The Global Impact of ESG Legislation
24 May 2023 13:00
ESG screening, or environmental, social and governance screening, is becoming an increasingly important part of due diligence for companies around the world. Legislation mandating ESG due diligence is being introduced in many countries, and even where it is not yet required, consumers, investors, and employees are demanding ethical practices from companies.
Improving ESG due diligence processes is essential for companies to avoid regulatory penalties, reputational damage and to meet the growing expectations of stakeholders for responsible business practices. This blog will explore the reasons why ESG screening matters, including examples of recent enforcement actions taken against companies that have failed to adequately screen their operations for human rights and environmental impacts--we'll also include our checklist for due diligence so you can make sure you take every necessary step to avoid risk. Let's dive in.
Recent ESG legislation
Among the most prominent trends in compliance today is the spread of legislation mandating companies to carry out due diligence on the human rights and environmental repercussions of their business and its third parties. And, as we saw with the pandemic, response to the Russian war on Ukraine and increase in global natural disasters, one country's response to global phenomena can have a massive impact on the entire world.
The same is true of ESG responses as very few companies operate in just one market--meaning that foreign legislation can alter the business decisions of many global actors.
Here are some recent examples of global legislation:
- The European Commission has adopted a proposal for a Corporate Sustainability Due Diligence Directive. This would require regulated companies operating in EU member states to ensure activities by the business and its suppliers comply with strict human rights and environmental sustainability criteria.
- Germany’s Supply Chain Due Diligence Act will mean that, from 2023, regulated companies in the country must carry out due diligence and risk management to mitigate human rights violations in their supply chains. Failure to comply could incur fines of up to 2% of global revenue and temporary exclusion from public contracts.
- The Netherlands' Child Labour Due Diligence Act 2019 mandates any company selling or supplying to consumers in the Netherlands to investigate whether child labor has been involved in the production process.
- The US’ Uyghur Forced Labor Prevention Act 2021 makes a presumption that all goods produced in Xinjiang, China, came from forced labor. As a result, companies cannot import these goods to the US–unless they can prove through due diligence that forced labor was not involved.
- The Slave-Free Business Certification Act was introduced in the US Senate in 2022. If it passes, it will require certain large companies to audit their supply chain to investigate forced labor. Companies would have to publish reports on the results of the audit and document their efforts to eradicate forced labor.
- Effective December 2022, banks in Hong Kong must ensure they meet certain requirements for managing climate risk and make appropriate disclosures on their activity to the regulators.
- Hong Kong’s regulatory authorities are expected to introduce mandatory climate reporting for financial institutions and listed companies by 2025. Hong Kong's Exchanges and Clearing’s Reporting Guide contains requirements for financial practitioners to assess and understand their company’s ESG record.
- Singapore brought in Environmental Risk Management Guidelines in June 2022. They state that banks, asset managers and other financial companies need to identify and engage with those customers who are most likely to expose them to environmental risk, then mitigate that risk.
More countries are considering adopting similar legislation, and even where there is not legislation there are growing expectations from consumers, investors and employees that firms demonstrate an ethical approach. So all firms should be prepared, which starts with improving their due diligence process.
Examples of ESG enforcement actions
Businesses that skirt ESG requirements do so at their own peril. With increasing legislation comes increasing risk of consequences if a business chooses to forgo ESG requirements.
Here are just some of the enforcement actions relating to alleged regulatory breaches in 2022:
- A multinational commodity trading and mining company was due to pay penalties of up to $1.5 billion after investigations by regulators in the US, Brazil and the UK. It was alleged that the firm had carried out bribery and corruption to benefit its oil operations in countries including Cameroon, Equatorial Guinea, Ivory Coast, Nigeria and South Sudan.
- A fintech firm was fined $360,000 by the United Arab Emirates’ regulator over alleged due diligence failures in its Anti-Money Laundering approach. The regulator said the firm had failed to carry out enhanced due diligence on high-risk customers after a business relationship had started.
- A US-based waste management firm agreed to pay over $84 million in response to investigations by Brazilian and US regulators into the apparent bribery of foreign officials in Brazil, Mexico and Argentina. The company was alleged to have paid over $10 million in bribes between 2011 and 2016 to retain business advantages which led to over $21 million in profits.
- A Luxembourg-based steel manufacturer had to pay over $78 million to resolve claims by the US Securities and Exchange Commission that its Brazilian subsidiary allegedly paid bribes to win contracts from a state-owned company.
- A telecommunications firm based in South Korea was fined $6.3 million over alleged violations of the Foreign Corrupt Practices Act around bribery of public officials in South Korea and Vietnam.
- A UK company with strong links to Hong Kong was fined £30,000 for allegedly breaching European sanctions related to the conflict in Ukraine by doing business with a firm that was subject to an asset freezing order. The firm also suffered reputational damage with coverage in the Wall Street Journal – a reminder to firms that due diligence should also include ongoing monitoring of sanctions changes.
Clearly, ignoring these laws can have major repercussions for businesses around the globe--let alone the impacts on the environment and human rights. Therefore, it is important that companies do their due diligence to avoid hefty fines or other consequences.
Choose a due diligence solution that works for you
Given the extreme consequences of not complying with country ESG laws, it is imperative that all companies perform regular due diligence. But, robust due diligence research can take time that you don't have. That's where Nexis® Diligence™ comes in. With Diligence, you can do a thorough job with their due diligence tasks in a manner that leaves ample time for their your deliverables.
Nexis® Diligence makes it easier to quickly and thoroughly vet and monitor third parties, explore relations and associations, check for red flags and develop a risk profile at scale. You can research entities, explore associated entity interests, check for red flags and develop an entity profile with ease. Our enriched data empowers you to experience truly global data discovery, so you never miss important legislation that can impact your business dealings.
Interested in learning more? Our Due Diligence Checklist 2023 provides a comprehensive look at everything you need to consider as you operate your business. And, when you're ready to get started, sign up for a 7-day free trial to see how Nexis® Diligence TM can help you mitigate risk easily.
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