CPAs in the high-priority and high risk world of ESG fraud

Wildfires, droughts—as the effects of climate change become harder to ignore, Canadians increasingly say sustainability is a priority when it comes to purchasing decisions. According to data from Agriculture and Agri-Food Canada, eight in 10 Canadians value a sustainable lifestyle and 65 per cent believe there’s a moral obligation to use environmentally friendly products.  

But as awareness about sustainability grows, so too does the pressure on companies—and those responsible for sustainability metrics—to look good on the environmental front, even when reality doesn’t live up to the claims.  

According to new research from KPMG, 89 per cent of Canadian companies surveyed say they are facing “intense scrutiny” from stakeholders to deliver meaningful progress on ESG (environmental, social and governance) initiatives, and 86 per cent are worried these growing pressures may lead to ESG fraud within their organizations.  

“In recent years, companies have been incentivized to highlight ESG achievements, either for pure reputational purposes or because executives have had monetary incentives tied to the accomplishment of specific ESG targets, such as net zero emissions, diversity and inclusion metrics or other governance aspects. That’s combined with a weak control environment [and] the fact that industry standards have not yet been established,” says Myriam Duguay, who leads KPMG in Canada's national investigation services and fraud risk management practice 

It's a perfect storm of motivation, opportunity and other classic factors—rationalization, capability—that make up the so-called “fraud diamond,” a popular theory about what drives people to commit corporate fraud. But unlike other types of malfeasance, many involved in ESG initiatives and reporting aren’t clear where the lines are, leading to concerns they may inadvertently mislead consumers and other stakeholders.  

To wit, 81 per cent of respondents to KPMG’s survey say they’re specifically concerned about the risks of “inadvertently” committing ESG fraud.  “There's a wide spectrum,” says Duguay. “One example is cherry picking. In an environment where disclosures are voluntary, companies may deliberately choose to disclose things that are advantageous to the company while hiding other things that puts them at a disadvantage. For example, a company can introduce a product to be sold that reduces waste—a metric disclosed by the company—but that also increases transport emissions since it needs to be sourced from another location further away, a metric conveniently not disclosed by the company. The cherry-picking strategy fails to ensure that the company’s disclosures are complete. 

“Another example is temporal greenwashing, particularly in investment funds. Specifically, investment managers can voluntarily rebalance their portfolios prior to reporting dates by dropping investments which are not ESG-aligned. Subsequently, the portfolio will appear more sustainable than it is, positioning it in a more favourable light while reaping the returns of non-ESG investments.” 

Intentional or otherwise, all types of ESG fraud can have consequences. And the stakes are high—and growing.  

Last year, the U.S. Securities and Exchange Commission reached a $55.9-million (USD) settlement with a Brazilian mining company for manipulating safety audit data, following a dam collapse that killed 270 people and created losses of more than $4-billion in market capitalization, though the company settled without admitting to the SEC’s claims. Under the E.U.’s new beefed-up anti-greenwashing laws, which come into effect in 2026, violators could face fines of up to four per cent of annual revenue among other penalties.  

Here at home, the Canadian Sustainability Standards Board is working to advance clearer rules for sustainability-related financial information and climate-related disclosures. If the Canadian Securities Administrators incorporate the new standards into a National Instrument, they would become mandatory under Canadian securities law. And Canadian companies are already subject to stiffer penalties under amendments to the Competition Act that came into effect in 2022. Further amendments to penalize environmental-related abuses are working their way through Parliament. 

Now is the time to take preventative action, starting with developing best practices for measuring, reporting and compliance, Duguay says.  

“Surround yourself with the right advisors: Specialists who are well-versed in ESG issues can adequately support you in understanding the company’s impact on the environment, determining the pain points, and establishing the best course of action to minimize the impact on the environment and society in a meaningful way … Ensure that a robust control environment is established. That includes ESG factors in a company’s enterprise risk management process, an evaluation of the reliability of ESG data sources, and that all major sources of emissions are accounted for,” she says. 

“As ESG fraud and unethical ESG decisions share many similarities with financial fraud and embezzlement, CPAs can educate others within the organization on sound practices to minimize the risk of finding themselves in this type of situation.”