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Greenwashing, activism and internal probes: Will ESG fuel an increase in corporate internal investigations?

Regulators, employees, investors, the media, and the public are increasingly scrutinising companies over their environmental, social, and governance claims and obligations (ESG). That scrutiny may lead to an increase in independent investigations. Frankie Everitt, a Senior Associate at international law firm Fieldfisher shares her thoughts with Business Leader on the issue.

With a growing emphasis placed on the environmental, social and governance (ESG) performance of companies, boards are becoming more aware of the need to adapt their businesses, their products and their purpose.

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Driven by an increasing demand from ‘conscious consumers’ for sustainable goods and services, coupled with regulatory changes, investor pressure, employee activism and government targets to meet net zero carbon emissions, many businesses are focussing on sustainability and governance as strategic priorities.

However, governments, regulators, the media and the public are increasingly concerned that companies are hiding behind misleading claims of sustainable products and services.

Recent examples include:

  • The UK government launching an investigation into deals branded “green” or 100 per cent renewable amid concerns that energy suppliers are misleading consumers.
  • The asset management arm of a major European bank launching an internal investigation into allegations of greenwashing in its ESG investment funds. In whistle-blower reports from the firm’s global head of sustainability, it is alleged that misleading statements made in the bank’s 2020 annual report claimed that more than half of its assets were invested using ESG criteria.
  • The UK’s Financial Conduct Authority issuing a letter to alternative fund managers warning that a number of applications for authorisation of investment funds with an ESG or sustainability focus have been poorly drafted and have fallen below expectations, even containing claims that do not bear scrutiny.
  • A fast fashion retailer continuing to face pressure in relation to its supply chain working conditions. There have been fresh allegations of exploitative labour practices at one of its approved factories in Leicester, despite it taking steps to overhaul its supply chain, ending contracts with hundreds of manufacturers and banning the use of subcontractors.

Companies already face the prospect of regulators and other enforcement bodies in their sector initiating investigations and enforcement action across a wide variety of areas within the business.

The catalyst for an investigation can come from health and safety concerns, employment, financial, competition, cyber, consumer, public policy, immigration, regulatory, risk and compliance, trade and sanctions, tax and other areas.

ESG claims and obligations are adding to that accountability and increasingly, employees are prepared to blow the whistle about potential issues within their company, which may lead to investigations.

With governments and regulators tightening legislation and regulation around ESG, the burden of companies performing and reporting on ESG obligations is growing and common metrics and standardised reporting will no doubt be required as those reporting demands increase.

Where such issues arise, companies – and public bodies – will increasingly need to conduct independent and internal investigations into ESG concerns, to prove to shareholders, the media, politicians, and the public that they take these issues seriously.

It will also be vital that organisations develop systems to prevent claims about ESG products and services leading to regulatory action or litigation.

ESG-related investigations and compliance is a nascent area, but one that we predict will increase as governments clamp down on misleading claims.

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