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An Evolving ESG Landscape for Professional Service Firms

Release Date: July 2022
pdf download Implications for D&O Litigation From Climate-Related Risk

The role of professional service firms in Environmental, Social and Governance (ESG) is continuing to evolve. Firms need to address ESG issues on many fronts – from their own policies and practices to their role in ESG reporting and consulting. It is essential for professional service firms to stay informed about ESG concerns.

 

Regulatory Environment

Requirements, guidance and expectations around ESG disclosures are developing in jurisdictions around the globe, creating both opportunities and risks for professional service firms. One notable example is the U.S. Securities and Exchange Commission’s proposals that could make climate change disclosures mandatory for public issuers. The European Commission has proposed rules on sustainability reporting, including plans to make such disclosures mandatory. The proposed rules in both the E.U. and the U.S. include an assurance requirement, to be phased in over time. In the U.K., new regulations require certain companies to adopt disclosures in line with the Taskforce on Climate-related Financial Disclosures (TCFD) as of April 2022. Reporting issuers in Canada may also be subject to new climate-related disclosure rules under proposals issued by the Canadian Securities Administrators. With regulatory risk identified as a top ten risk by professional service firms in Aon’s 2021 Global Risk Management Survey, ESG regulatory developments are a key area to watch.

 

Human Capital Issues

The rising prominence of ESG has caused firms to increase their focus on human capital issues. Diversity and inclusion, pay equity, and health and safety are among the issues that are top of mind. The pandemic has highlighted the need for workforce agility and resilience while shaping how employees work. Firms are increasingly challenged to be progressive in addressing these social issues.

Heightened attention to ESG has also led to increased scrutiny on firm reputation and its impact on a firm’s attractiveness as an employer. While governance has always been of high importance for the professional services industry and its stakeholders, employees and potential recruits are becoming more critical in their evaluations of how a firm is addressing environmental and social issues. For instance, climate change “scorecards” are being used by law students entering the workforce to assess whether a firm’s values align with their own. Students are taking action to boycott firms that contribute to climate change through work performed for their clients. Furthermore, maintaining clients that are viewed as heavy carbon emitters is argued to affect retention. A strong focus on ESG represents an opportunity for firms to attract and retain talent.

As firms develop their ESG service offerings, the profession will require greater ESG expertise. Already faced with retention and recruitment challenges amid the “Great Resignation”, highly sought-after ESG talent will come at a premium. Firms have announced plans to ramp up their ESG practices, including hiring thousands of professionals, launching climate and ethics training programs for staff, naming ESG practice leaders, and investing billions into ESG service offerings. As more companies invest in sustainability, growing competition for ESG experts will present challenges for the firms.

 

Pushing for More Accountability

 

ESG-Related Activism

Activists are reviewing the role that professional service firms are playing in ESG, offering criticism and calling for more action, particularly from accountants. Some research has indicated inconsistencies in the climate-risk disclosures of over 100 carbon intensive global companies, calling into question the reliability of the information and pointing out that auditors have not addressed these discrepancies. The environmental law charity ClientEarth has advised the Big 4 that their failure to consider material climate-related risks puts them in breach of their legal duties under existing reporting requirements. Furthermore, some investors who rely on climate risk reporting for capital allocation decisions have threatened to vote against reappointing auditors that fail to address climate risk.

 

ESG-Related Claims and Complaints

Professional service firms are concerned about their potential involvement in ESG-related litigation. Climate-related cases more than doubled between 2017 and 2020 with actions related to social issues on the rise. While litigation over environmental issues has historically taken the form of public interest lawsuits, more recently plaintiffs have been exploring different strategies. The past few years have seen a rise in securities litigation and a deepening of the pool of plaintiffs. Cases have sought to drive operational change or underscore corporate responsibility, however, as reliance on ESG information for capital allocation decisions grows, the risk of corporate liability also rises.

Focusing on the ‘E’ in ESG, a brief overview of some high profile climate-related claims or complaints in various jurisdictions follows. While the cases do not name professional service firms, shifting trends require professionals to be aware of risks around the representations they are involved with.

  • Australia. In 2020, Rest, a major pension fund, agreed to a settlement with an individual who brought claims that the fund failed to provide information regarding the financial risks posed by climate change. The settlement includes commitments by Rest to take further action to consider climate-related risk in its investment strategies, as well as establishing new climate objectives and enhancing climate disclosures.
  • Netherlands. In 2019, an environmentalist group, Friends of the Earth Netherlands (Milieudefensie), filed a lawsuit against Royal Dutch Shell (RDS), claiming RDS had an obligation to reduce its CO2 emissions in line with the Paris Agreement. In 2021, in the first ruling of its kind, a Dutch court found RDS had an obligation to reduce CO2 emissions and required the company to set more aggressive emission reduction targets. RDS has filed an appeal against the decision.
  • USA. Lawsuits filed by the attorneys general of New York and Massachusetts allege ExxonMobil misled investors regarding climate change risks and the cost of greenhouse gas emissions. In 2019, the NY securities fraud case was dismissed. The suit in Massachusetts is still pending.
  • Canada. In 2016, Greenpeace Canada sent a complaint to the Alberta Securities Commission (ASC) alleging that Kinder Morgan Canada Ltd., an energy infrastructure company, failed to provide the required climate-related disclosures in connection to an initial public offering and requested the IPO be halted. The ASC reviewed the complaint, without disclosing the results. Kinder Morgan has since completed its IPO and faced additional complaints over the climate-related risk disclosures in its 2017 annual report.
 

Addressing ESG Concerns

A firm’s transparency, accountability and commitments with respect to ESG policies and practices will gain greater prominence in the coming years. ESG risk assessments, taking into account internal and external stakeholder expectations and practices, are becoming common practice in the marketplace.

Professional service firms face additional risk as they are also being scrutinized due to the ESG-related practices of their clients. Given the opportunity to influence ESG strategies and reporting, the ESG role played by professional service firms will be important going forward.

Firms need to understand the ESG risk factors impacting their industry to protect their reputation and manage potential liability exposure. Aon provides a wide range of services aimed to address top ESG concerns facing our clients, including board and c-suite oversight, human capital management, cybersecurity, climate, and supply chain risk.

The Professional Services Practice’s Risk Management Information team can help professional service firms focus on immediate risk challenges and to identify emerging risks and opportunities.

 
Audrey Jenner

 

If you would like to discuss any of the issues raised in this article, please contact Audrey Jenner or Rona E Davis.

Audrey Jenner
Vice President and Director
Montreal
Rona E Davis

Rona E Davis
Senior Vice President and Executive Director
Montreal


 
 
Laura-Wanlass

 


If you would like to discuss Aon’s ESG solutions, please contact Laura Wanlass or Patty Errico.

Laura Wanlass
Partner, Corporate Governance & ESG Advisory
Virtual


Patty-Errico

Patty Errico
Global Commercial Lead, Corporate Governance & ESG Advisory
Virtual