No Match Found
Public, political, regulatory and investor focus on sustainability issues has increased pressure on companies to ensure that their products and services are sustainable. Being able to demonstrate a comprehensive response to Environmental, Social and Governance (ESG) concerns can have a material impact on the long-term economic success of a company. However, as our recent Global Economic Crime Survey showed, increasing focus on ESG issues, combined with an evolving regulatory landscape presents new fraud risks.
Committing ESG fraud can result in serious consequences for the company, its directors and business partners. These include reputational damage and liability risks as well as fines and imprisonment. The risk of ESG fraud should therefore be considered proactively, with appropriate controls being included in a company’s compliance programmes. ESG fraud should also be taken into account during transactions, where it can seriously affect deal value. Finally companies should ensure that they have access to independent investigative support should accusations of ESG fraud arise.
“Repercussions from ESG fraud are starting to be felt whether these be in share price or through regulatory action.”
ESG fraud is a broad term that can refer to breaches of laws, regulations, internal policies, and other codes of conduct in the corporate environment involving sustainability data. This includes, for instance, fraud, breach of trust and falsification of documents, but also environmental offences or violations of human rights.
The risks of ESG fraud are increasing due to rising pressure from regulators, investors, consumers and the public. Updates to UK legislation such as the Modern Slavery Act and the introduction of mandatory disclosures for UK listed companies under the Taskforce on Climate-related Financial Disclosures must be taken into account by companies. However, regulatory requirements are not always straightforward, especially when companies operate in multiple territories. The lack of uniform requirements for the disclosure of sustainability metrics, combined with increasing voluntary disclosures by many companies make it even more difficult to identify fraudulent actions.
Greenwashing refers to companies making fraudulent claims in relation to their green or sustainable credentials in order to induce their customers and clients to buy more of their goods and services or buy them at a premium. It encompasses a wide range activity from false advertising, to breaches of environmental legislation, to old fashioned fraud that uses sustainability or environmental concerns as the hook. It is fast becoming an everyday term, with numerous recent high profile cases in the media. Regulators around the world are coming to grips with growing political will and public sentiment to tackle greenwashing. Cases of greenwashing served for countless negative headlines in recent years. Companies deliberately present themselves as particularly sustainable, without actually setting sustainable accents. The consequences for companies should not be underestimated, as greenwashing allegations can cause serious reputational damage.
Remuneration linked to ESG metrics and ESG-linked financing both increase the risk of manipulation of ESG data for financial gain. Increased reporting requirements and demands from investors and other stakeholders for disclosure of ESG data may also increase the risk of ESG data being manipulated to meet sustainability targets in reports.
ESG fraud can take different forms. Risks exist at all levels of the company and can also arise from business partners.
On 31 May 2022, the Department for Business, Energy and Industrial Strategy (BEIS) published its Response Statement (the Statement) following its consultation on reforms aimed at ‘Restoring trust in audit and corporate governance’. This states that BEIS intends to proceed with the proposal that directors of certain UK Public Interest Entities (PIEs) will be required to report on the steps they have taken to prevent and detect material fraud. 'Material fraud' broadens that definition of fraud to include non-financial fraud such as ESG fraud. Directors can therefore expect increasing scrutiny on the actions they take to prevent ESG fraud.
Our 2022 Global Economic Crime Survey, launched on 25 May 2022, reflects responses from 1,300 responses from organisations across 53 countries. This year, the survey found that 64% of UK respondents experienced fraud, compared to 46% globally (and 56% in UK 2020) - second only to South Africa.
For the first time, the survey considered issues related to ESG. One major consideration here is how organisations can understand and manage the ESG risks that exist within their supply chains, with one in three UK respondents admitting to an inability to monitor or report accurately on the ESG metrics associated with third party partners.
of our UK respondents (vs 55% globally) reported that they are able to monitor the accuracy of their third party partner's ESG performance.
Source: PwC's global economic crime survey 2022