Curbing Fraud in the Green Sector

This publication is authored by and reflected the views and opinion of PT Integrity Indonesia. More information about PT Integrity Indonesia is available on www.integrity-indonesia.com

“Sustainability” has become a hot topic discussed in various global forums, generating initiatives in various countries to switch over to sustainable business practices, such as with the establishment of France's Duty of Vigilance, Britain's Modern Anti-slavery Act, and Germany's Supply Chain Due Diligence Act.

Along with organizational and individual awareness of environmental, social, and economic challenges, investments related to Environment, Social, and Governance (ESG) have also grown rapidly in recent years. More than 3,000 investors with total assets under management of $100 trillion have signed a commitment to include ESG information in their investment decisions.

The Covid-19 pandemic and other natural disasters have also made various parties aware of the importance of ESG-based organizational management. The perspective of aligning business with the sustainability of nature becomes an urgency.

The term “Green sector” itself refers to all aspects related to nature. It includes several other terms, such as “green industry” and “green economy”.

Exposure to fraud

Unfortunately, as consumer demand for products and services as well as the abundance of investment capital and financial incentives in the green sectors increase, so do the opportunities for fraud. In addition, several other factors allow fraud to thrive in the green sectors.

First, the gap between ESG standards and the company's operational facts forces companies to adapt, in various ways. For example, a company that decides to adopt ESG standards may have to replace its largest supplier because of strong indications of non-compliance with ESG standards.

This condition creates pressure on the company. At the same time, as stated by Donald R. Cressey in his theory of fraud, pressure can encourage someone to commit fraud.

With such great pressure, instead of improving infrastructure and business models, decision-makers sometimes consider fraud as a rational solution to fulfill commitments.

Second, the rapid adoption of ESG has left the authorities with little time to develop a standardized regulatory and reporting framework.

Consequently, many companies disclose untested information to investors. In addition, the lack of standards makes it difficult to determine metrics.

For instance, the carbon emissions metric may not be an appropriate metric for measuring a company's ESG performance. However, in order to receive incentives, businesses do voluntary reporting on carbon emissions despite the obscurity of the metric.

Greenwashing, a new face of fraud

Another condition that has the potential to cause fraud is a marketing spin to campaign that the company is sustainable, while in reality, they engage in unsustainable activities. The campaign is categorized as greenwashing.

The term that was first used by Jay Westerveld in the 1980s has re-emerged in recent years, as news of greenwashing scandals often adorns media headlines. A report by the European Commission and the National Consumer Authority stated that 42% of claims on products sold online were greenwashing.

Dieselgate 2015 is perhaps the most notorious greenwashing scandal because it involved the prominent German car manufacturer, Volkswagen. Modifications to the emission test results were disclosed by a researcher.

The DWS scandal is the latest case. This Deutsche Bank business unit was examined by BaFin (German financial authority) based on a report from its former executive, Desiree Fixler, who said that the company was greenwashing with claims that more than half of its assets were invested using ESG criteria.

Fraud detection in the green sector

Both potential and proven fraudulent actions in the green sectors can be anticipated by implementing a whistleblowing system within the organization. With this system, supervision can be carried out comprehensively from upstream to downstream, both within the parent organization and throughout the supply chain.

Whistleblowing plays a crucial role in ensuring that company claims are not misleading and comply with ESG and compliance obligations. The SEC report indicated that whistleblowers were instrumental in "rescuing" nearly $5 billion in fraud-related losses.

The whistleblowing system itself is a critical component of ESG compliance. A company cannot be deemed to have good corporate governance if it has not adhered to the principle of transparency, which includes the implementation of a whistleblowing system.

Through this system, whistleblowers can safely raise any concerns within the company. By bolstering the whistleblowing system, companies are concretely and systematically supporting a sustainable climate, environment, and protection of human rights.

This publication is authored by and reflected the views and opinion of PT Integrity Indonesia. More information about PT Integrity Indonesia is available on www.integrity-indonesia.com