ESG fraud a growing concern for many businesses: KPMG poll

TORONTO — Canadian businesses that have experienced fraud are deeply concerned about a new and emerging type of scam: ESG fraud, according to new research from KPMG in Canada.

Last month, KPMG polled 300 Canadian organizations victimized by fraud to learn about the types of scams they have experienced. The survey showed 24 per cent of respondents that had experienced fraud within the past five years have discovered ESG fraud, and some are currently still dealing with it. ESG fraud occurs when a company’s environmental, social and governance efforts or data are exaggerated, embellished, or distorted.

As the pressure mounts on organizations to deliver on ambitious sustainability targets, nearly nine in 10 (89 per cent) respondents said they are facing intense scrutiny from their stakeholders to demonstrate tangible progress on ESG targets. Additionally, 86 per cent are concerned that the pressures are increasing the risk of ESG-related fraud happening within their organizations, and 81 per cent are concerned their organization could inadvertently commit ESG fraud.

“The fact that stakeholders are demanding accountability for ESG performance is a positive factor for driving change, but unfortunately it can motivate – and already is motivating – some individuals or teams within organizations to misrepresent or inflate their sustainability and financial metrics for corporate or personal gain,” says Becky Seidler, a partner in KPMG in Canada’s forensic and dispute advisory practice.

“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 adds.

Ms. Seidler says the survey findings underscore the need for organizations to implement strong controls that properly address ESG fraud. ESG fraud can take many forms, such as falsifying carbon offsets in ESG reporting, greenwashing and other types of data “washing”, misusing ESG grant funds, breaching ESG regulations and bribery and corruption, for example.

Key survey highlights:

• 24 per cent of 300 Canadian companies victimized by fraud in the past five years reported that they are experiencing or have experienced ESG fraud
• 9 per cent are currently dealing with or have previously dealt with internal ESG fraud; that is, employees or teams within their company have been found embellishing, distorting, or exaggerating ESG data or efforts
• 8 per cent are currently dealing with or have previously discovered external ESG fraud; that is, their suppliers or vendors are embellishing, distorting, or exaggerating their ESG data or efforts
• 7 per cent report that they are experiencing or have experienced internal and external ESG fraud
• 86 per cent are concerned about the growing risks of ESG fraud within their organization given how important ESG is becoming
• 81 per cent are concerned their organization could inadvertently commit ESG fraud
• 89 per cent say their stakeholders are increasingly demanding proof of their ESG records
• 89 per cent say their stakeholders are increasingly demanding proof of compliance with anti-corruption and anti-money laundering regulations

Amid widespread concerns about the growing risk of ESG fraud, nine in 10 respondents (90 per cent) say their organization has an ESG compliance program and 92 per cent also have anti-corruption compliance programs in place.