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Horizon Scanning: Greenwashing, Human Rights & ESG

Greenwashing

An essential element of compliance is looking to the future to assess potential risks and opportunities, and there is no better time to do this than at the beginning of a new year. What follows is a summary of some of the key risk and compliance-related topics to reflect upon for 2023.

No particular consideration has been given to prioritization, significance, or emphasis, as these will undoubtedly depend on an organization’s focus and risk threshold. It is intended to simply raise awareness of the challenges that may be emerging on the horizon in the near future – if not currently.

Greenwashing: Sustainability And Advertising

Greenwashing is the use of disingenuous environmental or eco-friendly claims (for example, ‘natural,’ ‘recyclable,’ and ‘organic’) by businesses to market products to consumers, typically via statements or symbols on the product itself. Today, greenwashing is increasingly prevalent as companies scramble to respond to consumers’ prioritization of the impact of their environmental footprint and consider the sustainability of their purchases.

One particular area of focus is carbon-offsetting claims (neutralizing an organization’s carbon footprint through the purchase of carbon credits) in order to promote itself as ‘net zero.’ It has become a common area for fraud against organizations or fraud by organizations, and a 2016 European Union study [1] found that 85% of ‘offset’ projects cannot be truly ‘additional.’

Greenwashing Investigations

Following the Competition and Markets Authority’s (CMA’s) publication of the Green Claims Code, the UK regulator is now moving forward with greenwashing investigations, currently focusing on the fashion industry, with additional industries expected to be reviewed in the near future. In September 2021, the CMA warned businesses that it would be carrying out a ‘full review’ of misleading green claims in 2022.

In an associated space, we’ve seen recent regulatory actions against advertising greenwashing by the UK Advertising Standards Authority (ASA), including actions against Ryanair [2] and Tesco [3] for misleading the public over their green credentials.

Human Rights Supply Chain

Of note are Australian, German, and EU initiatives on due diligence, with similar initiatives proposed in Norway and France.

The UN Guiding Principles on Business and Human Rights (UNGPs)Guiding Principle 17, states that:

In order to identify, prevent, mitigate and account for how they address their adverse human rights impacts, business enterprises should carry out human rights due diligence. The process should include assessing actual and potential human rights impacts, integrating and acting upon the findings, tracking responses, and communicating how impacts are addressed.

The four elements of a due diligence process (Assessing actual and potential human rights impacts [Guiding Principle 18], Integrating and acting upon the findings [Guiding Principle 19], Tracking responses [Guiding Principle 20], and Communicating how impacts are addressed [Guiding Principle 21]) are explored in depth in the UNGPs and the associated Commentary.

As well as measures which businesses should take, Guiding Principle 3 outlines that states should ‘(p)rovide effective guidance to business enterprises on how to respect human rights throughout their operations’, with the Commentary noting that such advice should be provided on human rights due diligence and ‘should indicate expected outcomes and help share best practices.’

Human Rights Concerns In Supply Chains

In Germany, on 1 January 2023, the Supply Chain Act (LkSG) came into effect. Aimed at addressing human rights concerns in company supply chains, companies based in Germany must now:

  • be required to establish a risk management system
  • perform regular risk analyses, and
  • employ appropriate mitigation and corrective measures to counter the risks of adverse human rights impacts associated with their business, products, or services. [4]

The LkSG has been built to encompass the whole spectrum of a company’s activities in any of its supply chains, ensuring due diligence is performed with respect to suppliers. The act is part of a general trend of governments seeking to ensure that companies are not inadvertently facilitating human rights abuses taking place within their supply chains.

Similar developments have occurred in Australia, where in 2021, amendments were proposed to the Customs Act, which seeks a total ban on any product entering the country that has, at any stage, been made using forced labor.

UK Human Rights Initiatives

The UK has a number of specific laws aimed at reducing businesses’ negative impact on human rights – for example, the Gangmasters (Licensing) Act 2004, the Companies Act 2006, and the Modern Slavery Act 2015.  

Regarding the Modern Slavery Act, there have been some proposed and enacted amendments in a bid to enhance firms’ controls. Following an independent review of the Modern Slavery Act 2015 and a public consultation, the UK government initially announced these amendments in September 2020.

The tabled Modern Slavery (Amendments) Bill seeks the creation of two new offenses as well as new disclosure requirements, thereby providing a legal basis to hold corporations accountable for non-compliance.

Enactment of these amendments would mean that companies, in addition to the modern slavery statement, are required to:,

  • publish and verify information about the country of origin of sourcing inputs in its supply chain
  • arrange for credible external inspections, external audits, and unannounced external spot-checks, and
  • report on the use of employment agents acting on behalf of an overseas government.

More significantly, a person who is responsible for a slavery and human trafficking statement – that is, company directors, members of limited liability partnerships, or partners in other partnerships – would commit an offense if information in the statement is knowingly or recklessly false or incomplete in a material particular.

Furthermore, a continuation of sourcing from suppliers or sub-suppliers which fail to demonstrate minimum standards of transparency after having been issued a formal warning by the Independent Anti-slavery Commissioner would also be subject to criminal charges. Depending on which of the offenses is committed, a conviction on indictment would entail either imprisonment or a substantial fine calculated on a business’ turnover or both. 

ESG In ABC Programmes

Forty-eight percent of respondents in Kroll’s 2022 Anti-Bribery and Corruption Report survey [5] reaffirmed the importance of incorporating ESG into their anti-bribery and corruption (ABC) program on a global scale.

Companies in the US, Canada, and the Middle East appear to be lagging, with only 43% and 38% of respondents, respectively, indicating that a review of ESG metrics is part of their ABC compliance compared to a higher average of 57% in Asia-Pacific and 52% in Europe and Latin America. This positive trend feeds off a comparable sentiment regarding the relevance of ESG compliance as part of ABC programs.

But regulatory activity is likely to drive this up further. For instance, on 21 March 2022, the US Securities and Exchange Commission (SEC) proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.

Developments In Corruption Country Risk Rating

The US Combating Global Corruption Act (CGCA) was introduced in Congress in June 2021 and, if implemented, would provide tools for governments, civil society organizations, and the public to hold government officials accountable for failing to fight corruption. Importantly, the CGCA would include a rating system for assessing countries on their anti-corruption efforts, require the US State Department to publish a list of potential Magnitsky Act sanctions targets in low-performing countries, and direct diplomatic engagement.

The proposed CGCA rating system alone could be a game-changer for compliance programs. It would provide a predetermined corruption rating as a jurisdictional risk category when assessing third parties.

Financial Pressures

A development that might slip under the radar is the financial pressures that will be affecting staff in every firm and business field. Crime is an activity that is against the law, and the link between criminal activity and the socioeconomic development of a society is undeniable and discussed in numerous academic papers.

The majority of such focus is on all criminal activity,[6] but there is even more direct connectivity between socioeconomic development and economic crime, as financial pressures lead public officials and private citizens to supplement their income in nefarious ways,[7] including fraud, scams[8] and white-collar crime.

These will create challenging conditions for compliance professionals when those pressures result in an insufficient workforce or other challenges. This is something compliance leaders and those in senior leadership should factor into their risk assessments going forward.

This article was first published by the International Compliance Association (ICA), the leading professional body for the global regulatory and financial crime compliance community. For more information on the benefits of becoming an ICA member, including access to the ICA’s complete content library of articles, videos, podcasts, blogs, and e-books, visit: Become an ICA Member – Application Form (int-comp.org)

About the author

Gaon Hart is experienced in developing Parliamentary and regulatory relationships as a renowned expert in designing, developing, and implementing global corporate compliance programs. He has recently been Head of Public Policy in the economic crime arena for Amazon, covering UK & Ireland, and prior to that, he was Head of Global Anti-Bribery & Corruption Advisory, Policy & Training for HSBC Bank, designing and implementing a global anti-corruption program from scratch covering 64 countries and 230,000 staff. These roles led from his experience as a Senior Crown Advocate with the Special Crime & Counterterrorism Division of the CPS, where he was seconded to the Attorney-General’s Office, acting as Lead Solicitor for the Government’s 2006 Fraud Review change program, developing the UK counter-fraud architecture that still exists today.

Publicly, he represented the UK at GRECO, UNCAC, and at an EU Mission to Romania, was Co-Chair of the UK Finance Anti-Bribery & Corruption Committee, advised the UN on their report, ‘Bankrupting the Business of Human Trafficking,’ co-authored the UK Finance definitive guide to the ‘Definition of Public Official’ and undertook multiple public engagements including appearing before a Parliamentary Treasury Select Committee on behalf of Amazon.

Gaon is currently also a Non-Executive Director for the NHS Counter-Fraud Authority and Managing Director of Legal Advisory Worldwide (a boutique legal consultancy company).

References:

[1] Institute for Applied Ecology, How additional is the Clean Development Mechanism?, March 2016

[2] BBC News, ‘Ryanair rapped over low emissions claims’, 5 February 2020

[3] The Irish Times, ‘Tesco rebuked by UK regulator over greenwashing in adverts for plant-based food’, 8 June 2022

[4] Debevoise and Plimpton, ‘Germany: Mandatory Human Rights Due Diligence’, 30 April 2021

[5] Kroll, ‘2022 Anti-Bribery and Corruption Report’, 6 June 2022

[6] United Nations, ‘Economic crises may trigger rise in crime’, 3 February 2012

[7] The Life in Transition Survey II was conducted in 2010 in 30 post-socialist economies of Central and Eastern Europe and Central Asia. It found that households hit by crisis are more likely to bribe and, among people who bribe, crisis victims bribe a wider range of public officials than non-victims. The crisis victims are also more likely to pay bribes because public officials ask them to do so and less likely because of gratitude.

[8] Cifas, ‘Fraud cases set to soar amidst cost of living crisis as criminals bet on economic uncertainty’, 13 July 2022

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