The rising challenge of sustainability fraud

Until recently, sustainability information and management has been a secondary activity for many companies. Often, a separate sustainability department was created and given the responsibility for the development of sustainability projects and programs. As companies started to report on their efforts, this was conveyed via separate reports. Of course, over time things have progressed. In an increasing number of companies, sustainability is becoming a mainstream topic and reporting has become integrated in annual reports, giving it higher prominence.

It is only recently that sustainability is seen as a critical business topic that is correlated with an organisation’s financial performance and that could impose a financial risk and/or opportunity. Investors are starting to notice the risks from sustainability developments, particularly climate change, and are slowly but steadily also starting to act on it. This is demonstrated by Blackrock and investor alliances such as the Climate Action 100+. Also, regulators are following with a rising sustainability agenda. Only in 2020, the EU, Canada, the United Kingdom and Japan have stepped up their efforts and close to 60 central banks as well as the International Organization of Securities Commissions (IOSCO) have strengthened their focus on sustainability issues.

All this comes not only with a rising attention for the future of the planet, but also with increasing financial interests, and an understanding that the two are growing ever more intertwined. A company that is not achieving expected sustainability objectives may face investor (and legal) actions, while the board may see lower remuneration. More importantly, with the introduction of the EU Taxonomy, access to capital will be impacted by whether projects are green or brown.

This paper is meant for companies and investors, to develop a further understanding of what inevitably is going to happen: as we know from our longstanding experience, financial interests not only come with positive drives towards better performance, they also bring risks of misrepresentation of relevant sustainable information-‘fraud’. We also know from our work with clients for over 25 years that systems, processes and internal controls of sustainability information are generally not at the level of those for financial reporting.

It is time, therefore, to address the topic of sustainability fraud and provide you with the potential risks you should be aware of and the actions you can take to prevent and act on it.