While anti-bribery and corruption measures and policies have become commonplace and are widely adopted and implemented by corporate entities of various sizes and industries across the globe, new important compliance topic is emerging that still may seem puzzling to many. Climate risks and sustainability are becoming increasingly critical issues for investors and capital markets in general and there is a rise in environmental, social and governance(ESG) awareness among employees, investors and regulators.
It might be a generational change that explains why an increasing number of employees are willing to hold their employers accountable with respect to environmental and social issues and are making reports to their legal and compliance departments that trigger internal investigations. The change is also led by investment funds that motivate the companies they invest in to be more transparent about the effects of their business on climate and sustainability, as well as ethical issues.
Pressure comes not only from whistleblowers and investors, but also regulators that are signaling that ESG issues will be taken seriously with more regulatory scrutiny over sustainability and ethics issues. As a result, we see an increase in the number of internal investigations, as well as corporations’ measures aimed at preventing future issues. ESG is becoming a board-level issue and management is willing to invest time and resources in prevention of litigation, regulatory and reputational risks. Public companies in particular are reporting that ESG is becoming a substantial issue, since the pressure is growing from both the investor side and the regulatory side. Some of them are even focusing more on ESG compliance than on more established enforcement areas, such as Foreign Corrupt Practices Act (FCPA). Institutional investors have expectations from companies to make ambitious ESG-related statements and regulators, on the other hand, are warning companies about the accuracy of their disclosures.
Regulators have indicated that ESG-related issues are an area of focus for enforcement. The Financial Conduct Authority (FCA) in the UK noted that ESG is high on their regulatory agenda and has created an new ESG director position. It also issued regulations requiring some of the listed companies to provide sustainability related disclosures. US Securities and Exchange Commission (SEC) has created a dedicated ESG task force within its division of enforcement and will focus on companies’ statements to the market about their efforts to prevent climate change and their sustainability strategies, to make sure that such statements are accurate and not misleading. The ESG task force does not handle its own investigations, but supports enforcement division investigations that deal with ESG-related issues.
ESG-related issues may potentially cover a broad range of corporate misconduct, from misleading disclosure regarding the company’s efforts to combat climate change to human rights violations in the context of supply chains, such as disregard or insufficient efforts to improve unacceptable working conditions at factories in the company’s supply chain. Accuracy of sustainability disclosures is an area of particular attention for companies. There is a greater desire to expand such disclosures, as this would be welcome by existing and potential investors, especially banks and investment funds, but lack of accuracy or overstatements may cause regulatory scrutiny. Major focus of the regulators so far has been publicly listed companies and asset management firmד that make misleading or exaggerated claims about their ESG credentials. Overstatements, misleading information or material gaps with respect to ESG efforts or climate risks is otherwise known and “greenwashing” and violates the rules governing public disclosures. An example of such greenwashing could be found in statements by funds that market themselves as environmentally friendly or socially responsible, but then hold stakes, for example, in traditional energy companies or otherwise violate their own investment restrictions. There is no single definition of ESG and disclosure language is open to interpretations, thus creating challenges for enforcement. It is reasonable to expect that the more opaque and ambiguous ESG disclosure statements are, the more they would be a subject of regulatory scrutiny.
As ESG-related investigations are on the rise, we invite you to carefully review the existing ESG policies or evaluate the need for their adoption. In addition, careful attention needs to be paid to public disclosures made with respect to climate, sustainability and ethical credentials and aspirations. Ideally, every business decision should be looked through an “ESG lens” not just the issues directly related to environmental regulatory work, climate change or sustainability.