ESG

We predict in 2022 five corporates will be subject to high profile and/or high value criminal or regulatory enforcement action for ESG-related breaches.

Why?

• Stakeholder expectations regarding ESG commitments will drive greater numbers of corporates to self-report suspected social and governance offences (such as bribery, money laundering, sanctions, fraud, tax evasion, modern slavery, market abuse and Companies Act offences), and to co-operate with the relevant authorities. Directors, senior managers and employees will be empowered to bring breaches to the attention of the authorities, where corporates fail to do so.

• Enforcement authorities (including the FCA and the CMA) will be subject to pressure from environmental law NGOs and others to pursue cases involving misleading environmental claims under existing regulation and consumer protection and fraud legislation (e.g. Greenwashing).

• The FCA will increase its scrutiny of whether ESG attributes of asset managers’ investment products are fair, clear and not misleading in light of a predicted growth in ESG funds next year.

• FCA enforcement of money laundering regulation breaches linked to environmental crime and modern slavery will increase in response to a failure to recognise these risks within existing financial crime controls by some businesses in the regulated sector.

• The Environment Agency imposed its largest ever criminal fine in 2020 (£90m) and has indicated it will prioritise the enforcement of the most serious breaches going forward.

See also our predictions relating to fraud under the Covid-19 recovery section.

Prediction authors: Alexandra Webster, Thomas Bowen, Amy Cook

We predict in 2022 a third of FTSE 100 companies will commission internal investigations into quasi-criminal conduct within their businesses or supply chains.

Why?

• There is an increased sensitivity within listed companies to allegations of human rights abuses, supply chain lapses, non-financial misconduct and other ethics / governance breaches due to the potential for any adverse press attention to impact significantly on share prices;

• Greater numbers of issues will be revealed by the conduct of human rights and supply chain due diligence, driven by the widespread adoption of the United Nations Guiding Principles on Business and Human Rights (UNGPs), the anticipated introduction of mandatory human rights and environmental due diligence obligations within the EU, the expectations of asset managers subject to the Sustainable Finance Disclosure Regulation and the proposed strengthening of the UK Modern Slavery Act regime;

• Key stakeholders, including investors, consumers and employees, expect quasi-criminal conduct to be addressed proactively and will take action where such expectations are not met (including by exercising shareholder voting rights, divesting assets, bringing civil claims, changing purchasing habits and whistleblowing);

• There is an increased focus across all sectors on director and senior manager accountability for attainment of ESG-related goals, and promoting good corporate culture and governance; and

• There is an increased risk of mass claims and greater scope for parent company liability in relation to misconduct within supply chains and subsidiaries.

Prediction authors: Alexandra Webster, Thomas Bowen, Amy Cook

We predict in 2022 at least five FTSE 250 companies will have an ESG-related claim issued against them.

Why?

• We expect to see an increase in ESG-related claims because companies are facing increasing ESG expectations from their shareholders/investors, consumers and regulators, as well as pressure from ESG activist groups.

• The continued development of due diligence and reporting obligations on ESG issues, including climate change and modern slavery, will expose companies to unprecedented scrutiny.

• Shareholder action in relation to ESG issues has been increasing, with the level of support for ESG shareholder proposals reaching record levels in 2021. See our analysis here. In particular, the Exxon shareholder vote on 26 May 2021, with its focus on the financial risk of climate change, has been touted as a blueprint for further shareholder action. This is an argument that has already had success in courts across the world.

• Following the landmark court decision in the Hague in 2021 against Royal Dutch Shell regarding its climate strategy and scope 3 emissions, we expect increased scrutiny on whether a company's climate strategy aligns with the Paris Agreement.

• 2021 also saw the latest in a series of recent English court decisions broadening the reach of corporate accountability for third party acts. See our articles here, here and here.

• Finally, in 2022 we predict an increase in regulatory enforcement action for ESG-related breaches, as noted in our above prediction. Increasingly, investigations and civil litigation run in parallel, or in close succession – see our article parallel proceedings microsite for more detail.

• We anticipate that the above will fuel the interest of claimant law firms and that litigation funders will continue to be keen to consider funding ESG-related claims with some ringfencing money specifically designated to aiding claimants to pursue such claims.

Prediction authors: Emily Blower