by J.S. Nelson

There are several basic reasons why we should expect to see corporate liability move in the ESG space in the U.S. as well. It may start with civil liability, but it may move quickly to criminal liability, primarily on the basis of fraud.

1. We are experiencing tremendous changes in social norms around ESG factors. In 2021, 76 percent of millennials age 33 to 40 thought that climate change represented a serious risk to society. The investment community is responding. By the end of 2019, 564 actively managed U.S. funds had added ESG criteria to their prospectuses. Twenty-three of the funds had over U.S. $ 1 billion in assets.
2. Changing norms tend to push enforcement behavior. These arguments have long undergirded the academic debate about the place of civil, criminal, and other sanctions. Professor David Skeel has written about how intertwined shaming sanctions are with enforcement norms. Professor Samuel Buell has written about the social value of labeling certain corporate behaviors as criminal, above and beyond the shaming value of civil liability. Professor Jennifer Arlen, recently in the pages of this blog, as well in other formats, has noted the important political economy of having criminal sanctions as corporate enforcement tools.
3. There is a thin line in U.S. corporate enforcement between civil and criminal liability. Part of this problem is the nature of corporate cases. They tend to contain so much documentary evidence that it can be difficult, especially with the availability of willful blindness instructions, to deny sufficient coordinated intent. Similarly, with that level of documentation, it can be easier to meet the burden of proof for criminal behavior “beyond a reasonable doubt” in evaluating the behavior of the corporation as a whole.

The DOJ has started to move in the area of ESG enforcement, and  has announced the dedication of enforcement resources for additional movement. The precursor for the recent German raid was legal action in the U.S. In December 2021, the DOJ informed Deutsche Bank AG that it may have violated a criminal settlement for failing to inform prosecutors of its failures to live up to ESG disclosures. In March 2022, Deutsche Bank agreed to extend the term of its outside compliance monitor on this basis.

Although the U.S. Deutsche Bank result arrived in the easier procedural form of enforcing an existing criminal settlement, as opposed to the generation and trial of a new indictment, the DOJ wants to step up corporate criminal enforcement. In her October 2021 keynote address, Deputy Attorney General Lisa Monaco explained that the Biden administration is “going to find ways to surge resources to the department’s prosecutors” combatting corporate crime. Enforcing the truth of ESG promises seems like low-hanging fruit in line with this approach.

Who Would Have Liability for ESG

It may be initially easier to impose criminal liability on corporations through respondeat superior, but there is a debate whether personal liability for directors, officers, and particularly compliance personnel may be coming too.

1. In March 2022 remarks to NYU Law’s Program on Corporate Compliance and Enforcement, and as noted previously in this blog, the DOJ has announced that it will consider requiring chief executive officers and chief compliance officers personally to certify the accuracy of the company’s annual reports and the effectiveness of the company’s compliance program before releasing the companies through resolution agreements. Not only may the company be liable for potential misrepresentations in documents, these individuals may liable personally as well.
2. The New York City Bar Association has already asked the SEC and the Financial Industry Regulatory Authority to consider a new framework for better protecting compliance officers from personal liability. The Bar Association highlighted a “sustained tide of concern” over cases in which compliance officers have been held personally liable for actions that “do not result from fraud or obstruction on their part.”
3. One of the largest sources of concerns coming to law departments is climate change and sustainability, although departments feel ill-equipped to respond in this area. According to a new joint study between Harvard Law School’s Center on the Legal Profession and EY, sixty-one percent of 1,000 general counsel expect to have to increase their collaboration with the business on sustainability issues. Ninety percent of company law departments report challenges in creating policies on environmental issues because there are not enough specific regulations to follow.

Closing Thoughts

Given this evolving landscape on potential criminal liability for ESG issues, and particularly climate change, we should be asking some questions and taking some measures.

1. Is this ad-hoc U.S. approach how we should be moving forward? We should want businesses to embrace action on climate change, but imposing liability without additional measures may backfire—and definitely leads to We need a comprehensive solution to respond to climate change that more clearly articulates the roles and expectations for businesses.  Given paralysis in Congress, and how reluctant the United States seems to be to adopt international standards, we are putting our companies at a disadvantage in meeting expectations for action that are increasingly based on those standards. It is in U.S. businesses’ interest to have a more uniform regulatory environment and expectations. Now that so many other countries have embraced uniform standards, businesses should push the United States to embrace similar standards too.
2. Can we speed up U.S. regulatory guidance on ESG? The SEC has put new climate change disclosure rules out for public comment. As with other attempts at standardization to protect them from liability, the business community should be welcoming these rules and encouraging their passage. In the face of potential criminal liability, 90 percent of company law departments should not be concerned that current U.S. regulations are too vague to follow. Even if we cannot adopt broader international standards, articulating climate change disclosure rules is a first step to making our regulations less vague.
3. Can we reduce the amount of fraud and other abuse in ESG? This misconduct is what is drawing regulatory attention and pending suits. Companies should be proactive in ensuring that they say what they do, and actually do what they are say. This sounds basic—and it should be the foundation of any good compliance program—but there is so much money to be made now in ESG promises that the temptation to cheat and not follow through is always there. See additional examples in my manuscript here. These are exactly the moments that test ethics in the marketplace, and we should want to pass that test.

J.S. Nelson is a Visiting Associate Professor at Harvard Business School, and Associate Professor of Business Ethics on leave from Villanova Charles Widger School of Law. It is based on her manuscript, “The Future of Corporate Criminal Liability: Watching the ESG Space,” available here.

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