Business Insight

Bribery Corruption and Climate Change Rising Temperatures and Tensions are on the Horizon

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    The correlation between climate change initiatives and the prevalence of bribery and corruption

    Regulators across the globe are increasing their efforts to detect, intercept and prevent bribery and corruption activities. As a result, the number  of bribery and corruption related investigations and high profile court cases has increased significantly. 

    The recent rise in enforcement activity means that boards, directors and senior management need to be acutely aware of their obligations and responsibilities to identify, mitigate and prevent instances of bribery and corruption both within their own organisations as well as with external partners and suppliers. 

    The influx of financial resources for climate change initiatives threatens to create a thriving market for bribery and corruption in circumstances where there is insufficient, or underdeveloped regulatory and legal frameworks. 

    In the past, bribery and corruption activities have been linked to CO2 reduction efforts and have been flagged as one of the primary hinderances to environmental preservation efforts in the developing world. This sentiment is supported by the Transparency International Global Corruption Report (Global Corruption Report) which observes that the countries most vulnerable to environmental problems also have high levels of corruption. In addition, countries that are proactively addressing and funding climate change initiatives are inherently more vulnerable to bribery and corruption for economic, political, regulatory, markets and jurisdictional reasons. This is due to initiatives having an influence on policies and regulation, misallocations of funds, and manipulation of markets, reporting and verification mechanisms.

    The Financial Action Task Force (FATF) anticipates that environmental crime, such as illegal logging, land clearance or mining, is to be among the most profitable proceeds-generating crimes globally. Thus, there is a need to recognise that climate change initiatives and bribery and corruption impacts are interconnected. 

    Bribery and corruption undermines climate change initiatives

    Growth outweighs proper regulation and structure for climate change initiatives

    Countries around the world are racing to create and implement new policies, legislation and regulation to address climate change risks, as well as investing and financing projects to capitalise on climate change related opportunities. The existing gap between growth and regulation creates a space for unclear or little to no regulation, and makes governments, organisations and their boards vulnerable to increased risks of corruption and bribery which can and does present itself in many different forms.  

    A prime example of this is the number of countries who have become signatories to the Paris Climate Agreement. Billions of dollars are planned to be distributed for the purposes of operationalising climate related projects (for example decarbonisation and adaptation activities). The availability of funds and the number of countries, companies and investors involved forces the question: what can we do to minimise the occurrence and impacts of corruption and bribery risks?

    Corruption and bribery often significantly undermines the real efforts governments, organisations and investors make to combat climate change. 

    Australia vs the rest of the world

    The Australian government has taken steps to strengthen the legislative enforcement of anti-bribery improve measures to prevent bribery. Updates to the ASX Governance Principles (see our update here), the re-introduction of the Crimes Legislation Amendment (Combatting Corporate Crime) Bill 2019 and the Attorney-General’s Department publishing of Draft Guidance on adequate procedures to prevent foreign bribery (see more generally our update here). Despite these steps, continued effort is needed to further strengthen  anti-bribery and corruption laws, as Australia still holds one of the lowest conviction rates for enforcement of bribery and corruption.

    Lack of clear climate change governance structure and laws preventing bribery and corruption

    European Union law requires large companies to disclose information in relation to the way they operate and manage social and environmental challenges through the EU Directive 2014/95/EU (EU Non-Financial Reporting Directive). Anti-corruption and bribery information has been included in the EU Non-Financial Reporting Directive, however the focus is more on reporting on climate change – for example supplementary guidelines on reporting climate-related information. There is not currently a clear linkage in the Directive or supporting Guidelines between reporting on climate change and anti-bribery and corruption risks. This could ultimately impact climate initiatives if companies are not required to consider anti-bribery and corruption risks as a component of their climate change activities and operations.

    An overarching message of the Global Corruption Report is that strengthening governance mechanisms, particularly transparency and accountability, can reduce corruption risk and result in more effective and successful climate change initiatives. The quality of climate governance and the degree to which policy development and decisions are accountable, transparent and responsive will help determine how well it addresses corruption risks. 

    In Australia, as governments and key regulators such as ASIC and APRA increase laws and regulation around climate change, so too will companies and investors need to incorporate these regulations and policies into risk management frameworks to ensure bribery and corruption risks do not undermine climate change governance and initiatives. 

    What is the risk for directors?

    Increase in individual responsibility 

    In the near future, corporate executives may be personally liable for failure to manage and address bribery and corruption risks as they relate to climate change activities. In addition, it is possible that new and more robust accountability requirements, like the FAR regime in Australia (see our update here), could very well extend to ESG and wider climate change activities that involve green finance, investments and similar types of initiatives.

    Hindering companies' growth

    Bribery and corruption also impacts financial growth of companies. The World Bank and Transparency.org estimate that businesses would grow around 3% faster on average if it were not for bribery and corruption. In many countries, corruption can be seen as a type of “tax” of doing business, and has been estimated to be as high as 20%. In an extreme example, when the Italian “tangenpoli” bribery scandal become public, the city rail construction costs fell by 52% and subway line construction fell by 57%. 

    Levels of funding dedicated to climate change policy and initiatives are projected to be significant in order to achieve carbon emission and climate positive targets, meaning it is crucial that bribery and corruption risks are managed to allow these initiatives the opportunity to be successful.  

    Supply chain risks 

    Climate change will have a significant impact on those parts of the world  most economically vulnerable. Increases in temperature, floods and severe weather shocks directly impact habitation and supplier productivity. Research into the impacts of climate change indicate a significant reduction in resource availability, increases in costs and disruptions to manufacturing and logistics.

    Bribery and corruption pose a significant risk across supply chains due to the global nature, complexity and sheer volume and scale across the operating environments. These risks are increasingly prevalent when impacts to supply chains leave organisations scrambling to fill gaps while still maintain customer expectations for quality and efficiency across their operations. New suppliers and geographies bring new risks, such as exposure to new intermediaries or foreign officials, increasing the exposure to corruption and bribery across a supply chain.   

    Impacts to global supply chains, coupled with poor supply chain management and inadequate risk and governance practices, create a clear opportunity for bribery and corruption practices to materialise.

    What can be done? Practical steps for combatting bribery and corruption in the climate change space

    It is vital for organisations to implement a strategy for the identification of climate change related bribery and corruption risks. 

    As political awareness and regulation matures, organisations will be required to demonstrate how these risks are being addressed. 

    It is key that organisations implement robust anti-bribery and corruption controls and monitoring framework and risk management practices, that enable an organisation to understand the constantly evolving risk environment. 

    Organisations should be addressing their risks by utilising and adapting existing risk management practices to identify and mitigate bribery and corruption in the climate change space. 

    Discovery and gap analysis

    Organisations engaging in any type of climate related activities, including with third parties and suppliers, need to understand the local and global regulatory landscape and identify bribery and corruption risks relevant to their business. 

    Organisations are encouraged to consider and adopt regulatory guidance on managing climate change related risk, including best practice disclosure standards such as the TFCD recommendations, APRA's regulatory guidance on addressing climate related financial risks, (see our update here) and ASIC's guidance for assessing climate change risk and disclosures.

    In addition, organisations should undertake a gap analysis of existing risk frameworks to identify areas of material concern and strategically prioritise during the implementation phase. 

    Implement and uplift

    Organisations are encouraged to implement key risks into existing risk management registers and frameworks, risk appetite statements, and remuneration and accountability practices to enhance overall risk and governance practices.

    It is vital that Boards and executives keep abreast of any changes to anti-bribery and corruption regulations in all of the jurisdictions that an organisation operates in, ensuring key climate change risks are considered. 

    Investment in training and knowledge uplift for staff will prove crucial to enabling staff to properly identify and manage key bribery and corruption risks in the climate change space.

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    For a robust anti-bribery and corruption framework, organisations should take steps to operationalise the efforts made to implement and uplift the risk frameworks. This includes undertaking regular risk assessments, including annual reviews of anti-bribery and corruption framework, climate change frameworks and associated controls. 

    Organisations should embed strong reporting mechanisms, with accurate reporting of risks to compliance staff, management and Board and Risk committees, and design clear processes for when incidents have been identified, to ensure a rapid response and investigation can take place.

     

    Ashurst Risk Advisory Pty Ltd (ABN 74 996 309 133) provide services under the Ashurst Consulting brand. Ashurst Consulting services do not constitute legal services or legal advice, and are not provided by Australian legal practitioners. The laws and regulations which govern the provision of legal services in the relevant jurisdiction do not apply to the provision of non-legal services. 

    For more information about the Ashurst Group and the services offered, please visit www.ashurst.com

    Liability limited by a scheme approved under Professional Standards Legislation (Ashurst Risk Advisory only).

    Authors: Elena Lambros, Partner (Ashurst Risk Advisory); Rob Hanley, Partner (Legal Governance Advisory); James Clarke, Partner; Samantha Carroll, Counsel; Charlotte O'Sullivan, Executive (Ashurst Risk Advisory); Wyndham, Specialist (Ashurst Risk Advisory) and Maxine Viertmann, Lawyer (Legal Governance Advisory)

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