Using Anti-Corruption Frameworks to Manage ESG Risk: Where the tuna meets the cooktop

Despite the seeming political backlash in the United States against managing environmental, social and governance-related (ESG) issues, multinational companies – and investors – are still seeing its business case.
But as reporting deadlines under the European Union’s Corporate Sustainability Reporting Directive approach, many companies may find operational challenges in implementing ESG programs. And for investors interested in ESG outcomes, unhelpful reporting standards and the prospect of greenwashing mean uncertainty still looms.
One useful approach for either may be to leverage their existing framework to identify and manage corruption risk, and ultimately balance business objectives tied to ESG with strong financial crime risk detection and mitigation activities. After all, many ESG risks – be they environmental degradation, forced labor, or social harms – are linked to bribery and corruption, and other financial crimes. Whether it is Amazon gold mined by using mercury, or African lithium dug up by children, the trade is greased by corruption and money laundering.
As one example, the same framework an organization uses to better understand a high-risk third party’s integrity can be leveraged to gleam further insights relating to ESG. That framework would include enhanced due diligence that probes news and business records about the third party’s directors and owners, and looks for red flags. Applying similar scrutiny to ESG concerns, a desktop search, source interview, or site visit may reveal a more nuanced risk picture.
The process isn’t just limited to direct counterparties. With greenwashing being a target for short-sellers, even working with reputable firms that verify ESG credentials is not risk-free – as was the case with the world’s largest carbon credit registry, Verra. One of its clients, Kenneth Newcombe, was recently indicted for fraud in connection with carbon credits linked to his company’s low-tech cookstoves. Those credits, which U.S. regulators say were vastly overstated, were sold to Shell and other companies for millions. But why did Verra sign off on those credits in the first place? It might be because Newcombe was also a member of Verra’s board of directors.
And while no amount of due diligence can reveal the future, a simple media search at the time these carbon credits were sold would have identified Newcombe as the seller and Verra as the verification body on the credits; a desktop search of either Newcombe or Verra would have revealed the board membership and conflict.
In fact, regulators have even accused Newcombe of changing the way Verra calculates cooktop carbon credits, in order to give his company a boost. While this fact (if true) may not have revealed itself so easily, red flags would certainly have waved in its direction – a thorough review could have probed into the offset calculation methodology, including how it came to be, and should have asked how the apparent conflict was to be managed.
Whether it involves cookstoves or the tuna they would fry, anticorruption practitioners know that holistic view of risk management goes beyond a tick-the-box exercise, and that a robust review of a deal or party requires understanding available facts in the appropriate context. Companies may find that other elements of the anti-corruption framework – including similar approaches to risk assessments, monitoring and reporting activities, and control measures – can be just as helpful to manage their ESG risks.
FCPA Compliance Consultant