ESG Investigations in Europe Part II – Handling particularities and challenges

Increasing risk and particularities of ESG investigations in Europe

As discussed in detail in Part I of this article, the risk for ESG-related investigations in Europe is likely to increase. Authorities have taken a collaborative approach in the early stages of the applicability of ESG laws such as the German Supply Chain Due Diligence Act (“SCDDA”). In the future, the focus is likely to turn to more severe enforcement measures, especially for companies in high risk business environments or that have not been able to meet the authorities' expectations in the past. Greenwashing and human-rights related investigations are already on the regular enforcers agenda in Europe and are expected to increase further.

ESG-related investigations typically involve a number of additional challenges compared to other types of investigations that we have described in detail in Par I of this article:

• Diversity of stakeholders
• Public focus on investigations •Involvement of different investigating authorities
• Complex legal and factual situation
• International dimension
• Public information on underlying facts

Companies should get acquainted with these particularities and review their processes to prepare for potential upcoming enforcement measures.

How to navigate the challenges of ESG investigations

Needless to say that preventive measures and the implementation of a compliance management system that particularly focuses on ESG requirements is the most effective way to avoid any kind of ESG investigation. Some authorities in Europe have shown a collaborative approach towards enforcing newly implemented ESG regulations while at the same time pushing on criminal enforcement cases into alleged greenwashing, or fraud. Companies should therefore work on the key requirements of these laws, such as implementing policies and conducting a thorough risk analysis to demonstrate their compliance efforts. In the case of authority requests, they should take an equally collaborative and thorough approach and work together with the authorities to ensure compliance and avoid further enforcement actions.

However, companies should still bear in mind the particular challenges that potential authority investigations pose and prepare by making sure some fundamental requirements are in place.

Ensure diligent ESG reporting

Especially with the new and upcoming ESG legislation in Europe, companies will be facing significant reporting obligations that will focus on their commitment to ESG and their implantation of and compliance with their due diligence duties. It will be key early on to implement a process that ensures that these reports are robust and fact-based as well as backed-up with readily accessible and consistent data.

As they are to be made publicly available, sustainability reports can easily be benchmarked against both any marketing statements made by companies as well as against any allegations on the violation of ESG-related duties. Both bear the risk of additional claims for greenwashing or misleading statements and thus may trigger ESG investigations or litigation.

Take any allegations of incompliance seriously

Given the public and political focus on ESG-related topics in Europe, companies should take any allegation of incompliance seriously early on, irrespective of their origin. Allegations may arise from different internal or external sources, including through reporting mechanisms, NGO activity, or media inquiries. Companies should carefully examine and investigate the allegations internally, e.g. through their case handling process, before taking any, especially external-facing, decisions. Ensure that all results of the internal investigation are thoroughly documented and subject to legal privilege.

Given the nature of ESG-related topics, following-up on such allegations may be more complex and may require the involvement of various departments or group companies, including in different countries. Therefore, companies should pre-emptively establish points of contact at the relevant group companies and departments that may be contacted should any allegations arise.

Communicate carefully and consistently

Depending on the topic and nature of the allegations, ESG investigations may be accompanied by significant media coverage or public scrutiny. To avoid later corrections or spillover effects, companies should be careful and conservative when commenting on the allegations and refrain from making early statements before the (internal) investigation of the allegations is concluded.

If statements made in the heat of the moment later turn out to be incorrect, they may give rise to separate allegations of their own and may damage the company’s reputation as well as jeopardize the relationship with other stakeholders, including authorities.

Companies should also ensure that any external communication is thoroughly reviewed and fact-based and reflects the current status of the (internal) investigation. Statements should be carefully aligned with all internal stakeholders, in particular the legal and compliance departments, and should be consistent towards all external parties.

Finally, companies should assess early on how its transparency and reporting obligations may trigger disclosure of any results of the (internal) investigation. In the setup of an investigation, companies should assess how to best be able to claim and not waive their legal privilege over the investigation findings while still complying with their reporting obligations.

Coordinate authorities and stakeholders

More than in other cases, ESG investigations will typically require the alignment of different internal and external stakeholders, often in various countries across the globe.

It is key that companies identify all stakeholders involved in the investigation and coordinate them effectively. Specific focus must be put on any authorities that are or may be investigating the allegations and to align any statements or communications towards investigating bodies. Especially in the earlier stages of the newly implemented legislation, authorities may welcome a cooperative approach, as, e.g., the German BAFA has explicitly stated. It is therefore worthwhile to establish a direct communication channel to the authorities involved early on.

Other stakeholders that may play a role or have an interest in the outcome of the investigation must equally be managed. The evidence-gathering process may require companies to reach out to and align with third parties such as suppliers. Especially in cross-border situations, effective project management is a key factor in handling the investigation and ensuring to limit the company’s exposure.

Early focus on remediation

Especially where the allegations materialize, companies should adopt remediation measures early on in the process, not only after the conclusion of the investigation. This can help to mitigate further exposure, limit the reputational damage and demonstrate that the company is taking the allegations seriously.

After the conclusion of the investigation, a thorough remediation plan should be adopted and documented to prevent future incompliance in the matter. This can then be included in the company’s following ESG reporting.

Conclusion and outlook

A rise in ESG investigations in Europe is likely to be reckoned with in the time to come. Although any kind of investigation will always put companies under pressure and disrupt business, there are some key measures that companies take before and during ESG investigations that can enable them to navigate these difficult situations and limit their exposure to the best extent possible.

The key goal for companies at this stage is to closely monitor their risk exposure and ensure compliance with newly implemented ESG compliance and reporting regulations. Companies should thoroughly document their compliance measures and processes to be able to respond to any authority requests. Tightly aligning ESG reporting, e.g. under the CSRD, with any green claims the company makes, can also limit the risk of potential future greenwashing allegations.

Finally, companies should also look at their internal audit and investigation processes and make sure they are suited to meet the challenges of ESG investigations. Existing processes should be checked against these particularities and updated where needed.

Authored by Christian Ritz, Sebastian Gräler, Oliver Cook, and Felix Werner.