The Strategic Importance of Forensic Governance Investigations in Combatting Greenwashing
The Strategic Importance of Forensic Governance Investigations in Combatting Greenwashing
In recent years, regulators have sharpened their focus on combatting greenwashing, resulting in the publication of relevant guidance, anti-greenwashing rules and, in cases where greenwashing is suspected, mandating investigations into organisations.
Greenwashing is arguably a systemic issue, meaning that the quality of an organisation’s governance structures and processes can make all the difference when it comes to perceptions of whether an organisation is greenwashing. This article explores the role of robust governance in combatting greenwashing and how forensic governance investigations can be crucial in revealing the true health of an organisation’s governance structures.
What is Robust Governance as an Enabling Function?
To understand how governance can enable meaningful environmental outcomes, it is important to distinguish between robust and good governance. Good governance implies breadth, an organisation’s ability to meet its compliance obligations through putting in place the appropriate systems and controls. Robust governance adds depth, building from compliance obligations to proactively embedding – in this specific case - environmental thinking into the organisation’s culture.
Integrating environmental thinking into an organisation’s culture will transform the organisation’s approach to business strategy and enterprise risk management. For instance, the organisation could be better placed to meet non-financial reporting requirements, ensuring completeness in reporting and in marketing, and building trust with stakeholders through the management of climate-related risks, including aligning of financial goals and organisation practices with climate and ecological objectives¹. Maturity in these aspects will empower the organisation to engage with business partners and clients in a manner that is consistent with its environmental values, which may include leveraging its position and credibility in this realm to promote environmental best practices in its supply chain and client businesses.
How does greenwashing impact Organisations
For organisations, greenwashing can have devastating impacts. Organisations may have proceedings brought against them by regulatory authorities, non-governmental organisations, or private actors. The UK’s Competitions and Markets Authority, for instance, has concluded an investigation into three separate fashion retailers scrutinising their green claims, securing undertakings to change the way they display, describe, and promote their green credentials². Successful regulatory actions in the UK may also result in penalties of up to 10% of global turnover for organisations, or up to £300,000 for individuals, found to be engaging in greenwashing at a threshold which breaches consumer protection law.
From a reputational perspective, the LSE’s Grantham Institute found that a filing or an unfavourable court decision in a climate case is estimated to reduce a firm’s value by 0.41% on average, relative to otherwise-expected outcomes. The mean firm value was found to be reduced by 0.57% following court case filings and by 1.50% following unfavourable judgments against the largest emitters operating in the Energy, Utilities and Materials sectors. These conclusions were reached through the authors constructing a comprehensive database of filings and decisions spanning 108 climate change lawsuits filed worldwide against US- and European-listed corporations between 2005 and 2021³.
Why is it Important to have Forensic Governance Investigations?
Forensic Accounting and Corporate Intelligence skills have both long been essential elements of effective investigation of suspected fraud, corruption or other malfeasance and can similarly be leveraged in investigating or uncovering instances of greenwashing.
For any given company, there will be a concentrated pool of information held (for the most part confidentially) within the company itself; and a rather more dispersed cloud of information held in various forms outside the company. In the former case, various categories of relevant information can be found within a company’s books and records or reside within the heads of its employees. Forensic accountants will seek to access as large of a pool of relevant proprietary information as possible to investigate the matter. In the case of the latter, Corporate Intelligence specialists can respond quickly to identify, retrieve and analyse reliable evidence scattered outside the company, whether on the public record or in the form of human intelligence, part of an important and necessary investigative process that may also serve to inject crucial momentum into the early stages of a wider investigation.
Having Forensic Accounting and Corporate Intelligence teams working effectively in tandem and sharing new information rapidly as it is unearthed can lead to irresistible conclusions on the nature and extent of greenwashing within an organisation. These conclusions can in turn form a solid basis for decision-making on how the organisation may improve its performance, impact, and reputation across a range of environmental and other governance factors.
BDO’s market-leading Forensic Governance Investigation practice can assist organisations of all types and sizes. Our practice leverages several decades of experience and global reach to mitigate salient risks before any reputational or financial damage can be done.
For further information, or for assistance, please contact Alexander Davies.
1. Tackling Greenwashing from a Governance Perspective, Chartered Governance Institute UK & Ireland
2. Green Claims: CMA Secures Landmark Changes from ASOS, Boohoo and Asda, Competitions and Market Authority
3. Impacts of Climate Litigation on Firm Value, Grantham Research Institute on Climate Change and the Environment