Firms Risk ESG Fraud Consequences, Awareness Is Weakest Link
byFred Obura July 21, 2023 in Investment, Kenyan News
Firms Risk ESG Fraud Consequences, Awareness Is Weakest Link
Reading Time: 4 mins read
The shifting focus from financial performance to sustainable business practices in making decision by stakeholders is fueling a new form of fraud in organisations, known as greenwashing or ESG Fraud.
Companies and organisations are misreporting ESG achievements to meet the expectations of investors, regulators, customers or to meet individuals’ performance goals. According to PwC’s Global Economic Crime and Fraud Survey 2022, a more common example of this is bribery of government officials to avoid safety or environmental inspections or to get favourable results. Another form of internal ESG fraud is the manipulation of data to earn ESG credits.
“In a project we undertook in the Eastern Africa region recently, we observed a potential misrepresentation of ESG project components to stakeholders, resulting in a misrepresentation of accrued ESG credits to potential customers and investors,” notes PwC.
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“As this is an emerging area, the regulatory frameworks are still in the development stage for most countries which, when coupled with the reported limited understanding of the subject, provides an environment in which materialisation of the aforementioned risks can thrive.”
ESG describes non-financial factors that influence the sustainability of an organisation. Environmental factors focus on safeguarding the natural environment which include corporate policies addressing climate change, for example.
Social factors focus on how organisations manage matters relating to diversity and inclusion, equity, social justice, and working environments. Governance on the other hand focusses on an organisations’ transparency, accountability, and good leadership behaviour etc.
“The relationship that exists between sustainable business practices and the achievement of organisational goals is becoming an area of emphasis for stakeholders. Previously, stakeholder decisions heavily relied on financial performance. ESG is now one of the key considerations for many stakeholders.”
Challenges In Managing ESG Risks
According to the survey, respondents in Eastern Africa noted that a general lack of understanding of ESG, inability to detect ESG misconduct and a failure to define ESG objectives for the organization pose a challenge in dealing with its risks.
ESG fraud could lead to serious consequences for an organisation, its executives and business partners. The most fundamental being failure to achieve organisation goals for not embracing sustainable business practices. Others could include reputational damage, fines, and penalties.
The consequences reinforce the need for organisations to be aware of ESG fraud as an emerging form of economic crime as they continue to embed ESG practices into their business operations. It is important for organisations to put in place ESG fraud mitigating measures from the onset at the core of their ESG strategy.
“It pays to proactively get it right from the onset instead of dealing with the aftermath. This can be achieved through raising awareness, conducting risk assessments, and embedding ESG fraud management within the established risk management practices. It is also instructive to note that in getting the ‘Governance’ pillar right, organisations will have created and fostered an environment that allows them to effectively manage the risk of fraud and other economic crimes.”
The PwC survey captured views of some 1,296 executives across 53 countries and regions. 62 per cent of frauds reported by respondents in Eastern Africa were by external perpetrators, either acting alone or colluding with internal actors.
Eastern Africa respondents lost a significant amount to fraud in the 2 years covered by the survey. 23 per cent of respondents in the region reported a total loss of between $50k to $100k and another 23 per cent lost between $100k to$1m.
The top five types of fraud reported by Eastern Africa respondents include Customer fraud, asset misappropriation, procurement fraud, cybercrime, bribery and corruption and supply chain fraud.
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