Determining role for accountants in combating greenwashing

Reporting on sustainability creates transparency about the sustainability performance of companies. Therefore, companies will have to start 'measuring' their sustainability performance. Investors and other stakeholders can then base their economic decisions on 'measured' and reported sustainability information so possibly capital may shift to sustainable companies. Measuring and managing implies that you can steer, says PwC's fraud specialist Micha Soentpiet. This also carries the risk of manipulation. After all, what gets measured gets managed… and possibly manipulated.

Much has been said about fraud in relation to financial reporting. Large-scale fraud cases that have caused stock prices to implode or led to bankruptcies are not unfamiliar to us. Sooner or later, questions will arise about the role of the auditor. Why did the auditor not detect the fraud (early)? Could the auditor have prevented the fraud? These are questions that may also be asked if a large-scale ESG fraud or greenwashing case occurs?

Rules for reporting on sustainability

Reporting on sustainability performance is driven, among other things, by the European Union, via amongst others the EU taxonomy. The risk of greenwashing is therefore acknowledged by the European Union. It is even the reason why there are rules about what companies can and cannot label as sustainable.

Lying about sustainability, you wouldn't do that, would you?

There are several reasons why companies may resort to manipulating sustainability information. This can be explained using the fraud triangle – pressure, opportunity, rationalisation – which is well-known to many auditors from the audit of financial statements.

Pressure

Companies and their management are increasingly rewarded based on sustainability performance. Think of obtaining cheaper financing, or an employee bonus when hitting a target. Even simpler: consumers are willing to pay more for products if they are 'green'. There is also increasing societal pressure to operate sustainably. Otherwise, you will no longer be part of it.

Opportunity

The standardised reporting rules - the so-called ESRS - for reporting on sustainability are new. Currently, there are (only) voluntary reporting standards, and companies are even free to determine 'what' they report. Many companies also have an immature reporting chain and/or control measures that ensure that sustainability information can be measured and reported accurately and completely. This provides an opportunity for manipulating sustainability information.

Rationalisation

Companies may be inclined to make sustainability claims or promises in order not to lag behind competitors. Companies know that - just like them - competitors cannot substantiate certain sustainability claims. Why should they be ‘the best boy in class’ and potentially lose market share?!

Forms of greenwashing

The auditor will provide assurance on sustainability information included in the sustainability report with the implementation of the CSRD. Currently, various companies have (parts of) their sustainability reports audited or reviewed by auditors. 

It seems almost inevitable that auditors will face the risk of greenwashing in assurance engagements on sustainability information. The auditor will have to make a good assessment of this risk and the way in which greenwashing can manifest itself. This is necessary to determine which procedures are needed to address the risk.

The way in which the risk can manifest itself is (very) broad. Often, there is no black-and-white situation. For example, a company may report a certain sustainability KPI correctly, but still give a misleading impression through text claims about this KPI. Or they may ‘hide’ essential information for understanding the KPI in a footnote. A company may also choose to focus on sustainability claims on which they score well and not report sustainability aspects on which they score poorly (cherry-picking). 

In the previous examples, there is an intentional act by the company. A company can also be accused of greenwashing when it is not them, but a supply chain partner who is the cause. Think of a supply chain partner who supplies products with a sustainability quality certification. The company thinks it is operating sustainably because it buys products with a certification. Later it turns out that this certification has no value or is fraudulent. 

No checklist, but think for yourself

In greenwashing, the perception of the user of sustainability information is important. What may feel like deception to one user may not be the same for another. It also applies that not every user considers the same sustainability theme equally relevant. 

For auditors, this means that they need to be alert to greenwashing risks. In situations that may be perceived as misleading, it is important for auditors to maintain professional scepticism and apply professional judgment. Not just ticking off a checklist, but thinking for themselves and engaging in a discussion with the company on the question, ‘do we find this acceptable or not?’.