Trends in fraud and financial investigations: Greenwashing

Richard Shave, discusses Greenwashing from the perspective of a fraud investigator: could the fight against greenwashing lead to a change of emphasis in the wider fight against fraud?

What is Greenwashing?

With societal concern for the environment reaching new peaks, an accompanying trend has been the increased level of companies being called out for misrepresenting their green credentials, or ‘greenwashing’. Greenwashing is a term that seems to have exploded onto the scene in recent years and is increasingly recognised as part of our everyday vocabulary. It is defined by the Cambridge Dictionary as: “behaviour or activities that make people believe that a company is doing more to protect the environment than it really is”.

The phrase is however not a new one and has actually been around for 40 years having been coined back in the 1980s by an environmentalist Jay Westerfield, who took issue with a Fiji hotel’s environmental claims. He observed that the hotel left notes to customers encouraging them to reuse towels and claimed to be protecting reefs and the island’s ecosystem. This appeared to be at odds with the expansion exercise the hotel was going through, impacting the very same reefs and ecosystem it was claiming to protect.

Modern day examples of greenwashing range from misleading product advertising regarding production to inaccurate investment fund descriptions and wildly exaggerated sustainability credentials reported in glossy corporate annual reports.

One of the biggest current areas of concern is how funds are representing themselves to investors. According to the Edelman Trust’s 2021 Barometer Special Report, 86% of the 700 US investors surveyed believe that companies frequently overstate or exaggerate their Environment Social and Governance (ESG) progress when disclosing results and 72% of investors globally don’t believe companies will achieve their ESG commitments¹.

Several high-profile greenwashing investment cases have hit the headlines recently on both sides of the Atlantic, with BNY Mellon and DWS, a subsidiary of Deutsche Bank, accused of exaggerating their ESG credentials. BNY was fined £1.5m for the mis-statements, whilst DWS faces action on apparently similar offences. And with headlines of reported raids by City of London Police recently hitting the front pages, corporates will also be very aware of the related reputational risks.

The ESG revolution and changing reporting landscape

As the public appetite for sustainability increases and ESG matters rise in prominence so does the pressure on corporates to disclose their ESG credentials in a fair and transparent manner. Big changes are in the pipeline in terms of corporate reporting requirements as global bodies, governments and regulators jostle to react to the public demand for greater transparency and limit the risks of greenwashing.

But with different attitudes and sustainability requirements in play in different jurisdictions it is perhaps not unsurprising that concerns have arisen regarding a potential lack of consistency in the developing (and overlapping) ESG disclosure frameworks.

Many of the early frameworks in place have centred around climate-related risks, with the Task Force on Climate Related Financial Disclosures (TCFD) gaining considerable traction. In the EU it is hoped that the recent introduction of the EU Sustainable Finance Disclosure Regulation (SFDR), which provides a reporting framework for ESG labelling of funds, will help to clamp down on some greenwashing practices. In the US the Security and Exchange Commission (SEC) announced proposals in June for a set of disclosure requirements that will apply to US investment advisors and funds, as well as many European funds with US investors.  The UK has also been working on its own rules and the FCA has rolled out some useful “Dear Chair” letters providing guidance on their expectations on ESG reporting.

It is hoped that the creation of a new standard-setting board-the International Sustainability Standards Board (ISSB), established at COP 26 last year, will represent a big step forward. The intention is for the ISSB to provide some harmonisation of sustainability-related disclosure standards and introduce some rigour behind sustainability reports. The ISSB meets this week to discuss future priorities and begin to assess the feedback from stakeholders on the two proposed IFRS Sustainability Disclosure Standards which are out for public consultation until 29 July 2022.

While most of the initial reporting requirements are currently aimed at larger companies and capital markets one of the knock-on effects is that those larger companies are also beginning to press ESG demands down through their supply chains. Going forward more and more employees are also expected to be studying ESG reporting with a keen eye, as other companies follow Mastercard’s approach of linking employee pay to ESG goals. Indeed, when one considers the sheer breadth of the ESG ideology, including increasingly urgent environmental challenges that ultimately impact us all, the list of stakeholders for this type of reporting is truly global in reach.

Public perception of the fraud of greenwashing

Of course, where there are new rules and regulations impacting corporate disclosures there will always be those, either wilfully or not, that bend or breach the rules. And actions linked to misreported ESG matters are certainly one of the expected future trends in litigation.  In the corporate investigations field, we also expect to see an increase in appointments investigating breaches as sustainability reporting issues arise alongside the more traditional fraudulent financial reporting.  

One interesting angle from a fraud investigator’s point of view will be to see how the image of greenwashing develops over the coming years and whether it will be treated with the same apathy as some accounting misstatement frauds.

The difference in the public perception regarding the relative importance of different types of fraud has been a source of frustration for many in the fraud prevention space. The straightforward asset misappropriation fraud committed against a consumer or business is often treated as a more pressing matter than the large-scale financial misstatement frauds committed within corporate accounts. In reality this latter category is typically far more significant in terms of quantum and the effects can often ripple through to the wider society, from impacts on pension funds and insurance premiums to employment and the economy as a whole.

A feature of the recent AGM season was the growing shareholder anger directed at many boards regarding empty ESG promises. Perhaps Greenwashing may be the topic that changes the image of reporting fraud? With ESG reporting impacting such huge numbers of diverse stakeholders on a global basis, let us hope that the fight against Greenwashing may be the trigger for a much-needed clamp down on financial statement fraud as a whole. 

We are here to help you navigate and minimise the impact of fraud issues

At BDO we advise businesses on detection and prevention of fraud and financial crime. We help organisations understand the specific risks relevant to their business and develop best practice procedures and solutions to protect them against the threat of economic crime. Where businesses suspect they have been a victim of fraud we conduct rapid response forensic investigations and advice on crisis management.

If you have any queries, please get in touch with Richard Shave, Director, Forensic and Valuation services. 

Richard Shave 
Director – Forensic and Valuation Services
+44 (0)20 7893 3546 
richard.shave@bdo.co.uk