Businesses worried about ESG fraud as stakeholder pressure mounts: KPMG poll

TORONTO — Businesses are increasingly concerned about ESG fraud, which is when a company’s environmental, social and governance efforts or data are exaggerated, embellished or distorted.

A new survey by KPMG in Canada of 300 Canadian organizations victimized by fraud found that 89 per cent of respondents said they’re facing intense scrutiny from stakeholders to demonstrate progress on ESG targets.

The majority of the respondents said they’re worried these pressures are increasing the risk of ESG fraud.

The majority also said they’re worried their organization could inadvertently commit ESG fraud. 

Becky Seidler, a partner in KPMG’s forensic and dispute advisory practice, said pressure from stakeholders can be a force for positive change, but can also motivate some to misrepresent their sustainability and financial metrics for corporate or personal gain.

“The consequences of ESG fraud can be significant, including financial and reputational harm, and quite possibly the loss of social license to operate if stakeholder trust is damaged,” she said. 

ESG fraud can take many forms, including falsifying carbon offsets in reporting, greenwashing, misusing ESG grant funds, and others, Seidler said. 

Almost a quarter of the surveyed organizations, all of which dealt with fraud in the past five years, said they have experienced or are currently experiencing ESG fraud.

In some cases, the fraud was internal, meaning employees or teams within the company were found to have embellished, distorted or exaggerated ESG data or efforts, KPMG said.

Others are dealing with external ESG fraud from their suppliers or vendors. And still others have dealt with both internal and external ESG fraud.

With heightened scrutiny around ESG disclosure and performance right now, Seidler said ESG fraud or negligent misrepresentation could lead to a securities or Competition Bureau investigation, or even a class-action lawsuit. 

The survey underscores the need for organizations to have strong controls that can identify and prevent ESG fraud, Seidler said.

“ESG fraud is a new and emerging risk for many organizations. That’s why it’s crucial for businesses to build anti-fraud defences into their ESG strategies early and proactively, rather than reacting after the fact,” she said. 

This report by The Canadian Press was first published March 21, 2024.

The Canadian Press