Various high-profile campaigns, such as those led by Extinction Rebellion, Black Lives Matter, and the MeToo movement, have shone a spotlight on environmental, social and governance (“ESG”) issues and the importance of ensuring that organisations and individuals are held accountable for their actions. This is where ESG investigations are your most valuable asset.
Naturally, where corporate accountability is demanded, the necessity of robust investigatory practices becomes even more crucial. Where allegations of corporate or individual wrongdoing are made, organisations need to ensure that they have the necessary expertise and appetite to conduct ESG investigations in accordance with best practice.
Just as stakeholders will evaluate an organisation’s ethos and commitment to ESG initiatives, they will also assess an organisation’s approach to identifying and remedying wrongdoing when it arises. There’s no doubt that culture and accountability continue to be seen as key factors in ethical investment practices. With this in mind, we should expect to see an upward trend in the number of ESG investigations taking place.
Why are ESG investigations on the rise and why are they important?
1) A growing demand from stakeholders for business accountability, transparency and internal scrutiny
Conducting a robust and thorough investigation into ESG issues will provide senior management with the necessary information to make informed ESG decisions and to ensure that steps are taken to mitigate, remediate, improve and manage potential risks. In turn, this will help facilitate business engagement with stakeholders and, crucially, regulators.
2) An increased focus on social failings and reputational damage
As is clear from the example of fashion retailer Boohoo (who saw £500m wiped off its value when stocks plummeted 18% following allegations of health and safety regulation breaches[1]), the market is showing greater responsiveness to social failings and perceived unethical practices. Social failings can cause immeasurable reputational damage, leading to both immediate and longer-term impact on a company’s bottom line. Companies weathering a reputational crisis will often face an immediate reduction in share price (as was the case for Boohoo), as well as the longer-term consequences caused by the loss of brand trust, with customers and investors deflecting to competitors they perceive to be more aligned with their own corporate and personal values. This emphasises the need to respond to ESG risks in a timely manner; a swift response with a fair and thorough investigation can help senior managers identify potential breaches and act swiftly to put in place remedial action. Failure to do so can speak to a brand’s ethics as loudly as the initial wrongdoing itself.
3) The rapidly changing landscape
With ESG rising in prominence, we are witnessing accelerated regulatory changes, placing further obligations upon organisations to keep pace. ESG investigations are therefore an invaluable tool, not only to uncover and address any potential wrongdoing, but also to function as a risk assessment, through which an organisation can conduct gap analysis and consequently refine its policies and procedures.
4) Increasing use of whistleblowing channels as a mechanism to raise ESG concerns
Whistleblowers are now increasingly reporting ESG-related issues, such as concerns relating to the sustainability of their supply chain; allegations of workforce misconduct; a lack of diversity and inclusion; health and safety; and employee wellbeing. Undertaking independent internal investigations into allegations of wrongdoing is a necessary step to ensure the effectiveness of the whistleblowing channel. Through such investigations, organisations will find themselves better equipped to assess the credibility of allegations and, as a result, their potential exposure, enabling any remedial measures to be swiftly implemented. Such investigations also demonstrate to internal stakeholders that the ethical standards a company subscribes to aren’t just tokenistic, and that reports of wrongdoing will be taken seriously. In this way, ESG investigations also act as a deterrent for future misconduct.
5) Culture and governance
Stakeholders now expect to see evidence of good corporate governance, with an organisation’s purpose, decision-making processes and senior management oversight increasingly scrutinised. Internal ESG investigations offer the chance to identify any potential management concerns and provide the means by which business practices and corporate culture can be benchmarked against industry best practice. Identifying and mitigating risk at an early stage will not only reassure stakeholders, but will also enable organisations to avoid the pitfalls of poor corporate governance, and the subsequently severe reputational and financial penalties.
6) Bribery and corruption
Bribery and corruption continues to be a major concern for investors who will look unfavourably at organisations whose processes and systems are not deemed adequate to prevent such wrongdoing. Internal reviews of ABC policies and procedures are therefore crucial, not only to identify possible misconduct, but to also carry out internal risk assessments to assess how an organisation can best promote and achieve its sustainable development goals.
7) Increased regulatory scrutiny and enforcement action
With increased prominence in the market, ESG issues continue to be subject to an evolving regulatory landscape. Some of the key provisions include:
- ESG disclosures
We are increasingly seeing organisations accused of ‘greenwashing’ and ‘social-washing’ practices; i.e. conveying a false impression of their environmental and social conscience. ESG investigations offer the ability to assess the reality of business practices, to see how far they measure up to their public communications and, where disparity exists, adopt urgent remedial measures to ensure alignment.
- Human rights and supply chain sustainability
Now subject to more onerous disclosure and reporting obligations, businesses are expected to conduct due diligence in relation to the potential human rights and environmental impacts of their own operations, as well as those of their supply chains. ESG investigations give firms vital visibility and oversight over current practices and the risks posed by third and fourth parties with whom they work (or are considering working with), in order to assess and remediate any potential negative impact.
- Climate change and environmental issues
There has been a significant rise in claims based on climate change and environmental issues, and so organisations operating in certain sectors, such as the extractives industry, face an unavoidable reality: they’re highly likely to be heavily scrutinised by stakeholders due to the environmental impact of their operations. The same goes for the financial services industry: earlier this year, Deutsche Bank A.G.’s asset-management arm, DWS Group, became the focus of a three-pronged investigation by the US Department of Justice, the Securities and Exchange Commission and Germany’s BaFin. The probe followed allegations levelled by the asset manager’s ex sustainability chief, Desiree Fixler, of significant greenwashing.[2] When markets opened following the news that authorities were investigating sustainability concerns, DWS Group’s share price slumped by more than 10%.[3]
Continually assessing your corporate ESG performance through ESG investigations gives companies the invaluable opportunity to preemptively identify and mitigate any potential wrongdoing before incurring the wrath of regulators, stakeholders and the court of public opinion. - Sanctions
The recently approved EU Global Human Rights Sanctions regime, which introduced restrictive measures against serious human rights violations and abuses, emphasises the robust stance taken by many governments to tackle human rights violations. Going forward, human rights violations are likely to feature as an increasing concern for organisations – internal investigations represent an invaluable opportunity to uncover any such violations and to implement urgent remedial action should it be needed.
Conclusion
With the intensified expectations placed upon organisations to improve their ESG capabilities and commitments, combined with stakeholders’ demands for corporate transparency and accountability, the need for robust ESG investigations has never been so important. It is therefore necessary that organisations assess their investigatory capabilities and ask themselves whether they have the appropriate resources and relevant expertise.
ESG investigations, much like other internal investigations, present their own unique challenges. An ever-changing landscape of new regulation and legislative change, a lack of harmonisation in industry expectations, and the need to handle very sensitive issues such as human rights violations, discrimination and harassment in the workplace, present important issues for organisations to which they must respond.
With ESG becoming a key consideration for regulators and stakeholders alike, organisations that demonstrate their adaptability and culture of good ESG compliance will invariably stand out in the market – and are already doing so. Getting ahead of the curve and implementing a proactive approach to ESG investigations will promote not only an organisation’s short-term profitability, but also its long-term viability.
We’re helping clients around the world develop their ESG investigations capabilities, either through internal training or by providing an outsourced ESG investigations team. If you would like to ensure your ESG credentials are of the highest standard, talk to us today about how we can help.
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[1] https://www.theguardian.com/business/2020/jul/13/boohoo-shares-drop-18-as-new-leicester-factory-reports-threaten-sales
[2] https://www.bloomberg.com/news/articles/2021-08-26/dws-shares-fall-after-u-s-opens-probe-on-sustainability-claims
[3] https://www.fnlondon.com/articles/deutsche-banks-dws-group-shares-slump-amid-sec-probe-on-esg-claims-20210826
