Managing and Mitigating ESG Integrity Risks

Summary

Exploring this nexus between ESG-related Misconduct, Civil Liability and Financial Crime, two risk categories are being outlined. First, the risks of supply chain due diligence failures such as the risk of money laundering and civil liability and second, sustainability reporting failures such as the risk of greenwashing or fraud. Also, the report highlights the need to identify, prevent and to mitigate these risks. 

Growing interest in ESG factors is reshaping business strategies to embrace responsible practices. While the attention for increasing ESG reporting obligations is rising, less attention is given to related ESG integrity risks. The expanding scope of regulatory obligations in the ESG domain significantly increases businesses’ potential exposure to ESG-related misconduct and the nexus with civil liability and financial crimes. Effectively managing and mitigating ESG integrity risks demands a comprehensive understanding of relevant regulations and potential exposure, enabling the successful embedding of preventative and risk mitigating actions within operations.

As stakeholders and regulatory bodies demand greater transparency and accountability, companies must navigate a complex landscape of potential risks related to ESG-related misconduct, civil liability, and financial crimes. Environmental misconduct includes practices such as pollution (e.g. releasing harmful pollutants into the environment) and illegal deforestation and mining. Social misconduct includes labour rights violations, unsafe working conditions and discrimination or harassment on the work floor. Examples of governance misconduct include bribery and corruption, insider trading or lack of board independence.

Under the framework of the EU Green Deal, new EU Directives driving the sustainable transition expand the scope of responsibility for ESG related misconduct. The Corporate Sustainability Reporting Directive (CSRD) requires large companies to disclose their ESG performance, enhancing transparency. The Corporate Sustainability Due Diligence Directive (CSDDD) holds companies accountable for identifying and mitigating environmental and social risks in supply chains. The Green Claims Directive ensures accurate and ethical communication of eco-friendly initiatives, countering greenwashing. Parallel to the expanding scope of responsibility for ESG related misconduct, the Environmental Crime Directive (ECD) imposes criminal penalties for harmful behaviour.

Financial crimes, including money laundering and fraud, can exploit weaknesses in company’s ESG policies. The ESG integrity landscape encompasses three main (criminal) misconduct areas of potential exposure to ESG-related crimes: engaging in harmful and criminalized activities, laundering the proceeds of ESG-related crimes and fraud – in some cases related to greenwashing. Examples of ESG-fraud are fraudulent ESG-related statements in annual reports, concealing ESG-related criminal activities in sustainability reporting and misusing ESG-related subsidies and transformation budgets. From a civil-liability perspective, risks concern misleading disclosures and wrongful acts.

To navigate this complex landscape and to manage and mitigate ESG integrity risks effectively, companies need to conduct thorough risk assessments, implementing robust policies and procedures, and continuously monitoring and evaluating the effectiveness of risk mitigation efforts. Collaborative efforts are crucial, including in-company (involvement of share- and stakeholders), intercompany (supply chain), as well as public-private collaboration.

More information?

If you would like to know more about how to manage and mitigate ESG Integrity Risks, please contact Forensic & Financial Crime Partner Maarten Rijssenbeek, Legal Partner Rozemarijn Bloemendal or Sustainability Partner Wim Bartels via the contact details below.