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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

ESG Investigations: The challenges of investigating ESG-related issues and incidents

Investigations relating to Environmental, Social or Governance (ESG) issues or incidents are not new. However, over the last decade the interest in ‘ESG’ has grown and with more attention on the risk and rewards, ESG-related investigations, and focus on how they are conducted, are on the rise.

ESG-related investigations can pose a number of additional challenges to those found in more 'traditional' investigations. In particular, with businesses' ESG credentials increasingly under scrutiny, such investigations need to address not only compliance with applicable laws, but also the integrity of ESG commitments. While managing legal risk and exposure will always remain a key driver of investigations, an ESG-related investigation often involves specific consideration of alleged misalignment with businesses' own ESG policy frameworks in areas that go beyond legal compliance.

We address some of the relevant considerations in a chapter on 'Environmental, Social and Governance Investigations' published in the latest edition of 'The Practitioner’s Guide to Global Investigations' (see link below).

In the chapter, we look at some common features and challenges of conducting effective ESG-related investigations. Key points to consider include:

  • What are the relevant standards against which the issue or incident will be assessed? Both 'hard' and 'soft' law commitments, as well as any relevant internal or public corporate standards or statements, will need to be considered.

  • Who are the potential stakeholders and how might they trigger an investigation? The range of stakeholders and the ways in which issues can come to the fore are generally more varied in an ESG context. Scrutiny may come, for example, from enquiries by NGOs, leaks to the press and political pressure. An effective communications strategy from the outset will be key to managing the risk.

  • Does the issue require particular investigator expertise and/or independence? Inadequate expertise can undermine the investigation's credibility, as will a mismatch between stakeholder expectations and the approach taken to the level of independence of the investigation.

  • How will pressures to be transparent about the investigation be balanced with managing risk for the business? Businesses will often make transparency commitments, but these need to be managed carefully in the investigations context if protections for the business, such as the ability to claim legal privilege over investigation documents and communications, are to be preserved.

  • How will engagement with stakeholders about the investigation be managed? ESG-related investigations may focus not only on business risk, but also on risk to external parties affected by the issue or incident under investigation. Stakeholder engagement can be very challenging in these circumstances, where the subject matter is often sensitive. This is particularly the case with investigations into adverse social impacts associated with businesses' operations.

  • What business risks does an ESG-related issue or incident present – reputational, financial, operational, legal or all of the above? Most investigations will carry all of the above kinds of risk for the company. ESG-related investigations are no different, but typically those risks can be easily heightened. Taking proactive steps to encourage employees to raise concerns internally, and putting in place effective grievance mechanisms and whistleblowing procedures, can assist with identifying ESG issues before they escalate into risks to the business or affect external stakeholders.

For more detail, see our chapter 'Environmental, Social and Governance Investigations', in 'The Practitioner’s Guide to Global Investigations'.

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