Environmental, Social and Governance Investigations

32.1 Introduction

Investigations relating to environmental, social or governance issues are not new. However, during the past decade, the interest in ‘ESG’ (a term thought to have been coined by a 2004 UN Global Compact study[2]) has grown, and ESG factors have become important criteria for investors to identify material risks and, increasingly, growth opportunities. With more attention on risk and reward, ESG investigations are on the rise. These are now often led by lawyers because of the growing legal and regulatory implications, and the sensitivities frequently involved. We look at some common features and challenges of investigating these issues, and how to approach them in effective ESG-related investigations.

32.2 ESG issues and investigation triggers

Over a number of years, ESG has fast risen to the top of board agendas, with companies more aware that failure to address these matters can be detrimental to their businesses legally, financially, operationally and reputationally. Global events such as the covid-19 pandemic, #MeToo, Black Lives Matter and increased climate change activism have turned the spotlight onto ESG practices such as whistleblowing arrangements, diversity and inclusion, employee well-being and environmental crisis management. ESG issues have gained traction in global policy discussions, an example being the UN Climate Change Conference (COP27) that took place in November 2022, with a focus on measuring and tracking ESG performance. Investors and investment managers, among other stakeholders, look to ESG criteria to assess whether businesses are attractive propositions and the level of ESG risk they carry, and there is growing external pressure from governments, regulators and international organisations to do so. Business leaders are increasingly accepting the need to proactively identify their own ESG standards, against which stakeholders will hold them to account. Building compliance frameworks to meet those expectations and considering response plans are just some of the ways that companies can mitigate ESG risk.

But what are ESG issues and when do investigations into them arise? What falls within ESG is evolving, and the intersectionality between the three factors is increasingly recognised. However, the three components of ESG have been distinct issues for some time and can be broadly defined as follows:

  • Environmental: There is increasing pressure on companies to take on more responsibility for their role in environmental impacts. The environmental criteria by which a company might be judged include its use of energy and water, how it uses raw materials and deals with its waste, and how it interacts with the natural world. There is progressively more law and regulation being made in this area, including mandatory reporting obligations. Businesses are responding to these obligations and to activist investors by setting climate change and other environmental targets against which they can be held to account. An ESG-related environmental investigation can differ from a ‘traditional’ environmental investigation[3] as the focus is not only on scientific and technical assessments of root cause and impact, but also on the company’s potential culpability, its actions and what can be inferred about its governance.
  • Social: The reference to ‘social’ factors typically encompasses both the positive impacts businesses have on society and how companies remedy negative impacts or harms. The inclusion of the ‘S’ reflects the increased expectation of stakeholders to demonstrate that they have a positive impact on people and communities, and that action is taken to prevent, mitigate and remedy negative impacts on people. This stakeholder pressure, together with the serious reputational damage, financial loss, operational disruption and legal liability companies face if they are involved in human rights abuses, either directly or through their value chain, means that some companies are taking voluntary steps to reduce harm and negative impacts on people and their rights, increase positive impacts and report steps and outcomes on a voluntary basis. Mandatory reporting, and, potentially, due diligence obligations on workplace behaviours and culture, diversity and inclusion of the workforce, employee well-being and the accountability of executives drive further corporate change – and increasingly, high-profile employee whistleblowers hold employers to account when external disclosures do not match the lived experience at the organisation.[4] Fresh regulatory initiatives to protect employee well-being (such as the EU proposal for the ‘right to disconnect’,[5] and existing similar free-standing domestic legislation) will provide another basis on which employers are called to determine via internal investigation (whether or not in response to specific allegations) that the rights of workers are protected and to be legally compliant or make positive disclosures.
  • Governance: Governance factors determine, for example, how a business is controlled and overseen by its board and senior management, assesses and manages its risks, makes decisions, obtains and acts on staff feedback, remedies shortcomings and is structured. Of the three ESG factors, governance issues may seem less prominent, especially when set against the urgency of climate change or severe human rights abuses. However, a corporate’s environmental or social failures can often arise where good governance is lacking. Good governance factors can range from accurate and transparent company reporting, to employee engagement (including grievance and collective consultation mechanisms, and whistleblowing arrangements). Indeed, poor corporate governance allegations[6] or allegations of bribery and corruption underpin a number of high-profile ESG failings. Poor governance can also result in, or amplify, the effect of bribery and corruption failings or failings in a business’s supply chain, among other things. The quality of corporate governance not only has a bearing on whether incidents occur but also how effectively they are investigated and remedied.

Against this backdrop, there are many potential triggers for investigation – both internal and external. Salient examples include:

  • Environmental disasters: Events such as an oil spill or the collapse of a dam can trigger investigations into the adequacy of the risk management processes businesses put in place to prevent them or into disclosures made relating to the risk of environmental harm.[7]
  • Supply chain issues: The complexity and global nature of supply chains render them vulnerable to bribery and corruption, and human rights abuses, that often entail labour abuses, but can also include negative impacts on other human rights, including rights related to health, food, land or water.[8]
  • Displacement of communities: Many large-scale infrastructure projects displace communities. The social impact can be severe and can trigger huge pressure from non-governmental organisations (NGOs) and others to conduct investigations.
  • Discrimination, harassment and culture: Alleged incidents of workplace misconduct continue to trigger investigations. Poor culture in all or part of the business, including where employees feel unable to speak up, can manifest itself in many ways, such as in discriminatory behaviour[9] or sexual harassment allegations.[10] For regulated entities in the financial sector, non-financial misconduct (and more broadly, a non-inclusive culture or environment) is increasingly seen as a failing by regulators. For example, in a recent round of letters to remuneration committee chairs, the UK Financial Conduct Authority (FCA) re-emphasised the importance of culture and accountability – and ESG – to incentivisation and rewards,[11] and the UK Financial Reporting Council has also recently published a guide entitled ‘Corporate Purpose and ESG’.[12]
  • Greenwashing: Investigations of allegations of greenwashing, namely the misselling or misstatement of the sustainability credentials of a company or its financial products or performance,[13] are on the rise. This has been the subject of growing regulatory scrutiny. In the United Kingdom, the FCA published a set of guiding principles to address greenwashing in ESG and sustainable investment funds in July 2021 and the following year announced it intended to apply increasing scrutiny to ESG claims made by hedge funds and private equity firms.[14] The UK Competition and Markets Authority (CMA) published the Green Claims Code in September 2021, requiring companies to be able to substantiate any environmental claims they make about their products.[15] In January 2022, the CMA commenced a compliance review of environmental claims made in various sectors, starting with fashion retail.[16] The number of greenwashing-related complaints received and upheld by the UK Advertising Standards Authority and advertising regulators in other jurisdictions has also increased in recent years.[17] In the United States, the Securities and Exchange Commission (SEC) formed a task force in March 2021 to proactively identify mis­statements in ESG disclosures by public companies and investment managers, and announced three sets of proposed rules and disclosure requirements in the first half of 2022, furthering anticipated enforcement in this space.[18] Unsubstantiated claims regarding the nature of ESG-focused funds are of interest to regulators because many charge substantially more in fees and other costs than non-ESG funds, and financial institutions offering such funds are increasingly subject to scrutiny leading to investigations and fines.[19]

32.3 Legal and regulatory frameworks

As with any investigation, a key step is ascertaining the standards against which the subject matter will be assessed. These can be particularly complex in the ESG sphere. While there will be clear legal obligations engaged in some investigations, in others, companies may need to look at both ‘soft’ and ‘hard’ law commitments. Although not legally binding, soft law is typically prominent in the design and execution of ESG investigations, as companies seek to demonstrate not only strict compliance with law or regulation, but also transparency and a more comprehensive understanding of ESG issues. Internal standards (including corporate policies and procedures), and the company’s external statements and disclosures, may also be relevant benchmarks in investigations (and reputational management may need to be employed).

In some areas, such as human rights, there is a relatively advanced benchmarking framework for companies – against which knowledgeable stakeholders will also expect a company to assess its conduct. In other areas, the applicable standards will be less clear: the company will need to come to a view on what frameworks it will apply, while considering the likely expectations of stakeholders (particularly where corporate standards have been publicly expressed). This lack of clarity, and the potential for a mismatch in expectations, makes ESG investigations particularly challenging.

32.3.1 Hard law

A vast amount of domestic legislation and regulation has underpinned each of the ESG pillars for several decades. For example, the broad frameworks underpinning environmental protection in the United Kingdom are well established.[20]

Further legislation and regulation focused on corporate involvement in ESG issues has been developing on both sides of the Atlantic.

  • In the United Kingdom, this includes a duty on directors to promote the success of the company, including by having regard to a series of factors promoting ESG objectives.[21] In December 2020, the FCA introduced a rule requiring premium listed commercial companies to make disclosures consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD – see further below), or explain why they are not able to do so. The FCA may extend the scope of the rule to include all listed companies in the future. As regulators respond to investor and consumer concerns regarding good governance, a number of corporate obligations have been, or are expected to be, implemented, including individual accountability regimes, such as the Senior Managers and Certification Regime for certain regulated entities in the United Kingdom, under which the regulator expects ‘firms to have clear roles and responsibilities for the board and its relevant sub-committees in managing the risk from climate change’.[22]
  • In the United States, regulations are used at the federal level, but also at the state level, such as the Californian legislation requiring companies to disclose the extent of their due diligence with respect to human trafficking and slavery in their supply chains.[23]

To comply with these requirements companies may need to carry out investigations, for example to identify whether the company is involved in negative human rights impacts, or as part of its due diligence to assess its environmental impacts. Moreover, the company may, during the course of preparing to comply with reporting requirements, identify that it has failed to properly disclose on ESG matters. This, in turn, may trigger an investigation into the failure to have proper processes in place, or in some cases, the need to report the decision, progress or outcome of an ESG investigation under the applicable rules.

32.3.2 Soft law

Soft law standards and principles provide a framework for companies seeking to advance their ESG credentials. There are two broad categories that are most likely to be relevant when conducting an ESG investigation: consensus-based international standards and principles, and voluntary standards and principles.

32.3.2.1 International standards and principles

The most notable of the consensus-based international standards and principles are the UN Guiding Principles on Business and Human Rights (UNGPs). The UNGPs detail processes known collectively as human rights due diligence, which involves a company taking steps to identify, prevent, mitigate and account for how it addresses its potential or actual adverse human rights impacts, as well as processes to enable remediation of impacts the company has caused or contributed to. These processes have been applied beyond human rights, being incorporated in the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises (OECD Guidelines), for example, which prescribe a due diligence approach applicable in all areas where businesses can be expected to act responsibly (for example, the environment). Those carrying out ESG-related investigations increasingly consider whether the key precepts of the UNGPs and OECD Guidelines have been met in the conduct being investigated.

Further, the International Financial Reporting Standards Foundation’s global ESG reporting standard, expected to be finalised in 2022, will be set by the new International Sustainability Standards Board, with its scope, format and content to be determined.[24] Ultimately the standards will need to be adopted in domestic law by jurisdictions or be a voluntary standard that companies adhere to alongside any mandatory regulatory reporting.

32.3.2.2 Voluntary standards and principles

Prominent voluntary ESG regimes at an international level include the Sustainability Accounting Standards Board and the Global Reporting Initiative. The latter is an independent organisation based in the Netherlands aiming to provide a common language for organisations seeking to communicate their ESG impacts. It creates accountability by allowing investors to see whether companies are enacting environmental conduct standards. Companies volunteer to be held accountable to evidence their good ESG practices. In respect of climate, the TCFD, created in 2015 by the Financial Stability Board, has developed a framework to help public companies more effectively disclose climate-related risks and opportunities through their existing disclosure processes. The TCFD sets out a reporting framework based on a set of consistent disclosure recommendations for use by companies to make their climate-related disclosures more transparent and comparable, covering four different categories: governance, strategy, risk management, and metrics and targets.

Specific jurisdictional standards and principles, such as the UK Corporate Governance Code, may also apply. The FCA requires all companies with a UK premium equity shares listing to annually report on their application of the Code – on a ‘comply or explain’ basis, which includes setting out where they have not applied it – effectively making it part of company law for those entities. These rules have recently been overhauled to include fresh targets for board diversity – seen as a core indicator of a healthy corporate culture from an ESG perspective – and further revisions to reflect expanded ESG and sustainability reporting were proposed by the Financial Reporting Council in July 2022.[25] Private companies are encouraged to apply the Code, but do not have the same reporting requirement.

ESG-related voluntary standards and principles can also be industry or sector-specific. For example, there are several financial sector voluntary initiatives, such as the Equator Principles, UN Environment Programme Finance Initiative/UN Global Compact Principles for Responsible Banking and UN Principles for Responsible Investing for investment managers and other investors. Similarly, the extractives industry is encouraged to look to standards, including the Extractive Industries Transparency Initiative, the Responsible Gold Mining Principles and the International Council on Mining and Metals 10 Sustainable Development Principles. In some situations, companies will need to apply standards and principles as part of a commercial relationship; for example, clients of the International Finance Corporation (IFC) are required to uphold the IFC Performance Standards.

Companies subject to an ESG-related investigation should ensure they adhere to any voluntary standards and principles that they claim to follow, to protect the integrity of their ESG commitments.

32.3.3 Corporate standards

In addition to hard and soft law obligations, corporate standards – policies, procedures, codes of conduct and values – are essential benchmarks for an ESG-related investigation. This is particularly the case where a company makes public its ESG commitments, indicating to stakeholders that these are the standards it will hold itself, its employees and its business partners to. An ESG-related investigation will frequently find that corporate standards, and systems and controls to meet them, are part of the problem. In all ESG-related investigations, but particularly those where governance is found lacking, there is likely to be the need to feed back into the business the conclusions of the investigation and actions for putting in place more robust corporate standards – and ensuring compliance with and effective monitoring of those standards – to address investigation findings.

32.4 Particularities of ESG-related investigations

The considerations relevant to traditional investigation as to the scope, claims to privilege, resourcing, available expertise, governance, engagement with relevant regulators and law enforcement, engagement with stakeholders, etc., also apply in ESG-related investigations. However, ESG investigations raise a number of additional considerations and challenges, some of which are set out below.

32.4.1 Triggers

Many of the triggers for ESG investigations, such as customer complaints, employees escalating concerns, employee surveys, whistleblowing reports, reviews by internal compliance or audit functions, or questions from regulators are common in any investigation. However, in ESG-related investigations, the range of stakeholders almost always extends further, and the ways issues can come to the fore are generally more varied. Numerous NGOs, consumer and employee groups, and the media have been actively exposing companies on ESG matters for some years, and investors, regulators, governments and policymakers now frequently join those stakeholders in applying pressure on companies facing ESG issues. Triggers may include enquiries by NGOs, internal leaks to NGOs or the press and political pressure. These triggers are less easy to predict and monitor, and companies may find themselves more at risk of being blindsided by the discovery of an ESG issue and under more pressure to provide a response.

In such circumstances, companies should ensure that they counter this with an effective communications strategy at an early stage. This may be part of a wider crisis management strategy in the context of significant matters – but in almost all ESG investigations circumstances will be relevant. Scoping is always important in the management of any investigation, but the scrutiny will likely be greater when considering whether it is appropriate for the company to investigate a particular ESG incident, or to undertake a wider investigation (for example, where a harassment incident indicates a more systemic cultural problem). An ill-advised press release that overpromises on the investigation may cause the company to lose control of the scope and set it up to disappoint stakeholders from the outset.

32.4.2 Investigator expertise and independence

The many and varied stakeholders involved in ESG-related investigations may take a keen interest in not only the outcome and findings of the investigation but also its approach and conduct.

ESG expertise is growing within companies, but for those lacking the resources of large institutions, it may be necessary to bring in specialists in the ESG issues at play alongside others experienced in conducting investigations. Inadequate expertise or insufficient resources will undermine the investigation’s credibility.

Independence can be particularly important in ESG investigations, which often deal with sensitive issues, and any real or perceived conflict of interest may cast doubt on the investigation’s integrity. Different degrees of independence may be implemented, from conducting the investigation internally with external legal advice, to instructing external counsel or another third party to lead the investigation. Whatever the approach, companies should be cautious in responding in the immediate aftermath of an ESG incident with a press release announcing a fully independent investigation. A stakeholder’s interpretation of ‘independent’ in this context might translate as an expectation that the investigation will be wholly conducted by a third party with no existing relationship, or likely future relationship, with the company or its investors. Where this is not case (for example, when the investigation is a collaboration between the company and its external counsel),[26] it is important to be clear about the approach to ‘independence’ to avoid misleading engaged stakeholders.

32.4.3 Transparency, privilege and reporting

Companies may face pressure to be transparent about processes and their effectiveness, to ensure accountability. There could be tensions between these considerations and legal risks for the business. Companies will often make – and be expected by stakeholders to make – transparency commitments, which might include, in an ESG-related investigation, the publication of findings, such as a written report. Transparency commitments may also be enshrined in law, with some jurisdictions requiring a degree of reporting on non-financial issues.

This may have implications for the company’s ability to claim legal privilege over documents produced as part of the investigation. A company intending to have the benefit of legal privilege will need to set up the investigation team according to the requirements of the relevant jurisdictions. However, while for internal investigations there are usually alternatives to publishing formal reports in order not to waive privilege (such as providing oral updates on factual findings), this may be insufficient to adequately respond to the various stakeholders in an ESG investigation, who may expect a written report. Companies often make reports on ESG issues publicly available as a result.[27] Companies will want to consider this at the outset of any investigation and not assume that materials produced along the way will necessarily be withheld from publication at a later stage.

32.4.4 Stakeholder engagement

Traditional investigations tend to be inward-looking and largely focus on the conduct and the consequential risks to the company. They often involve determining whether breaches or failings have occurred and identifying responsible parties. ESG-related investigations focus not only on business risk, but also on risk to external parties affected by the conduct under investigation. Where there are external ‘rights holders’,[28] this will likely mean more engagement with potential victims, local communities, NGOs and others whose rights may be affected, or who speak for those affected, by the relevant issues.

ESG investigations can touch on matters that make stakeholder engagement very challenging. Investigations looking at possible infringements of human rights or environmental disasters will involve dealing with potential victims, and often whole communities, who have been deeply affected. Political tensions might also arise; for example, state-sponsored human rights abuses (e.g., in relation to forced labour) mean that a company with operations in certain jurisdictions can be at risk if it does not navigate an investigation carefully. Given these sensitivities, stakeholder engagement is a touchstone for each step of an ESG investigation. Engagement should be built into the investigation plan, and extensive interaction with external stakeholders such as rights holders and NGOs may be required.

Companies also need to understand that the existence of readily identifiable victims, rights holders and whistleblowers can change the dynamics of the investigation, and this frequently occurs in ESG investigations. Their rights will need to be carefully handled, including in interviews. This may involve a balancing of requests for anonymity and data protection issues against the need to put allegations to implicated parties and report to stakeholders.

32.4.5 Heightened business risk

Traditionally, most corporate investigations will carry reputational, financial, operational and legal risk for the company. ESG-related investigations are no different, but typically those risks can be easily heightened.

  • Reputational risk: An ESG investigation that is not properly handled can result in a good reputation built up over many years being lost overnight. Investors and wider society increasingly expect ESG factors to be taken into account by companies to guide governance, decision-making and strategy as part of responsible business conduct. Recent years have seen a rise in activist shareholders proposing or supporting resolutions requiring companies to adopt gold standards on ESG issues, or pushing for changes in corporate governance, as well as publishing score cards comparing companies’ ESG performance. These actions are often supported by consumers and NGOs, who may also call for boycotts, generate negative publicity through campaigning on ESG issues, or put pressure on regulators to intervene and investigate allegations of ESG failures.
  • Financial risk: As investors increasingly focus on, and publicly commit to, evaluating their holdings based on ESG criteria, failure to properly investigate and remediate ESG issues can deter investors, resulting in lower market capitalisation and access to capital. This is illustrated, for example, by Unilever’s public statement that its approach of integrating human rights and other sustainability considerations into mergers and acquisitions made it an attractive buyer that might be differentiated among bids.[29]
  • Operational risk: Clearly, ESG incidents can lead to business interruption for the company or its supply chains. Where a misconducted investigation further damages a company’s relationships with stakeholders, such as local communities, this may, for example, have implications for local recruitment, or amplify the risk that groups take actions to interrupt company business.
  • Legal risk: While follow-on litigation and regulatory enforcement is a very real risk following many investigations, ESG issues attract a lot of attention. Increasing political and societal interest means additional prominence of ESG incidents in the media; there has been a rise in shareholder activism and NGO use of litigation to seek corporate accountability;[30] claimant firms and funders are active in the space; and regulators will likely feel they need to be seen to be taking action. To take climate change as an example, in recent years shareholders have pursued claims for failure to adequately report climate change risks, as well as for breach of directors’ fiduciary duties to take the risks seriously in their decision-making. NGOs bring strategic claims for ESG failures, as well as supporting alleged victims in bringing claims. Businesses have faced increasing litigation in respect of non-financial misconduct, in particular harassment and discrimination allegations in the wake of #MeToo and Black Lives Matter. Increased claims by employee whistleblowers alleging that they have been subjected to a detriment or dismissal as a result of an ESG-type disclosure (for example, that a company is greenwashing products) are anticipated. Key to mitigating legal risk is to consider it from the outset, including awareness that the content of the investigation might feed, and be disclosed in, claims or enforcement actions in the future. Clear boundaries on the information produced and to whom it is circulated during the investigation will assist in containing material produced, as will communications protocols giving those privy to relevant information guidance on what communications are and are not appropriate.

While control over the external environment to mitigate the risk is more difficult, companies can take steps in advance of an incident occurring to encourage employees to raise issues internally before they escalate into business risk or are leaked to shareholders, the media or NGOs: promoting a strong internal ‘speak up’ culture; having efficient grievance and whistleblowing processes; engaging with staff at all levels; monitoring the effectiveness and outcomes of grievance processes; and appointing a non-executive or supervisory director with responsibility for engagement on these issues. Once the investigation starts, regular engagement with stakeholders will be important to try to minimise any dissatisfaction with the outcome and the likelihood of stakeholders needing to resort to other mechanisms, such as the courts, to seek remedy and redress.

32.4.6 Remediation

It is important from a governance and stakeholder engagement perspective to track recommendations and actions arising as the investigation progresses. But consideration of remediation is not something that can be left to the end of an ESG-related investigation. While remediation follows many investigations, the sensitivity and high-profile nature of ESG issues mean that there will likely be a very strong expectation that an ESG-related investigation considers remediation as part of its recommendations, and so the thinking on remediation will need to be progressed alongside the investigation. This is particularly the case with societal issues, where frameworks such as the UNGPs require businesses to offer or participate in remediation where they have caused or contributed to adverse human rights impacts. Under such frameworks, whether or not businesses have caused or contributed to negative impacts, they are expected to design and implement grievance mechanisms and reporting channels to facilitate prompt and effective identification and resolution of potential future issues, as well as mechanisms to evaluate their own performance in this regard. Moreover, what constitutes remediation is, in the context of ESG incidents, broader than simply monetary compensation, and can include apologies, restitution, rehabilitation, injunctive relief and guarantees to guard against repeat instances in the future. In some cases, remediation may include disciplinary sanctions, which must be handled sensitively and appropriately to balance appropriate investigatory action with employment law requirements to mitigate future risk.

Some ESG issues may not be quickly remedied, and statements around remediation need to be realistic; failure to act on commitments could result in further scrutiny or criticism. Similarly, remediation may require actions by third parties (for example, within the supply chain), where practicalities and contractual arrangements may hinder swift remediation.


Footnotes

[1] Emily Goddard, Anna Kirkpatrick and Ellen Lake are senior associates at Clifford Chance. The authors would like to thank their colleagues Amy Bird, Michael Coxall and Michelle Williams for their assistance in preparing this chapter.

[2] The Global Compact, ‘Who Cares Wins: Connecting Financial Markets to a Changing World’ (2004). In 2006, the concept of ESG was integrated into the UN-backed Principles for Responsible Investment, which provide a framework for the incorporation of ESG factors into investment practice.

[3] See, for example, BP’s investigation into the Deepwater Horizon matter in 2010. The technical report by BP’s internal incident team was made publicly available: ‘Deepwater Horizon, Accident Investigation Report’ (8 September 2010), https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/sustainability/issue-briefings/deepwater-horizon -accident-investigation-report.pdf.

[4] For example, Frances Haugen and Facebook.

[5] See, for example, Clifford Chance, ‘Protecting Mental Health in the Digital Workspace: the Right to Disconnect’ (July 2022), https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2022/07/Right-to-disconnect-directive-employment-client-briefing.pdf.

[6] See, for example, the multiple investigations into Volkswagen’s emissions testing, ‘Volkswagen to sue former management over Dieselgate’ (26 March 2021), https://globalinvestigationsreview.com/fraud/german-car-manufacturer-volkswagen -will-take-legal-action-against-its-former-ceo-and-the-head-of-its-audi-unit-over-alleged-negligence-linked-the-long-running-and-costly-diesel-emissions-scandal.

[7] See, for example, the US Securities and Exchange Commission’s (SEC) charge against Vale SA in April 2022 regarding false and misleading claims about the safety of its dams prior to the collapse of the Brumadinho dam in 2019, killing 270 people and causing environmental and social harm: ‘SEC Charges Brazilian Mining Company with Misleading Investors about Safety Prior to Deadly Dam Collapse’ (28 April 2022), https://www.sec.gov/news/press-release/2022-72.

[8] See, for example, allegations of forced labour use at supplier factories, ‘BooHoo to launch investigations into its supply chains: Independent Review into the boohoo Group PLC’s Leicester supply chain’ (24 September 2020), https://www.boohooplc.com/sites/boohoo-corp/files/final-report-open-version-24.9.2020.pdf.

[9] See, for example, the investigation commissioned by BrewDog following allegations from ex-employees about a ‘culture of fear’ at the company, ‘Culture & Inclusion Review – High Level Findings’, https://www.brewdog.com/uk/independent-culture-review; and the investigation by the United Kingdom’s Conservative Party following high-profile allegations of Islamophobia, ‘Report of the independent investigation into alleged discrimination, citing protected characteristics, within the conservative and unionist party in England, Wales and Northern Ireland’, https://singhinvestigation.co.uk/.

[10] See, for example, Rio Tinto’s external review of its workplace culture, which identified that bullying, sexual harassment, racism and other forms of discrimination were prevalent throughout the company in February 2022, https://www.riotinto.com/news/releases/ 2022/Rio-Tinto-releases-external-review-of-workplace-culture; and the high-profile investigation into alleged misconduct of the chief executive officer (CEO) of UK fashion retailer Ted Baker, https://markets.ft.com/data/announce/detail?dockey=1323-14036908 -6QQK7UD9OP59VBEI1KK552QP46.

[11] FCA, Dear Chair of the Remuneration Committee Letter (2 August 2022), https://www.fca.org.uk/publication/correspondence/dear-chair-remuneration-committee-2022.pdf.

[12] Financial Reporting Council (FRC), ‘In Focus: Corporate Purpose and ESG’ (which follows on from ‘Creating Positive Culture – Opportunities and Challenges’) (April 2022), https://www.frc.org.uk/getattachment/Directors/The-Culture-Project/FRC-In-Focus-Corporate-Purpose_April-2022-(1).pdf.

[13] Similarly, there is an emerging trend relating to concerns over ‘social washing’.

[14] FCA Dear Chair letter, ‘Authorised ESG & Sustainable Investment Funds: improving quality and clarity’ (19 July 2021), https://www.fca.org.uk/publication/correspondence/dear-chair -letter-authorised-esg-sustainable-investment-funds.pdf; FCA Dear Chief Executive letter ‘Our Alternative Supervisory Strategy’ (9 August 2022), https://www.fca.org.uk/publication/correspondence/portfolio-letter-alternatives-2022.pdf.

[15] Competition and Markets Authority (CMA) Guidance, ‘Making environmental claims on goods and services’ (20 September 2021), https://www.gov.uk/government/publications/green-claims-code-making-environmental-claims/environmental-claims-on-goods -and-services.

[16] CMA press release, ‘Misleading environmental claims’ (originally published 2 November 2020, updated 29 July 2022), https://www.gov.uk/cma-cases/misleading-environmental-claims. In connection with its review of the fashion retail sector, the CMA opened investigations into three fashion brands in July 2022, citing concerns that the brands’ marketing implies that their products are more sustainable and/or environmentally friendly than they are, ‘ASOS, Boohoo and Asda investigated over “green” fashion claims’ (29 July 2022) https://www.gov.uk/ government/news/asos-boohoo-and-asda-investigated-over-fashion-green-claims.

[17] See, for example, the Advertising Standards Authority’s (ASA) decision to uphold complaints against Shell UK Ltd relating to a radio advertisement that all of the carbon emissions from fuel purchased by members of a Shell loyalty scheme were offset, ‘ASA Ruling on Shell UK Ltd’ (8 July 2020), https://www.asa.org.uk/rulings/shell-uk-ltd-g20-1049869-shell-uk-ltd.html; and the decision of the Dutch Advertising Code Committee to uphold complaints against KLM relating to an advertisement implying that customers could opt to completely offset the carbon emissions from their flights, ‘Stichting Reclame Code – File 2021/00553’, https://www.reclamecode.nl/uitspraken/klm/reizen-en-toerisme-2021-00553/338478/.

[18] SEC press release, ‘SEC Announces Enforcement Task Force Focused on Climate and ESG Issues’ (4 March 2021), https://www.sec.gov/news/press-release/2021-42; SEC press release ‘SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors’ (21 March 2022), https://www.sec.gov/news/press-release/2022-46; SEC press release ‘SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices’ (25 May 2022), https://www.sec.gov/news/press-release/2022-92; SEC press release ‘SEC proposes Rule Chance to Prevent Misleading or Deceptive Fund Names’ (25 May 2022), https://www.sec.gov/news/press-release/2022-91.

[19] See, for example: in May 2022, BNY Mellon Investment Adviser Inc settled a charge with the SEC for US$1.5 million following an investigation over whether the investment adviser had misled investors regarding the ESG credentials of certain funds, SEC Press Release, ‘SEC Charges BNY Mellon Investment Adviser for Misstatements and Omissions Concerning ESG Considerations’ (23 May 2022), https://www.sec.gov/news/press-release/2022-86; investigations in the United States (by the SEC and Department of Justice) and in Germany (by the Federal Financial Supervisory Authority) into DWS, the asset management branch of Deutsche Bank, following allegations by a whistleblower (the former Head of Sustainability at DWS) that the company overstates its use of sustainable investing criteria (which led to the resignation of DWS’s CEO after a raid on its Frankfurt office in connection with the German investigation in June 2022), https://www.ft.com/content/ff27167d-5339-47b8-a261-6f25e1534942, https://www.ft.com/content/50f5c4a1-5ebe-40cc-a89f-2952f58ba324; and the SEC investigation launched in June 2022 into funds managed by Goldman Sachs whose names contain ‘ESG’ or ‘clean energy’, https://www.ft.com/content/5812ab1f-c2d4-4681-a6be-45f0befd92df.

[20] In the United Kingdom, environmental legislation is constantly being amended, updated and consolidated, but current examples include the Environment Act 2021, the Environmental Protection Act 1990 and Environmental Permitting (England and Wales) Regulations 2016.

[21] Companies Act 2006, s.172.

[22] Prudential Regulation Authority, Supervisory Statement SS3/19, ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ (April 2019), https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory -statement/2019/ss319.

[23] The California Transparency in Supply Chains Act.

[24] See the International Financial Reporting Standards’ Sustainability-related Reporting website for current status, at https://www.ifrs.org/projects/work-plan/sustainability -reporting/#current-stage.

[25] FRC position paper, ‘Restoring Trust in Audit and Corporate Governance’ (12 July 2022), https://www.frc.org.uk/getattachment/aafabbc3-81a3-4db3-9199-8aaebb070c7f/FRC-Position -Paper-for-Board-Awayday_-July_2022.pdf.

[26] This is usually an effective approach, through the combination of external counsel’s expertise, and internal personnel’s familiarity with the company’s business and internal standards.

[27] See, for example, the BooHoo investigation, supra note 8.

[28] Under the Universal Declaration of Human Rights, all human beings are ‘rights holders’; individuals are rights holders that can make claims, and states and other actors are ‘duty bearers’ that are responsible and can be held accountable for their acts or omissions.

[29] Unilever Human Rights Progress Report 2017, p. 12, https://www.unilever.com/Images/human-rights-progress-report_tcm244-513973_en.pdf. ‘Our approach to both environmental and social sustainability makes us an attractive buyer to many companies/shareholders who share our values and can be an important differentiator in a field of bidders.’

[30] See, for example, Vedanta Resources PLC and another v. Lungowe and Others [2019] UKSC 20 (regarding alleged toxic emissions from the Nchanga Copper Mine in Zambia. The claimants are a group of 1,826 Zambian citizens alleging that both their health and their farming activities have been damaged by repeated discharges of toxic matter from the copper mine into their water sources from 2005 to date); Mariana & Others v. BHP Group PLC and another [2021] EWCA Civ 1156 (the Court of Appeal granted the applicants permission to appeal against the High Court decision in relation to a claim arising from the collapse of a Brazilian dam in 2015. The claimant group is made up of at least 200,000 people); Milieudefensie et al v. Shell [Hague District Court, Judgment of 29 January 2021 C/09/365498 / HA ZA 10-1677 (zaak a) + C/09/330891 / HA ZA 09-0579] (the Court found in favour of four Nigerian farmers and a number of environmental activists following six pipeline leaks in Nigeria. Shell’s Nigerian subsidiary and the parent company, Royal Dutch Shell, were found to have violated their duty of care); Okpabi and others v. Royal Dutch Shell Plc and another [2021] UKSC 3 (the UK Supreme Court concluded that it was at least arguable that the parent company owed a duty of care to the claimant Nigerian citizens in respect of alleged environmental damage and human rights abuses arising from oil leaks from pipelines and associated infrastructure operated by Shell’s Nigerian subsidiary); and the derivative action launched by ClientEarth against the board of directors of Shell, which as of August 2022 remains in the pre-action stage (regarding the directors’ mismanagement of climate risk and failure to prepare for Shell’s transition to net-zero). The claim is based on breach of directors’ duties under ss.172 and 174 of the Companies Act 2006.

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