As ESG Investments Continue to Rise, Whistleblowers are Critical to Uncovering Fraud

Kohn, Kohn & Colapinto LLP

Sustainable investment, known as ESG Investment, which stands for the focuses of Economic, Social and Governance, has skyrocketed in recent years. Sustainable investment increased by $288 billion globally throughout 2020. ESG assets are expected to represent “more than a third of the $140.5 trillion in projected total assets under management” at over $50 trillion by 2025. This type of investment can have a significant influence, as it can serve as an incentive for companies to better manage their impact on climate change and human rights by requiring due diligence in these areas to increase investment. Its impact can travel from publicly traded companies to seemingly unconnected industries and issues through their supply chains

There are multiple reasons for the sudden increase in ESG Investment. The first is that ESG Investments have recently outperformed other stocks. These socially conscious investments had limited returns for investors in the past; however, ESG Investments now have strong performance even through turbulent markets. A second reason for the increase in ESG Investment is the growing recognition of the urgency of environmental and social issues globally and the need for quality internal governance in a corporation. This recognition is especially prevalent in Millennials, who are significantly more likely to review their investments for ESG impact. The last main reason is the growth of big data technology, which enables assessing companies on economic, social, and governance issues.

Some issues have arisen in light of the new interest in ESG investment. One main issue is the lack of standardized definitions for what qualifies as ESG. This issue is especially prevalent for the “Social” aspects of ESG, for which definitions range widely. John Ruggie, architect of the United Nations “Protect, Respect and Remedy” Framework, notes that the “Social” aspects of ESG align with protected human rights. Ruggie urges using internationally recognized human rights standards” such as the Guiding Principles from the Corporate Responsibility to Respect Human Rights as a basis to measure the “Social” policies that corporations follow.

The SEC has noted the increased interest in ESG investment. In April 2021, it formed a Task Force to focus on climate and ESG issues, including misconduct in ESG disclosures. In a Risk Alert, also from April 2021, the SEC noted “instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks” in “examinations of investment advisers, registered investment companies, and private funds engaged in ESG investing.” The agency is currently working to make standardized and mandatory reporting requirements on climate impact for corporations.

For any new disclosure requirements established by the SEC, whistleblowers will play a key role in ensuring that corporations' statements are not false or misleading. Giving climate, environmental, and human rights whistleblowers the opportunity to report violations to the SEC will ensure they have access to the whistleblower protections of the Dodd-Frank Act. Whistleblowers are already responsible for leading to almost $5 billion in financial remedies by the SEC since 2011. By strengthening the ESG disclosures required by corporations, global whistleblowers will have an increased ability to protect the climate, environment, and human rights.

Some aspects of ESG investment, such as the lack of standardization for measuring “Social” aspects of companies and SEC’s climate impact disclosures, are not yet fully established. However, the rising influence of ESG investment is driving action to address these concerns. ESG investment is a new powerful way to make corporations and investment funds manage their impact on the climate, environment, and human rights around the globe. As in other areas, whistleblowers will play a vital role in enforcing ESG Investment regulations established in this new field.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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