Environmental, social and governance (ESG) issues were very much at the center of debates during the 18th Annual International Bar Association’s Anti-Corruption Conference held in Paris on June 14 - 15, 2022. This is hardly surprising.
Identifying, monitoring and investigating ESG-related wrongdoings is high on corporates’ agenda, with legislative and regulatory frameworks proliferating around the world. Several acts have already made the headlines; namely the California Transparency in the Supply Chains Act, the German Supply Chain Act and the French Duty of Vigilance. There are other expected projects in the pipeline in the EU and Japan.
In the past, multilateral development banks (MDBs) have set the trend in investigating sanctionable practices in the fight against corruption. Could they now have a leading role tackling ESG violations? If so, MDBs would probably need to adopt a new sanctionable practice specifically relating to ESG. MDB investigators would certainly need to be trained appropriately, as it is likely that ESG violations would not be investigated in the same way as corrupt practices. And sanctions traditionally incurred when violating MDB procurement guidelines may not be appropriate for ESG violations.
I. Are MDB sanctionable practices sufficient for ESG violations?
Five major MDBs have adopted harmonized definitions of sanctionable practices and investigative guidelines, setting a common understanding of what corrupt, fraudulent, coercive and collusive practices cover.
The first question to be considered when discussing whether ESG violations may give rise to specific investigations (and sanctions) by MDBs is whether the scope of the existing sanctionable practices offer sufficient legal basis to justify an investigation.
A prima facie analysis suggests that ESG violations may adequately be combatted through fraudulent practices, the definition of which encompasses “any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.”
Some MDBs appear to have chosen this option and do not envisage creating new sanctionable practices for ESG issues.
Combating ESG violations through the prism of fraudulent practices may offer a useful initial basis from which to start, but should only be a temporary basis. Indeed, the fraud element can only be used if there is prior misrepresentation or misleading statement on a specific ESG. The absence of any such prior misrepresentation is likely to preclude MDBs from establishing the existence of a fraud to be sanctioned, meaning they would not have any legal basis to conduct their investigation.
Most MDB procurement guidelines make it clear that recipients’ business should be conducted ethically, which could serve as a useful tool for any ESG-related violation. Yet, the lack of international harmonization on what ESG covers is a problem: each MDB can set its own criteria for what “ethical behavior” means, and what ESG commitment should include. Fraudulent practices in relation to ESG would, therefore, vary from one MDB to the other; which may give defence attorneys scope to challenge the allegations.
In all, MDBs cannot solely rely on fraud to combat ESG violations.
Transparency and predictability are key to ensure the credibility of MDBs’ sanctioning process. Recipients of MDB funds need to better understand and anticipate what could be construed as an ESG-related wrongdoing. To that end, MDBs must establish clear, comprehensive (and ideally harmonized) ESG standards.
II. How can MDBs investigate ESG violations?
In practice, ESG violations may range from allegations of forced labor and oil spills through to lack of gender diversity. While all are legitimate considerations relating to ESG issues, MDBs are not likely to be equally sensitive to all of them, and investigators are likely to lack proper training and awareness on how to probe all violations.
When a situation may result in various, sometimes competing, ESG considerations, investigators may lack appropriate guidance on how to prioritize them. A compelling example is that of the boom of solar energy, which development is indisputably in line with greater environmental protection. Yet, this industry heavily relies on components produced in China’s Xinjiang region, where allegations of forced labor against the Uyghur population have been made. Similar concerns are raised with electric vehicles, and the dependence on cobalt mining for e-battery, the majority of which is mined from the DRC where allegations on poor working conditions and the use of child labor are raised.
As public scrutiny increases, MDBs will need to invest more thought and effort into combating ESG violations.
Naturally, the challenge of appropriate training and awareness is not limited to MDB investigations. It also concerns national jurisdictions. For instance, criminal environmental law derives from many different sources in France, with many offenses often having overlapping constitutive elements. This requires a greater harmonization at the national level, as well as appropriate training of specialized jurisdictions to adequately tackle environmental issues.
III. Is debarment an appropriate sanction for ESG violations?
The range of available sanctions is largely harmonized across MDBs, with debarments constituting the vast majority of sanctions to date.[1] Most MDBs have adopted a baseline sanction of three-year debarment with conditional release.
However, one may question whether debarment constitutes an appropriate sanction to ESG violations.
Part of the answer pertains to the scope and length of the debarment. If a debarment is limited to specific facilities directly responsible for harm to the environment – instead of targeting an entire corporation – its impact could be limited, as would be its deterrent effect. For example, the US Environmental Protection Agency (EPA) was criticized for debarring only the parts of the BP group responsible for the Deepwater Horizon spill of April 2010, which did not prevent the company from bidding on public procurement contracts with the US Department of Defense.[2]
Some commentators argue that debarment may not be an effective tool to combat certain wrongdoing. The OECD, interestingly, recommended bringing more nuance to debarment enforcement, in particular giving greater weight to a company’s remediation plan and compliance enhancements. This is particularly relevant for ESG violations, where training and improvement are key to setting a long-lasting trend for recipients of MDB funds.
Conclusion
As was the case for the fight against corruption, MDBs have a leading role to play in tackling ESG violations. However, there is no possibility of a “one size fits all’’ approach to ESG. It must be viewed as a matter that cannot be squeezed to fit into the existing enforcement.
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[1] Independent Development Evaluation, Comparative Review of Sanctions Practices across Multilateral Development Banks, African Development Bank, May 2019.
[2] N. A. Kulbiski, Another Perspective on “Too Big to Debar”: BP, the Environmental Protection Agency and the World Bank, Public Contract Law Journal, Vol. 41, No. 4, 2012.
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This article was published on the Webiste of the MDB Integrity Professional Association (MIPA) and can be found under the following link:
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