Why Greenwashing is Accounting Fraud

As the world shakes off the pandemic induced economic stupor, business leaders are waking up to the realisation that ‘Greenwashing’ is an accounting fraud which could imperil their business. The fraud of Greenwashing is, at its core, a conflict between reported behaviour and actual behaviour, and the organisation’s Executive risk personal liability.

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Greenwashing is an Accounting Fraud
Misrepresenting 'Green' or 'Eco' attributes spells trouble!

Greenwashing and ESG Regulations

With the E.U. CRSD and associated taxonomy already well developed, the U.K. SRD (Sustainability Reporting Directive) is hot on its heels. Early indications are that the UK SRD is likely to be even more stringent that its European counterpart.

The outcome will be that we’ll have the European Union (EU) Sustainability Reporting Standards, the International Financial Reporting Standards (IFRS), and the International Sustainability Standards Board (ISSB), and every company will be to be fully aware and compliant. Hot on their heels – and likely to act fastest of all – the US Securities and Exchange Commission (SEC) Chair Gary Gensler announced imminent and sweeping reforms could be pushed through in 2022.

What is Greenwashing?

Greenwashing is when any business or organisation makes a claim or enhances its appearance to suggest it conducts its operations in an environmentally-friendly manner when the reality is a neutral or even negative effect. This applies equally in respect of how they craft their image or manufacture a product or deliver a service.

Why do firms commit ESG fraud?

Organisations which engage in greenwashing gain an unfair advantage: they reap the societal benefits and profitability. CSR reporting, and now EGS reporting, are both opportunities for such fraud. This was highlighted by Donald T. Campbell, the social scientist who conceived the principle of Campbell’s law. This states that “pressure to achieve a metric will corrupt the metric’s usefulness”. In other words, if a firm can derive the benefits of ESG without implementing the changes required, they will do so if its easier than meeting the standards.

Every business needs to be wary of “selective disclosure of positive information about a company’s environmental or social performance, without full disclosure of negative information on these dimensions, so as to create an overly positive corporate image” (Patten and Crampton, 2003). The fraud of Greenwashing is, at its core, a conflict between reported behaviour and actual behaviour.

The C-Suite and ESG Data

It’s clear that the C-Suite – the Executive – of any mid to large enterprise, sets its budgets, projects cash flow, and directs capital according to its ESG metrics. The potential rewards have long been apparent, and with executive compensation being linked to performance, it’s tempting to pay lip service to the detail.

False NFR is a Crime

The E.U. CSRD has ample requirements for member states to impose penalties for infringements of the reporting duties when implementing the directive into domestic law. The approach echoes the current Non Financial Reporting Directive (NFRD), which is already carries provisions for criminal penalties. The CSRD extends these penalties to include sanctions such as:

  • a public statement outlining the nature of the violation and indicating the responsible person/entity;
  • a cease-and-desist order against the responsible person/entity; and
  • administrative pecuniary sanctions

ESG Reporting Considerations

While only larger corporations are required to make TCFD and other ESG disclosures, they are already pressing ESG demands upon their supply chains.

These larger businesses must consider the expertise and training of their boards and key employees, and question whether they have the resources they require to perform their duties..

Corporate governance controls and reporting will need to change to ensure that directors at both parent company and subsidiary level have assurance and oversight of the data — processes and controls that underpin climate change and other ESG reporting. This will be essential to mitigate personal liability, financial penalties and reputational damage.

What does ‘Sustainable’ Mean?

In the U.K, we have seen a rise in cases against Greenwashing brought by the Advertising Standards Agency (ASA), the Competition Markets Authority (CMA), and the Financial Conduct Authority (FCA).

Problems arise with use of terms which have no universal definition, with ‘Sustainable’ being a particular concern. What does it mean? When a product is dressed up with a green label, together with a recycled carboard price tag, and attached with a piece of undyed string, many firms will brand the item as ‘green’.

Such marketing drives inflated prices too, because the socially conscious Generation Z will gladly pay a premium, as was noted by McKinsey who conducted research on buying habits.

The reality is that without attention paid to the supply chain, there’s often no evidence of any ‘green’ or ‘sustainable’ aspects to the product. Evidence must be found to demonstrate that, for instance, the clothing was produced with use of hazardous chemicals, or that those chemicals were disposed of properly, and that the workforce labour conditions were fair and decent.

Your Marketing and Greenwashing

Your firms’ marketing and advertising strategy needs to be examined. It can educate consumers about the environmental impacts of products and services., and help them to make better informed choices to select products which do have a lower environmental impact

Remember, though, that the true value of environmental claims and marketing rests on the assurance that the claims are both credible to consumers, and that they reflect a genuine benefit to the environment.

False, misleading or confusing claims have the potential to undermine consumer confidence in so-called ‘green’ marketing or lead to unfair competition between businesses, and that is where the ASA and the CMA get involved at great cost to your firm.

author avatar
Humperdinck Jackman
Leads the daily operations at ESG PRO, he specialises in matters of corporate governance. Humperdinck hails from Bermuda, has twice sailed the Atlantic solo, and recently devoted a few years to fighting poachers in Kenya. Writing about business matters, he’s a published author, and his articles have been published in The Times, The Telegraph and various business journals.


Matt Whiteman

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