Greenwashing and the Role of Auditors

Our Public, Regulatory & Investigations or Banking teams look at the rising issue of ‘greenwashing’ in the corporate world. They explore what it is, why it can be so damaging and the key role that management and accountants play in ensuring that they are able to recognise and avoid it.

Greenwashing is likely to be detrimental to a business’s reputation once the misleading activity is exposed. ‘Greenwashing’ is commonly understood to occur when a company engages in practices to mislead or capitalise off the desire for environmentally friendly products or services. This is done by presenting a false impression that its actions, aims, or products are greener than they really are. We examine how auditors and financial boards can gauge good practices in an area that is increasingly the focus of regulators.

Greenwashing may mislead investors and consumers who may forgo savings on a similar products and services, by paying a premium for what they believe to be a ‘greener’ product. Ultimately the practice represents a serious risk to business. This is particularly concerning because a recent Competition and Markets Authority global review of randomly selected websites found that 40% of green claims made online could be misleading.

In its Global Financial Stability Report, the IMF noted that “proper regulatory oversight and verification mechanisms are essential to avoid greenwashing”. For example, Irish Auditing & Accounting Supervisory Authority (IAASA) has challenged issuers’ climate targets and requested information underpinning “net zero” commitments.

What does this mean for management, directors and audit committees?

• Pay close attention to how social responsibility goals and efforts to implement the goals are communicated externally. Managers should ensure that these goals are achievable and that there is credible evidence to show that the green claim is true.
• Ensure that green claims don’t exaggerate positive environmental impact or contain anything that is not correct, whether this is clearly stated or implied.
• Beware not to breach regulatory requirements when making green claims, for example, Consumer Protection legislation or the European Green Deal legislation which requires all large companies and listed companies (except micro-enterprises) to disclose information on social and environmental activities.

What does this mean for accountants?

• Carefully review green assertions by companies and seek evidence to back up these claims. Pay particular attention to claims that appear to be too good to be true and ensure that there is a balance and consistency between the disclosures in the management commentary and in the financial statements.
• Check whether claims have been independently verified by third parties, for example, Fair Trade.
• Apply skills of professional scepticism and attention to detail when considering the difference between fact and fiction.

Comment

According to IAASA, consideration of “consistency of climate-related information between financial statements and other pronouncements will likely be a current topic” over the next few years. It is therefore essential for businesses and accountants to become familiar with developments in this area and to ensure compliance with applicable regulatory requirements.

For more information and expert advice, contact a member of our Public, Regulatory & Investigations or Banking teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.