Scandalous scam or essential investor? What ESG means for your global trade business


Lately, there has been a lot of talk about environmental, social and governance (“ESG”) policies in companies. Elon Musk has called ESG an “outrageous scam”.[1] And although there is no clear definition, investors and rating agencies, as well as end buyers and consumers, are increasingly looking for financially and morally sound companies that are committed to these principles. , and the US government codifies various aspects of the broader ESG umbrella into law. Investors are increasingly active and interactive with the companies in which they invest. Since the financial incentives to appear ESG compliant are high, companies are also likely to cheat on ESG reporting.

ESG principles are increasingly part of compliance programs and integrating ethics into corporate culture and identity is paramount. Companies cannot claim to be ESG compliant by simply ticking the right boxes. Companies with international business activities should consider how ESG principles are integrated into their operations. While commentators tend to pay a lot of attention to the environmental aspect, this article will examine trade-related areas encompassed by the social and governance aspects of ESG, including human rights, forced labor , trade controls, anti-corruption and other business areas. trade-related business compliance.

Forced labor

Human rights, which encompass forced labor issues, overlap with social and governance principles. ESG-conscious companies do not want to contribute to human rights abuses, even indirectly through their supply chains. In recent years, the United States government has taken steps to address human rights abuses by preventing forced labor goods from entering the United States through a web of laws and regulations that overlap, including the forthcoming Uyghur Forced Labor Prevention Law (“UFLPA”). which takes effect on June 21, 2022.[2] The UFLPA creates a rebuttable presumption that all goods originating from or produced in the Xinjiang Uyghur Autonomous Region of China are the product of forced labor and prohibited from entry into the United States. Customs and Border Protection will detain or seize these goods unless the importer can overcome the presumption of forced labor by presenting clear and convincing evidence, which could be costly in terms of time, legal fees and supply chain disruptions.

A multi-agency U.S. government publication, the Xinjiang Supply Chain Business Consulting[3] – originally published July 1, 2020 and updated July 13, 2021 – discusses the risks of doing business that may involve such forced labor and provides guidance on how businesses can consolidate those risks. Unsurprisingly, these warnings and advice, which are based on the International Labor Organization’s Handbook on Combating Forced Labour,[4] focus on a key element of ESG policies in general: enhanced due diligence, which includes awareness of red flags and warning signs, and knowledge of relevant government agencies and their laws and regulations. This increased due diligence facilitates further action against forced labor from an ESG perspective. These include: 1) implementing ESG policies prohibiting forced labor within your organization; 2) audit and map your supply chain; 3) build relationships with suppliers to promote ESG objectives; 4) training of stakeholders both internal, such as employees, and external, such as vendors and suppliers; 5) record keeping in accordance with applicable government regulations; and 6) monitor your ESG and forced labor policies and programs to identify strengths and areas for improvement.

Trade sanctions and controls

Beyond prohibiting the import of forced labor products, to promote certain ESG principles abroad, such as human rights and other areas under the umbrella of social and governance, the United States employs a variety of sanctions and trade controls. The Bureau of Industry (“BIS”) of the Department of Commerce administers export controls under the Export Administration Regulations (“EAR”). Under EAR, BIS controls the export of US-origin products, software, and technology for a variety of reasons, depending on the nature of the product, including several reasons that fall under ESG principles. These social and governance issues include counter-terrorism, chemical and biological weapons, crime control and regional stability. Promoting these goals aligns with ESG on its face, effectively ensuring that malicious actors do not have access to products and technology that could facilitate human rights abuses or other undemocratic activities. or illicit.

Beyond Commerce’s export control regime, there are other government sanction programs with which companies must comply. Chief among these are the Treasury Department’s Office of Foreign Assets Control (“OFAC”) nationwide embargoes on North Korea, Cuba, Syria, Iran, and North Korea,[5] and the regional embargoes of the Crimea, Donetsk and Luhansk regions in Ukraine. In addition, OFAC administers sanctions programs, such as one that enforces the Magnitsky Human Rights Accountability Act,[6] targeting repressive regimes and perpetrators of human rights abuses. Compliance with these programs is crucial for any business, not just those that import or export. Beyond the obvious human rights violations and social ills that these sanctions programs are meant to combat, the consequences of violating sanctions regulations can be serious. Penalties can be steep – up to $1,000,000 per violation in criminal fines[7] – not to mention the reputational damage that can result from, for example, designation on one of the Treasury sanctions lists. Any ESG-conscious company will want to avoid transactions that go against its ESG policies, and a strong sanctions and trade compliance program can reinforce these policies.

The heads of the Departments of Commerce and Treasury, along with those of the Departments of Justice, Homeland Security, State, Energy, and other U.S. government agencies, constitute the Committee on Foreign Investment in United States (“CFIUS”).[8] Under the Foreign Investment Risk Review Modernization Act (“FIRRMA”), CFIUS reviews foreign investment transactions for any national security risks they may pose. In certain situations, domestic companies with foreign investors must disclose certain information to CFIUS. Although “national security” is not defined by CFIUS, constituent agencies are likely to review any foreign investor’s ties to undemocratic or repressive regimes for possible threats to national security. Thus, a trade-related ESG program should incorporate, to the extent appropriate, controls or procedures related to possible foreign investments.

Anti-Corruption Laws

Companies doing business outside of the United States must straddle the line between US legal business practices and local customs: a typical payment or gift in one region may be considered a bribe by the US government . Bribery and corruption have negative downstream effects on society, the kind that ESG principles seek to address. The Foreign Corrupt Practices Act (“FCPA”) criminalizes corrupt payments or offers to foreign officials for the purpose of obtaining business and applies to all U.S. persons and certain foreign issuers of securities.[9] Thus, preventing corruption and complying with the FCPA is not only good practice for effective ESG programs, it is also the law. In addition, the FCPA requires companies to meet certain accounting requirements, reiterating the need to embed ESG principles into core business functions.

ESG reporting and disclosure

Finally, much is written about ESG in the context of Securities and Exchange Commission (“SEC”) disclosure, reporting and enforcement. April 2022, one year after the formation of the ESG Task Force,[10] saw the SEC’s first major ESG enforcement action. The SEC has accused Brazilian iron ore producer Vale SA of securities fraud, alleging that the defendant made false and misleading ESG disclosures regarding the security and stability of its mining operations.[11] The case is ongoing, but the enforcement action announcement demonstrates that companies must carefully review any ESG-related report or disclosure – including any of the areas discussed in this article – and signals that the SEC is serious about promoting ESG principles.

Conclusion

Because the principles encompassed by ESG are so broad, it is necessary to assess all of a company’s operations to determine where they can be integrated. Just as there is no single compliance program, there is no single ESG program. Integrating ESG principles into operations can be timely or seem overwhelming. If your organization is unsure where to start, conducting an enterprise-wide ESG audit can help address key areas where ESG policies or objectives can be implemented. This can be used to create ESG-related metrics, a code of conduct or a comprehensive compliance program to ensure your company is better able to achieve its ESG goals and attract ESG-conscious investors. ‘ESG.

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