Article September 13, 2022

Social pillar: The sleeping giant of ESG?

Environmental, social and governance (ESG) is one of the most important considerations for businesses today, influencing various corporate concerns including profitability and brand reputation.

Although ESG is particularly pertinent for large corporates, smaller businesses are also coming under heightened pressure to satisfy regulations and expectations within this space.

Traditionally, the G (governance) pillar has been the dominant force in D&O liability. More recently, emphasis has been placed on the E (environmental) pillar of the ESG framework, with stakeholders paying close attention to how businesses measure and manage their contributions to the environment. However, the S pillar is increasingly building its relevance in a number of contexts. This pillar refers to the social element of the ESG framework, which generally outlines the way in which firms address societal issues.

Internally, employee practices are a key focus in the S pillar. Research shows that a positive work culture can enhance profitability, alongside contributing to positive brand reputation. Another element is cybersecurity and data protection. This involves risks and issues that take the form of data leaks and cyber hacks. These events can result in a host of issues for businesses if vital information gets exposed to third parties. Litigation is highly frequent in this arena with cyber exposures topping the list of S pillar concerns for many businesses. If a firm lacks sufficient protection against cyber-attacks, insuring individuals in management positions can become particularly difficult.

Supply chain functions are also key to a firm’s S pillar exposures. If a company works with immoral suppliers that lack ethical production methods, this can lead to severe litigation and reputation damage. In a digital age, the impact is magnified through the power of social media, as allegations can be broadcasted on a global stage within seconds.

Ultimately, environmental, social and governance has become one of growing consideration for D&O underwriters in assessing and rating risks. The market is seeing an increasing amount of event-driven litigation relating to inaction on issues such as diversity and human rights, so D&O underwriters have a keen and developing interest in the way businesses set out and enact their S pillar priorities.

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