With the growing legal significance of ESG topics for corporate management the question arises whether ESG investigations should be treated as distinct from traditional internal investigations related to, for example, corruption and fraud. This blog addresses why ESG investigations into topics such as potential human rights violations, environmental damage in supply chains, discriminatory and hostile work environments, or insufficient health & safety precautions will require special and distinct investigation skills and resources.

Scope and investigation triggers

ESG investigations should have a broader factual scope than traditional investigations, often necessitating the involvement of a variety of expertise found across different legal practice groups at law firms and diverse business departments at companies.

As with all topics relating to non-compliance, triggers for internal investigations can be diverse and concern internal and external factors. Such triggers relate to the results of M&A or financing due diligence exercises, whistleblowing, internal risk analyses, audit reports and notifications of public (enforcement) authorities. An increasingly key feature for triggering ESG investigations will be stories that come into the public domain, such as investigative reports published by the media or NGOs.

Determining the benchmark 

For ESG investigations, it will be important for companies to sort through the wide array of benchmarks and legal frameworks for the relevant actions and incidents. Prior identification of the relevant benchmarks and the determination of the final investigative framework is therefore key.

In the context of ESG topics being investigated there is a need to not only focus on hard law – which due to the increasing density of ESG regulations and their global reach is substantial – but various soft-law and other frameworks, including

  • soft law instruments (most prominently the UNGP and OECD Guidelines for multinational enterprises),
  • voluntary public commitments (industry standards; commitments in relation to industry associations, such as particular Code of Conducts with e.g., separate sanctions and remedy mechanisms),
  • contractual commitments (e.g., Health & Safety Programmes to comply with being imposed by business partners or standards imposed via participation in public procurement, such as used by the World Bank Group for its group-financed projects or by the International Finance Corporation), and
  • the company’s own public ESG strategy and targets.

Hence, a thorough assessment of the various benchmarks to be used is crucial and will ultimately determine the success of an ESG investigation.

Necessary processes

Due to a sometimes rather diffuse information basis stemming from the various triggers, one ESG investigative measure that will certainly change in the future is the fact-finding process. Consultations of NGO reports and with NGO experts will become more important and constitute a new process of collaboration and assistance within ESG investigations. In this regard the involvement of special risk consultants that offer a broad intelligence work on site may also be needed in circumstances where the ESG risk stems from actions further away from the company’s control and where its leverage is limited. In such a case, it will be necessary for example to expand the circle of interviewees – apart from company-employees – to stakeholders and business partners in order to clarify structures and behavior outside the company that are, however, connected to its business operations.

In parallel to the fact finding, an early coordination of the media/crisis strategy is vital. While the public expects transparency from business, pre-mature public commitments to full disclosure and cooperation with authorities may entail risks that need to be thoroughly considered beforehand. This holds all the more true regarding ESG investigations that deal with topics in the media or otherwise of high public interest.

Challenges of ESG investigations

ESG as a global topic also entails worldwide prosecution risks for global companies and requires strong transnational cooperation with other jurisdictions. Due to the manifold hooks and links of ESG-related incidents, a government investigation on health & safety deficits in one country might swiftly become a non-financial/sustainability reporting issue in another country. In particular, with regard to human rights and supply chains we see a close link to economic crimes as well.

Another particularity of ESG investigations is the evidence required to be gathered. On the one hand, there are certainly more company-related ESG information publicly available – which can constitute a vulnerable point regarding potential proceedings –, on the other hand, due to the extended global responsibility attributed to companies with respect to ESG (e.g., within the full length of supply chains), it might not always be easy to find sufficient evidence.

Taking a look at the attorney-client privilege, there is a risk that in the realms of ESG investigations, it might be endangered, i.e., being (unintentionally) waved more easily. With the public's increased demand for information, there will be a stronger desire of businesses to share exonerating evidence and insights from the investigation. Although attractive from a reputational point of view, this must be approached with extreme caution for opening up potential legal liability. Additionally, the interaction with many stakeholders over the course of the investigation is particularly challenging with respect to keeping matters confidential or privileged.

Follow-up advice and action

Similar to other investigations, one of the outcomes of an ESG investigation should be being able to improve the current situation and structures that might have led to the identified incident (lessons learned). In most cases the compliance and risk management system will need to be upgraded and adapted.  Yet, in relation to ESG investigations there might be a broader mix of follow-up actions. For example, it could be necessary to expand or specify a company’s overall ESG strategy. This could comprise follow-up business judgment decisions on exiting a business sector or withdrawing from a region the company is operating in as well as assessments of disclosure duties/opportunities in management reports and prospectuses. It may well also include the comprehensive amendment of certain business models.  In this sense, an ESG investigation can boost a company’s efforts to meet the moment of setting “the right” ESG strategy for its corporate objectives. Such strategy will be built-on a strong foundation of internal (preventive) media guidelines and robust reporting frameworks.

Take-away

It is important for companies to appreciate the key differences between traditional investigations and ESG investigations, including:

  • Broad factual scope and need for highly specialized expertise on many subjects
  • Wide range of triggers for investigation
  • Diverse legal and soft-law frameworks for conducting the investigation
  • Diffuse knowledge and broad factual basis available
  • Increased interaction and communication with many stakeholders/third parties
  • Global enforcement/litigation risks requiring strong global investigative approach
  • Heightened scrutiny by public and media to be addressed thoroughly.