How heavily will ESG factor in global regulatory investigations and enforcement in 2022?

Will the increased profile and progress of commercial and institutional ESG-related initiatives and goals come under the regulatory investigations and enforcement spotlight following multi-national events like COP26?

The spotlight is shining

Vigorous debates will continue to rage on the global stage - in boardrooms and in the main streets of local communities - about whether COP26 made enough progress. Regardless of personal or institutional perspectives, one thing is clear: regulators are engaged. Some are leading the charge and others are just coming on-line, waiting for more cohesive and concrete guardrails to be developed.

Whatever levels of investigation and enforcement activity your institution may have seen this year, you should expect more in 2022, and environmental, social and governance (ESG) will be a focus. Transparency and accuracy are essential to navigating these choppy and uncertain waters.

2021 pronouncements foreshadow activity

US Acting Comptroller of the Currency, Michael Hsu issued “Five Climate Questions Every Bank Board Should Ask” in November 2021. His theme is “turning words into action.” While no mention is made of enforcement or investigations, the questions will drive action and begin to create roadmap for examination and enforcement when things go awry.

The five questions are:

  1. “What is our overall exposure to climate change?”
  2. "Which counterparties, sectors, or locales warrant our heightened attention and focus?”
  3. "How exposed are we to carbon tax?”
  4. "How vulnerable are our data centers and other critical services to extreme weather?”
  5. "What can we do to position ourselves to seize opportunities from climate change?”

Executives’ strategies to grapple with and address these questions will be shaped by the institution’s culture, current strategy and ability to drive change. Representations institutions make to regulators and to the marketplace will be subject to intense scrutiny and potentially investigation and enforcement.

Evolved risk culture intelligence - dare I suggest “RQ” - will mitigate risk and accelerate sustainable growth.

In many instances, that may involve regulators in multiple countries, depending on the institution’s global footprint. To me, the final question is the thorniest - risk culture will be key. Just as high emotional intelligence (EQ) has been crucial to sustaining global workforces through the pandemic, evolved risk culture intelligence - dare I suggest “RQ” - will mitigate risk and accelerate sustainable growth. Safety and soundness, transparency and sustainability will be weighed against commercial advantage and gains. Examiners and enforcement teams may take differing views of the relative components and ultimate balance institutions strike. For example, the U.S. Securities and Exchange Commission (SEC) and the UK Serious Fraud Office may take different positions on whether statements regarding “sustainability” of new business practices constitute greenwashing, whether vendor and counterparty ESG vetting is deficient, or whether the institution’s green financing statements are accurate and transparent.

Guardrails and resources continue to emerge

Current standards are not uniform globally and will continue to emerge in 2022. In the EU, the Sustainable Finance Disclosure Regulations (SFDR) released in March 2021 have been augmented with Regulatory Technical Standards. Discussions, including at COP26, suggest that many of the principles in the SFDR can apply globally, but the debate continues. Will the UK Financial Conduct Authority’s (FCA) Task Force on Climate-Related Financial Disclosures (TCFD) concur? In the US, the administration and regulators are quickly coming up to speed and establishing profile.

Current standards are not uniform globally and will continue to emerge in 2022.

The Biden Administration released Executive Order 14030 regarding climate-related financial risk, and the SEC announced the formation of its Task Force on Climate & ESG Risk, led by Acting Deputy Director of Enforcement Kelly L. Gibson. According to Task Force Acting Chair, Allison Herren Lee, it “will play an important role in enhancing and coordinating the efforts of the Division of Enforcement, the Office of the Whistleblower, and other parts of the agency to bolster the efforts of the Commission as a whole on these vital matters.” In the UK, the FCA’s 2022 Business Plan highlights ESG initiatives and resources. For example, ensuring the quality of disclosures and practices of ESG or sustainable investment funds is a key focus. The FCA also seeks to ensure, among others: “integrity in the market for ESG-labelled securities, supported by the growth of effective service providers – including providers of ESG data, ratings, assurance and verification service” and “innovation in sustainable finance, making use of technology to bring about change and overcome industry-wide challenges.”

Investor and customer voices take the stage

The voices of investors, customers and employees (and their respective perceptions) will tend to drive enforcement focus on ESG-related issues. We can expect to see an increase in shareholder proposals targeting ESG issues as well as potential shareholder intervention (or attempted intervention) to drive certain ESG-related change. How financial institutions manage these demands could also heighten enforcement risk.

The voices of investors, customers and employees will tend to drive enforcement focus on ESG-related issues.

For example, US agencies are actively highlighting the role of and support for whistleblowers in unearthing misleading claims regarding green financing and sustainability goals progress. In fact, the SEC included in the announcement of its Climate & ESG Taskforce a specific weblink for whistleblower complaint submission.


ESG enforcement is gaining momentum. In 2022, we should expect increasing global collaboration. In my view, regulators are savvy that compliance accelerates in the wake of publicized enforcement. Three keys to avoiding that scrutiny are: (1) investing in “RQ” culture, (2) continuously improving operations for ESG initiatives, and (3) focusing on transparency to investors, customers and regulators.

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Partner and Global Practice Co-Leader - Financial Services Disputes and Investigations, Los Angeles

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Just one of the questions we explore in our latest Emerging Themes in Financial Regulation 2022 Horizon Report.

New for 2022, our report combines the views from our teams in both the US and UK with those of market practitioners and regulators.

We deep-dive into six themes:- Sustainability & ESG; Talent & People and Inclusion & Diversity; Governance; Regulatory Risk & Enforcement; Technology; and Changing Markets.

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This document provides a general summary and is for information/educational purposes only. It is not intended to be comprehensive, nor does it constitute legal advice. Specific legal advice should always be sought before taking or refraining from taking any action.

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