ESG

Rise of ESG Investigations

Environment, Social and Governance ("ESG") will remain a key regulatory driver also in 2024. With the continuing transition from a soft law to a hard law environment, enforcement activity and investigations remain at a high level and will further increase significantly. Although investigations into ESG issues often come in a similar form than typical criminal or regulatory investigations, there are some specifics to ESG investigations that companies should be aware of to mitigate increased liability and reputational risks for companies. This development requires a new focus and adjustments to existing compliance and investigation processes.

In autumn 2023, for example, the first major greenwashing investigation was partially settled with ongoing proceedings in Germany. A banking group and its funds subsidiary settled a SEC investigation in the U.S., agreeing on a payment of US$25 million based on greenwashing allegations that financial products did not comply with the declared ESG criteria. According to the SEC, the order found that the companies failed to adopt and implement policies and procedures reasonably designed to ensure the accuracy of their public statements about the ESG integrated products.

Since the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – "LkSG") came into effect on 1 January 2023, the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – "BAFA") has been actively enforcing and closely examining several grievances with allegations of human rights and environment related violations. Considering the ever-increasing public scrutiny, it remains highly likely that multinational companies with widespread supply chains will remain under specific focus for future investigations into ESG topics, especially in Germany and the EU with the Corporate Sustainability Due Diligence Directive ("CS3D") on the horizon.

ESG Topics in Investigations

The range of ESG topics that can become subject of investigations is broad. It can essentially be divided into the following three key areas of E S G:

Environment: The focus under "E" is on compliance with environmental regulation such as air, water, soil or waste regulation. In addition, sustainability criteria set by companies, such as climate protection targets, play an important role. This includes, for example, the establishment of an ecological balance and biodiversity, air, water and soil quality, energy and water consumption, CO2 compensation, the use of natural resources, waste management and recycling processes.
Social: The focus under "S" is on the protection and respect for human rights, equal treatment and non-discrimination, prohibition of child and forced labour, and ensuring fair working conditions for the own workforce and worker in the supply chain. The supply chain due diligence obligations under the LkSG are a prominent regulatory reality in this regard, which will be accompanied by the CS3D and other laws in the medium term.
Governance: The focus under "G" lies on the question of how successfully a company takes account of its environmental and social responsibility and how effectively it can prevent or at least investigate and remedy incidents through the clear allocation of areas of responsibility, the establishment of grievance mechanisms and comprehensive prevention and remediation measures. Additionally, overall governance topics play an important role under the "G".

Greenwashing

In addition, so-called greenwashing allegations based on misrepresentation of the sustainability performance of a company are likely to continue to rise globally in the future considering the recent trend in legislation to heighten the requirements regarding "green claims".

Such claims may refer to:

The company's performance itself and include, for example, inaccurate information on company's sustainability performance (e.g. regarding CO2 or circularity, or the protection of human rights);
A company's products, e.g. to marketing statements declaring products as sustainable, environmental friendly, CO2 neutral etc.

Specifics in ESG Investigations

The processes of an internal investigation also apply in principle to ESG investigations. However, there are some specifics requiring attention when managing ESG (internal) investigations.

Greater Variety of Triggering Events for an Investigation

ESG investigations can be initiated by a broad variety of potential triggering events. In addition to compliance hotline reports, customer complaints and internal audit findings, in recent years it has also been non-governmental organisations and other external stakeholders including (social) media which have uncovered violations of ESG standards.

Special Expertise and Independence in Internal Investigations

ESG topics often involve complex natural science contexts data, techniques and processes that require special expertise to investigate. While companies' ESG related knowledge is steadily improving, in many cases, it will still be necessary to consult and involve external experts.

The independence of the experts taking the investigation lead is very important for an unbiased and successful investigation. Any actual or perceived conflict of interest may cast doubt on the integrity of the investigation. Thus, an internal investigation conducted by external lawyers may prove beneficial.

Complex Evidence Collection

Although much company-related information in the ESG area is publicly available, it is sometimes difficult to secure sufficient evidence due to the global responsibility of companies in this field and the associated complex structures.

Regarding greenwashing specifically, investigators should also not limit their view on internal documents and processes, but review also advertisement and public communication to detect possible ESG related violations.

Reputational Risk

Although reputational risks are a typical concern in investigations, companies are particularly likely to be held (publicly) accountable in the ESG area given the high public scrutiny. Operational and reputational damage, financial losses and legal consequences are often the result.

While follow-on litigation and regulatory enforcement are very real risks in many investigations, ESG topics normally trigger shareholder lawsuits as well as strategic lawsuits by NGOs or other external stakeholders for ESG failures or in the interest of protecting victims.

Thus, it is even more important in ESG investigations to have a clear and early coordinated communication strategy in place to mitigate potential negative spillover effects. Before going public, companies should develop a clear and facts-based communication strategy involving all relevant internal stakeholders and external counsel (if necessary).

Specific Reporting and Transparency Requirements

On ESG topics, companies often enter into transparency obligations, e.g. under disclosure regulations such as the EU Corporate Sustainability Reporting Directive or towards their investors. These obligations may cause conflicts with confidentiality standards or attorney-client privilege. Companies should be aware of this and not rely on the confidentiality of the data and materials secured.

Involvement of External Stakeholders

Like ESG due diligence requires the involvement of external stakeholders, the same may be true for ESG investigations, e.g. including external parties such as suppliers, workers in the supply chain or affected local communities. This usually increases the complexity of investigations.

Cross-Border Considerations

Considering the global nature of supply chains, national peculiarities of the countries and the specifics of cross-border investigations must be diligently taken into account.

Outlook

Since the number of ESG investigations will likely increase, companies should continuously align their compliance management system and investigation processes. These should reflect current developments and legislative changes accordingly through an effective ESG strategy and ESG risk management including investigation processes to mitigate both regulatory and reputational risks to the best possible extent.

Likewise, ensuring compliance with all applicable legal regulations during an ESG investigation (e.g. whistleblower protection, supply chain law, but also the UNGP and OECD Guidelines), voluntary public and contractual commitments (e.g. industry standards and health programmes) and internal company standards (e.g. internal policies and codes of conduct) will best protect the integrity of the ESG commitments.

Christian Ritz Partner Hogan Lovells Munich T +49 89 29012 542 E christian.ritz@hoganlovells.com	Christian Ritz advises his clients on cross-border investigations and compliance matters with a focus on ESG compliance and supply chain due diligence. He regularly advises on the development, design and implementation of global risk and compliance management systems. A particular focus of his advice is on the development and implementation of compliance systems and processes to comply with global requirements in the areas of ESG and supply chain due diligence, in particular with the German Supply Chain Due Diligence Act (SCDDA), the EU Corporate Sustainability Due Diligence Directive (CS3D), and the EU Deforestation Regulation (EUDR). Just over the past 18 months Christian has advised over 30 international and national companies on the implementation of and compliance with the German SCDDA, including representation in ongoing investigations by the competent German enforcement authority BAFA. He is an active member of Hogan Lovells' global ESG group as well as the Business & Human Rights group. Christian is regularly recognised by legal directories such as Legal 500 and JUVE for his work in ESG, compliance, investigations, and antitrust.

Dr. Sebastian Gräler Partner Hogan Lovells Dusseldorf T +49 211 1368 394 E sebastian.graeler@hoganlovells.com	Sebastian Gräler handles compliance as well as investigation issues. He regularly represents his clients in regulatory and administrative litigation. Clients praise him as "highly committed and competent". Sebastian is a member of the global ESG Core Team of Hogan Lovells and regularly advises on ESG and environmental compliance issues. During a five-months secondment, he worked for the legal department of Volkswagen AG. Sebastian studied at the Westfälische Wilhelms-Universität Münster and the University of Sheffield (UK) and also worked at the German Police University. He was honored for his outstanding performance in the first and second state law examinations by the Friends of Law at the University of Münster and the State Government of North Rhine-Westphalia. In addition to his professional activities, Sebastian is a lecturer for European and International Business Law at the University of Wuppertal.

Dr. Felix Werner Senior Associate Hogan Lovells Berlin T +49 30 800930061 E felix.werner@hoganlovells.com	Felix Werner's practice focuses on legal compliance matters, internal investigations, public prosecutors' investigations including dawn raids, and corporate governance. His corporate governance practice comprises the development, structure and implementation of global compliance management systems. In addition, he counsels clients on corporate social responsibility, including environmental, social, and corporate governance matters, and supply chain due diligence (particularly regarding the German Supply Chain Due Diligence Act) as well as whistleblower legislation and Greenwashing. Felix is an active member of Hogan Lovells' global ESG group as well as the Business & Human Rights group. Felix studied law in Berlin and Milan. Subsequently, he wrote a dissertation on the personal liability of managers for violations of antitrust law. While completing his doctorate, Felix worked at international law firms in Berlin and Vienna and gained valuable experience in the field of antitrust law and compliance. During his legal clerkship, he worked for the Federal Ministry for Economic Affairs and Energy in Germany and at two international law firms. Before joining Hogan Lovells, Felix gained practical experience at an international law firm as an Associate.