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Is the EU ramping up for criminal ESG enforcement?

The Environmental, Social, and Governance (ESG) sphere has dominated the international business and legal landscape in the past few years. ESG, which relates to non-financial performance indicators for an investment or a business, makes it possible to assess corporate actions’ impact on the earth in terms of sustainability and ethics. What started as “soft law” embodied by UN and OECD guidelines, ESG is shifting into “hard law.” With that change comes legal obligations that drive enforcement. 

The EU as the driving force behind ESG legislation

The EU Corporate Sustainability Reporting Directive (CSRD), effective January 5, 2023, aims to expand sustainability disclosure requirements for large companies, which should take due diligence and actions to prevent or end adverse impacts of the business into account. The CSRD requires reporting on sustainability matters, defined as environmental, social and human rights, and governance factors, including sustainability factors in the meaning of the EU Sustainable Finance Disclosure Regulation (SFDR), which explicitly adds anti‐corruption and anti‐bribery matters to this list. The SFDR seeks to achieve more transparency regarding how financial market participants and financial advisers integrate sustainability risks into their investment decisions and advice. 

On June 1, 2023, the European Parliament approved a proposal from the European Commission for a Corporate Sustainable Due Diligence Directive (CSDDD). This Directive aims to ensure, through mandatory due diligence in global value chains, that large companies active in the EU market contribute to sustainable development and the sustainability transition by respecting human rights and the environment. The European Parliament explicitly considered that companies should consider corruption and bribery factors when carrying out human rights and environmental due diligence. 

The European Commission’s recently proposed Green Claims Directive (GCD) aims to protect consumers from greenwashing, which is when corporations make misleading claims about their green credentials and falsely market them as sustainable.

All of these EU legislation initiatives should be seen in the context of the European Green Deal (2020) and the “Fit for 55” package, both focused on reaching carbon emission reductions by 55 percent before 2030 and making the EU climate-neutral by 2050. 

Counter to the “ESG-backlash” trend in the U.S. – for example, the Florida Act Relating to Government and Corporate Activism that prohibits investment plans based on non-pecuniary factors, including ESG factors – European ESG legislation is developing quickly and impacts all industry sectors. 

Common crimes in an ESG context

The broad European sustainability approach within ESG makes it relatively simple to point out so-called “classic crimes” relevant to ESG enforcement. Examples within the Environmental domain are fraud with hazardous waste or chemical substances, illegal or improper use of pesticides, illegal trade in protected species, etc. Regarding Social, examples of common crimes are child labor, forced labor, and modern slavery.

Examples of crimes in the Governance space are tax and bankruptcy fraud, violation of economic and trade sanctions, anti-money laundering due diligence violations, and corruption. In a European and ESG context, effective and robust compliance programs are becoming increasingly important in avoiding criminal liability for corporations and their management.

The EU Deforestation Regulation, effective June 29, 2023, will expand the spectrum of ESG violations. As of December 30, 2024, making available certain products (palm oil, soya, wood, cocoa, coffee, cattle, and rubber) on the EU market will be prohibited unless the products are deforestation-free and fulfill other ESG requirements. This Regulation contains an extensive due diligence process and a comprehensive enforcement system. 

Laundering of money and other assets

The 2018 EU Directive on combating money laundering indicates 22 crimes as criminal activity, which form the basis for a money laundering offense when committed with intent. Human trafficking, sexual exploitation, and environmental crime are ESG-related crimes on that list. It expands jurisdiction: the money laundering offense extends to assets derived from conduct that occurred on the territory of another Member State or of a third country, where that conduct would constitute a criminal activity had it occurred domestically.

A recent study shows that Brazilian cattle raised on land created by illegal deforestation in the Amazon was laundered through a sophisticated ‘layering’ system before being slaughtered in Brazil and shipped to the EU as prime beef. 

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The comprehensive EU legislation on ESG topics should force large corporations to enhance their due diligence and compliance programs. Corporations should be aware that the European regulators’ ESG focus could increase criminal enforcement actions.

Especially because of the EU’s broadened definition of intentional money laundering, EU prosecutions could arise even from ESG predicate offenses that are not punishable in the third country where they take place. Corporations should keep improving their compliance programs to mitigate potential liability for financial crimes.

A version of this article originally appeared on the Bulletin of the International Academy of Financial Crime Litigators and is published here with permission.

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