Your expert for questions
Gunter Lescher
Partner, Forensic Services at PwC Germany
Tel: +49 151 12198599
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Risks from ESG offences threaten corporate success
The public interest as well as the political debate around the issue of sustainability have increased significantly and sustainable products being demanded highly in the market next to increasing regulatory pressure. For companies, addressing the triad "Environment, Social, Governance", ESG for short, is becoming increasingly important. Comprehensive sustainability determines the long-term economic success of a company. However, with its increasing importance, new risks also arise when violating laws and regulations.
"Non-compliance with ESG requirements can threaten a company's very existence."
Committing ESG fraud can result in serious consequences for the company, its executive bodies and business partners. These include reputational damage and liability risks as well as fines and imprisonment. Consequently, it is essential to address the issue preventively, to consider it as a compliance aspect and to take it into account in transactions, in addition to ensuring independent clarification in the event of indications of possible violations.
What we stand for
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What is ESG Fraud?
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.
Currently, the risks of fraud in the ESG context are increasing based on the rising pressure of regulators and the public. Developments in the Emissions Trading Act, Anti-Corruption Act, Supply Chain Act, the CSR reporting obligation, and the further concretisation of the EU taxonomy, among others, must be taken into account for ESG-compliant businesses. However, regulatory requirements are not always straight forward. The lack of uniform requirements for the disclosure of sustainability-relevant key figures on top makes it more difficult to identify fraudulent actions.
Our services at a glance
- Integrated ESG project approach
- ESG fraud prevention systems
- ESG Risk Assessments
- ESG Fraud Analytics
- ESG-Open-Source Intelligence
- Investigations
Integrated ESG project approach
| With our integrated approach – from strategy through execution – we support companies in a targeted and structured way in understanding the issue of ESG for their own business activities and implementing it appropriately. To do this, we identify company-specific influencing factors and drivers of action, analyse how individual business areas are affected and develop a transparent presentation of the current situation as part of our ESG assessment. Based on this, we develop a holistic ESG strategy together with you and accompany the implementation of the measures decided upon. |
ESG fraud prevention systems
Due to the ongoing regulatory development, fraud prevention around ESG is becoming highly relevant for compliance and should be integrated into the compliance management system accordingly. As part of our compliance consulting, we accompany companies in the (further) development of ESG fraud prevention systems. In doing so, we support them in identifying regulatory gaps and analyse compliance with regulatory and internal requirements. Furthermore, we assess ESG risks with regard to existing control mechanisms and safeguards.
ESG Risk Assessments
The aim of an ESG risk assessment is to identify anomalies and risks in key ESG issues at an early stage, but also to reveal opportunities. Among other things, we check relevant stakeholders for you via an integrity assessment and support private equity and portfolio companies in due diligences and post-deal reviews along the entire transaction life cycle.
ESG Fraud Analytics
In the event of suspected ESG fraud or as part of an ESG fraud investment, but also for preventive measures, data can provide key information on the background and causes of ESG fraud. We combine internally available company data with publicly available information and carry out analysis targeted to the underlying case. Our analysis solutions range from classic pattern recognition to complex AI-based analysis methods and are put together individually and in line with the relevant requirements of the underlying case.
ESG-Open-Source Intelligence
Before acquisitions, for instance, it is essential to identify ESG-relevant information about target companies, such as negative media coverage and legal disputes. We help you with your research by compiling media and press reports on the target company, identifying and including key persons and shareholders down to the level of the beneficial owners. For this purpose, we leverage our access to relevant information databases worldwide, such as sanctions lists, commercial registers as well as court and media databases.
Investigations
If cases of deception, fraud, falsification of documents or other offences occur in the ESG context, an independent, professional and court-proof investigation is crucial. We identify the facts and circumstances, clarify allegations, for instance, related to fraud or non-compliance with legal provisions by investigating the facts, circumstances and identify the perpetrators. This enables you to meet your legal obligations in connection with fraud and misconduct and to quantify the losses or damages incurred. We summarise the results of the investigation in a report that can be used in court. In addition, we support you with our comprehensive expertise in the development of appropriate remediation measures.
Where can ESG fraud occur?
Manipulation of ESG data
A possible fraud scenario results from the manipulation of ESG data. If ESG factors are integrated into companies' remuneration systems, there is a risk of deliberately falsifying key figures to obtain unjustified bonus payments. In addition, 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.
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. It is a thin red line between committing ESG fraud and greenwashing, so it is crucial to consider each case on its own merits.
"A successful company is increasingly distinguished by public's perception of its ESG positioning."
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