By Jonathan Armstrong, Partner, Cordery Compliance
Editors Note: In Part One the author laid out the risks of ESG. Here he follows up with practical steps compliance teams can take.
False Claims
There have already been concerns that some organisations have been opportunistic in proclaiming their environmental credentials without doing appropriate due diligence. For example, in 2019, the UK Advertising Standards Authority banned adverts from fashion retailer Boohoo after it took a stand against the use of animals in clothing. Boohoo advertised garments featuring “faux fur.” A pressure group purchased garments which (according to their tests) in fact featured rabbit fur. Boohoo said that it had made a real commitment to protecting the environment, that it had a supplier code and contract in place with its suppliers and it also inspected samples of stock in line with industry practice. Nonetheless, the ASA felt that Boohoo did not have enough evidence to support the claims it had made.
Another possible cause for concern with false claims may be in connection with an organisation’s statements to comply with its Modern Slavery Act (MSA) 2015 obligations. Statements are often included on an organisation’s website and, from March 2021, some organisations also file on the UK Modern Slavery Register. Currently, filing a statement on the Register is voluntary but 21,867 statements have been filed as at 18 October 2021. It is important to make sure that any statement made is legal, decent, honest and truthful too.
For publicly listed entities, the risks are possibly greater still. Many countries have laws which prohibit false claims being made by listed entities particularly where those claims could mislead investors.
What Should Organisations Do?
It is clear that organisations need to check the claims that they are making. Good intentions are no substitute for proper compliance processes. Those processes could include:
- Do appropriate due diligence. You’ll need a proper due diligence program for your supply chain. This shouldn’t just be a one-off exercise. Resources like the Humanium database of children’s rights per country can help. The EU has introduced draft guidelines on due diligence too (summarised here).
- Check the claims made. This is a difficult task when dealing with some parts of the world. We know that some suppliers don’t always tell the truth. Some third parties compiling independent reports have been misled too. Just because it is difficult doesn’t mean that there’s no legal obligation to try – as a simple rule if you can’t verify any claims you make don’t make them. As we’ve said the burden of proof is on the organisation to prove any claims it makes.
- Make sure your supply chain contracts reflect what you expect. You will need to check not only what your organisation does but also your supply chain. For example, if your transport company is switching from electricity to fossil fuels, is it under a contractual obligation to tell you? Is there a right of veto or a right to be notified or a right to be consulted?
- Make sure that you can trace goods and raw materials back to the place of production. This might be particularly important if EU or UK laws are introduced banning the import or forced labour products.
- Adopt a communications strategy, internal and external. Make sure that your marketing team and your investor relations team in particular know the issues with claims you can’t prove.
- Get the Board on board. Sometimes claims are made by those at the very top of the organisation because they want to show firm leadership on an issue or because they feel under pressure from a journalist or a shareholder at an annual meeting. Your board may need a briefing on the risks involved in ESG claims and the particular risks with renewable energy.
- Train the appropriate staff, such as those involved in procurement and purchasing. In our experience sometimes procurement people aren’t as alive to the risks as those in the compliance team. Awareness sessions can help.
- Be ready to investigate concerns. Complaints must be taken seriously especially from whistleblowers given the rising number of concerns in this area. Again this sometimes isn’t easy. We have had experience of whistleblowing claims in Asia from business rivals of a client’s existing supplier who think they may benefit if their competitor is dropped. As we’ve said some people don’t tell the truth but you’ll need to apply the same rigour to a whistleblower complaint in this area as you would with other compliance concerns.
There is more information about this and other modern slavery and supply chain topics here.
We will be discussing these issues in more detail in our seminar with the Society for Corporate Compliance & Ethics on 16 November. Details of the event are here.
You can download a pdf copy of the SHU report here.
You can download a pdf copy of the ActionAid report here
The Boohoo ruling is here.