Increased reporting requirements together with intense scrutiny from regulators and activists
Existing criminal laws often already cover ‘greenwashing’ of products and services, but many jurisdictions are introducing or tightening specific rules on disclosures on ESG credentials.
The EU is leading the field with its Corporate Sustainability Reporting Directive (CSRD). In 2025 the first cohort of in-scope businesses under CSRD will undergo their first reporting cycle. They will have to report on how ESG issues affect their financial performance, and their impact on the environment and society. Although this is an EU Regulation, its impact will be felt more broadly because non-EU businesses that do business in the EU are also in scope. CSRD will lead to much more information on ESG matters being publicly available, which is bound to be monitored by those looking to bring challenges.
Some businesses are already facing enforcement action because of ESG disclosures, e.g., ESG-related enforcement in 2024 included:
- The Australian Securities and Investments Commission (ASIC) successfully pursued civil penalty proceedings against two financial services providers for greenwashing.
- The U.S. Securities and Exchange Commission (SEC) imposed a USD17.5 million civil penalty on an investment firm for making misleading statements about the percentage of assets under management that integrated ESG factors in investment decisions.
While most enforcement activity has been regulatory in nature, there is likely to be pressure on authorities to use criminal enforcement in serious cases, e.g.:
- The criminalization of ESG breaches is an ongoing trend in France with more than 25 environmental deferred prosecution agreements concluded since 2020. The French Supreme Court also confirmed in January 2024 that French courts have jurisdiction over international crimes against humanity that companies commit overseas.
- In Germany, several criminal investigations have been launched into allegations of greenwashing, including potentially false ESG statements in respect of financial products.
- In the UK, dishonest greenwashing could form the basis of a ‘failure to prevent fraud’ prosecution, which comes into force on September 1, 2025 and will lower the bar for corporate criminal liability.
We have seen a rise in environmental prosecutions over the past year, and we expect this trend to continue, driven by the new EU Environmental Crime Directive, which came into force on May 20, 2024, and places a significant focus on corporate liability with tougher penalties. The introduction of new offenses in various jurisdictions, including of “ecocide” in Belgium, reflects the growing use of criminal law in the ESG arena.
On the civil liability side, some businesses are already facing increasing claims from investors alleging that they were misled into investing based on false ESG disclosures, as well as claims from NGOs to increase their environmental efforts (such as the legal action against Shell started by environmental groups in the Netherlands).
Pulling in the opposite direction, there is an ESG backlash in certain U.S. states where governors, state legislatures, and state treasurers have initiated an “anti-ESG” campaign to restrict the ability of government institutional investors (such as state and local pension funds) to consider ESG factors in their decisions. Some significant investments have been terminated on this basis. The new Trump administration is already signalling substantial changes in priorities. We anticipate that U.S. regulators may open new investigations rooted in domestic political interests, for example by re-examining companies’ approaches to environmental issues and diversity initiatives. We are already seeing examples of large U.S. businesses backtracking on their commitments in this regard.
Supply chain risk
The EU Corporate Sustainability Due Diligence Directive (CS3D) will come into operation in stages from July 2027. The CS3D is groundbreaking in two significant respects. First, it introduces mandatory human rights and environmental due diligence across EU and non-EU companies’ worldwide chains of activities, moving away from the generally voluntary nature of such due diligence (except for, e.g., French and German laws that already mandate certain due diligence steps and impose criminal or administrative sanctions). Second, it requires companies to adopt and put into effect a climate transition plan, which goes beyond the requirements of the International Sustainability Standard Board’s global baseline standard and the CSRD.
Under CS3D, companies can face a range of adverse consequences for non-compliance, including regulatory investigations and enforcement, complaints/regulatory submissions by concerned persons, hefty fines, and challenges with contractual award and performance. Additionally, companies may face civil liability claims, with trade unions and NGOs able to bring claims on behalf of affected persons.
Like the CSRD, the CS3D encompasses both EU-based companies and companies from third countries, provided certain thresholds of employees and turnover are met.
Even in countries not covered by existing or proposed specific supply chain due diligence laws, NGOs and activists are using existing criminal laws in novel ways to try and force enforcement action against alleged human rights abuses and environment harms in supply chains. For example, in the UK there have been challenges to alleged human rights abuses in the cotton supply chain and environmental harms arising from mining. In both cases activists have argued that human rights abuses or environment harms mean that the cotton or metals in the relevant supply chain constitute proceeds of crime and therefore anyone dealing with it are money laundering. These arguments may be bolstered by the increased criminalization of environmental harms, e.g., under the EU Environment Crime Directive. Similar arguments are being used in a bid to persuade the FCA not to allow the IPO in London of a fast fashion online retailer, again alleging forced labor in its supply chain.
Geopolitics will complicate supply chain compliance. In 2024, China’s Ministry of Commerce launched an investigation, under its ‘Unreliable Entity’ regime, into a large U.S. company for its alleged refusal to source cotton from a particular region of China.
Labor exploitation closer to home
In addition to global supply chain issues, there are also potential ‘social’ issues closer to home, where there is scrutiny of labor practices and associated tax issues. For example:
- Authorities in Belgium are pursuing more prosecutions in relation to “social dumping” (the practice of employing cheaper overseas labor to undercut domestic wages), and modern slavery. The construction sector has been a focal point for social inspection services, which expect businesses to remain vigilant and ever more proactive in their compliance efforts. It is not solely the direct employer that is liable in such cases; “chain liability” means that other parties in the supply chain, including principal contractors, can be held accountable for violations.
- In Italy, public prosecutors have intensified their scrutiny of corporations regarding illicit labor exploitation and related tax offenses. The Italian authorities have targeted not just direct perpetrators, but also a number of international businesses operating in logistics, fashion, and distribution that have benefited from or facilitated such practices through their subcontractors or suppliers. In one example, a seizure of EUR64.7m was ordered against a well-known supermarket group related to outsourced logistics workers.
Conclusion
Corporate accountability will remain a key focus for many regulators, with increased emphasis on holding companies and their executives accountable for ESG-related misconduct, whether it be for misleading statements about products, services, or investments, ESG supply chain weaknesses, or financial crime associated with delivering Net Zero projects.
Businesses should ensure that their governance structures are robust, and that directors and executives are well-informed about their ESG responsibilities.
Legal teams will need to be pro-active in managing these risks by ensuring there are robust compliance processes in place to mitigate potential legal challenges, as well as responding to such challenges as they arise both legally and reputationally.
This article is part of the A&O Shearman Cross-border White-Collar Crime and Investigations Review 2025.
