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Your expert for questions
Gunter Lescher
Partner, Forensic Services at PwC Germany
Tel: +49 151 12198599
Email
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.
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.
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. |
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.
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."