of the companies that are required to make sustainability disclosures and includes more stringent and harmonized reporting obligations.
At the same time, Australia has climate reporting proposals on the table, while, in the United States, the U.S. Securities and Exchange Commission recently voted to adopt its highly anticipated climate-related disclosure rules for public companies.
> “The importance of climate change remains high in some regions, such as Asia, Australia, and the Middle East, where it has been identified as a top seven risk,” per Clyde & Co., which notes that D&Os should be focusing on companies’ climate claims, as it is “clear that any disclosure requirements create liability for companies and their boards, [and] how they tackle the issue of complying with their climate (and other ESG) reporting requirements “will be as big a liability as not complying or reaching targets.” Moreover, there are “potentially huge knock-on effects to acting in the space not only for the companies, themselves, but also in terms of people and economies.” As such, “boards will need to fully understand all this before acting or could bear the brunt of claims arising from the mishandling of their ESG polices.”
> Reflecting on liability for D&Os, Clyde & Co. notes that in 2023, companies’ shareholders “increasingly sought to use the derivative action process to hold directors accountable for climate-related risks,” pointing specifically to “some interesting cases” in the UK, including one in which an environmental charity brought an action against an oil industry company, with the claimants arguing that the company’s directors should be personally liable for failing to implement an energy transition strategy aligned with the 2015 Paris Agreement and a UK company law, climate litigation, and pension law case, in which the claimants alleged mismanagement of the fund on several grounds, including over-investment in fossil fuel assets.
These cases were dismissed, but Clyde & Co. says that “we can expect similar litigation from climate-focused non-governmental organizations, activists, and investors in due course.” Clyde & Co. also states that shareholders in the U.S. have filed a number of actions over companies’ ESG initiatives – although, these cases “have been largely unsuccessful to date.”
Cyber Risks & Data Loss: Concerns about cyber risks rose to become a key concern among D&Os in 2023, with survey participants saying that these risks are not only “ever-evolving,” but with the increased availability of artificial intelligence (“AI”) tools, “cyber threat actors are beginning to integrate AI into their operations.” This will make such attacks “more potent and challenging to detect and, potentially, lowers entry barriers for novice criminals, contributing to the global ransomware threat.”
Clyde & Co. also asserts that cyber risk goes hand in hand with another key concern expressed by participating D&Os: data loss. “With the GDPR having been in force for a few years now, plus reformed regimes in many other jurisdictions, companies and D&Os have witnessed the significant fines that can be issued by data protection authorities following a breach and the law is still developing on claims from data subjects.” In addition, survey participants maintained that “the first party costs following a breach can be considerable and reputational risk is high.”
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