Smart firms are investing in ESG programs not just to showcase their cultural bona fides but to appeal to consumers and employees. But these programs can also heighten regulatory and reputational risk. Let’s explore some lessons ESG leaders could take from anti-bribery and anti-corruption probes.
FTI Consulting’s Beth Jones, Brian Ong, Edith Wong and Michael Cullen co-authored this article.
As ESG programs become more ubiquitous, investors, employees, customers and regulators are demanding more transparency and accountability from companies. For organizations, the stakes are high. Allegations of misrepresented or exaggerated ESG-related statements (so-called “greenwashing”) can result in investor activism, employee unrest or customer defection to competitors with sustainability programs that better align with their values. Collectively, these risks carry significant regulatory, reputational and financial implications.
The SEC’s creation of a climate and ESG task force, and upcoming regulations on climate-related disclosures, illustrate that the headwinds, at least in the U.S., are signaling an increasingly active regulatory enforcement environment.
U.S. authorities have been active in investigating improper or inaccurate ESG representations. In just the past year, the SEC has investigated multiple organizations over claims related to ESG and other corporate social responsibility initiatives:
- September 2021: SEC announces investigation of Activision Blizzard, one of the world’s most high-profile video game companies, over “disclosures regarding employment matters and related issues” following allegations of sexual misconduct and discrimination.
- April 2022: SEC charges Vale, a publicly traded company and one of the world’s largest iron ore producers, with “making false and misleading claims about the safety of its dams before the January 2019 collapse of its Brumadinho dam” in Brazil.
- May 2022: SEC fines BNY Mellon’s investment adviser division $1.5 million, alleging misstatements and omissions about its ESG investment considerations for certain mutual funds that it managed.
- June 2022: SEC begins investigations into Goldman Sachs over claims related to its ESG investment funds.
As ESG regulation and enforcement continue to expand, investigations likely will follow as ESG disclosure requirements and scrutiny increase. Although companies may not intentionally misrepresent their ESG commitments to stakeholders, the complexity of reporting requirements and the risk of misleading disclosures may increase; and so, too, will the need for companies to conduct their own internal investigations or investigations in response to regulatory inquiry.
What ABAC investigations can teach companies about broader ESG investigations
Over the past two decades, there have been numerous investigations into allegations of corporate malfeasance as a result of corruption and bribery schemes to secure economic benefit and the failure to maintain accurate books and records. In addition to anti-corruption as an important governance imperative under ESG, stakeholders are now scrutinizing other ESG imperatives, including carbon emissions, waste management, human trafficking and board diversity. Bribery and corruption investigations provide cautionary tales to companies and their advisers regarding broader ESG issues and offer a view into what the future landscape of ESG investigations may look like:
ESG-related allegations can be triggered by a wide range of stakeholder concerns
Historically, corruption investigations have been triggered by a variety of stakeholders, including whistleblowers, competitors and regulatory enforcement agencies. With ESG-related corporate initiatives, the scope of interest in what a company is doing within its sustainability program includes these same stakeholders, and more. ESG investigation-triggering stakeholders also include customers, non-governmental organizations (NGOs) and investors. Issues such as climate change and human trafficking can provoke strong individual reactions, which can lead to calls for the vetting of public ESG claims. In addition to the financial costs and disruptions caused by an investigation, other negative consequences resulting from greenwashing can include consumer-led brand boycotts, attention drawn by NGOs to child- and forced-labor issues, and potentially securities litigation. As such, companies need to be cognizant of stakeholder messaging around ESG risks, opportunities, strategy and progress toward goals to ensure they are communicating with accuracy, empathy, authenticity and transparency.
Traditional methodologies used in corruption and bribery investigations may prove useful for effective ESG-related investigations
These methodologies include digital forensics, investigative due diligence and transaction testing. Like the review of electronic evidence in a traditional corruption and bribery investigation, electronically stored information may contain evidence relevant to ESG-related risks. With advances in artificial intelligence and machine learning, use of these technologies is a means to drive more effective and efficient review. For example, the application of a machine learning process to the review of millions of supplier invoices to assess the sourcing of recycled materials produces efficiencies in a way that a traditional search term-based or manual review cannot.
In the same way that investigative due diligence can identify third parties with questionable affiliations to other subjects in a corruption investigation, targeted local database searches can identify third parties with ESG risks, for example those with business practices causing detrimental ecological impact or the use of unsustainable resources. In addition, physical site visits and discreet human inquiries can uncover issues that people will talk about, such as workplace safety and harassment issues.
A fundamental procedure in a corruption investigation is transaction testing used to identify business transactions that show signs of bribery or corruption. In ESG investigations involving issues like modern slavery, for example, business transactions should be tested for payments for activities like recruitment fees, which are often indicative of forced labor. Underlying documentation, such as invoices and payment support, should be reviewed for apparent business propriety.
ESG investigations can result in significant reputational harm
ESG investigations, which can involve what an organization says about its impact on the environment and society, have the potential to negatively impact the organization’s reputation, especially when ESG strategies have been touted as a competitive differentiator. During ESG investigations, it is important for companies to consider their strategy for communicating the results of the investigation and remediation plan to stakeholders. In some cases, the investigation may provide exoneration from ESG-related allegations, but in others, companies may need to acknowledge their deficiencies and provide a robust plan to regain the trust of its customers, employees and investors.
An effective sustainability program may reduce penalties in settlements with government agencies
The 10 largest settlements involving violations of the U.S. Foreign Corrupt Practices Act (FCPA) resulted in more than $15 billion in civil fines and penalties. The financial penalties stemming from ESG-related enforcement actions against Vale and BNY Mellon, which we mentioned above, have been low, but fines in the future may increase given the increasingly active regulatory and enforcement environments.
Some FCPA settlements were reduced in part due to cooperation credit obtained through voluntary self-disclosure and other cooperation actions, such as the implementation of an effective anti-corruption compliance program. Although it is unknown what types of ESG-related enforcement actions the U.S. government may undertake, the favorable position that U.S. enforcement authorities take to effective compliance programs may be a consideration in a settlement for ESG-related issues. By extension, an effective sustainability program could be viewed as a positive factor during settlement negotiations around ESG-related issues. A strong and credible sustainability program is foundational for organizations to set meaningful goals and achieve their desired objectives and targets. Therefore, it is important to conduct a current state assessment of the organization’s sustainability program, assess alignment to key industry-related standards, goals and metrics and identify gaps and priorities for enhancement.
The scope and complexity of sustainability programs and regulated reporting requirements will likely continue to increase. Companies today use ESG strategies as a competitive differentiator to demonstrate commitment to fostering environmental and social good. While this is a welcome trend, it carries certain risks for companies if they are not truthful about their strategies, goals and progress. Risks could include lengthy and costly investigations, financial penalties and reputational damage. Companies would be well-advised to look closely at the lessons learned from bribery and corruption investigations and implement those lessons within their ESG and sustainability programs.