A record 97% of respondents to the EY Global Integrity Report 2022 agree that integrity is important.19 However, senior management is often overconfident in the effectiveness of corporate integrity programs, with a growing “say-do” gap emerging between rhetoric and reality. This has implications for an organization’s ESG aspirations and increases the opportunities to greenwash.
Greenwashing in this context can be seen as a disconnect between words (what an organization says) and actions (what it is actually doing).
Senior management and board members should make sure they can back up what they are saying and consider the potential commercial, reputational, legal and financial risk of making statements they cannot support. Otherwise, they can be held accountable for violating a basic principle of stewardship and corporate citizenship, namely corporate integrity.
Consider what has happened with the financial services sector, where there is a swath of regulations sweeping across the globe to ensure organizations are held accountable both for their investments and the products they sell.
“If you’re investing in a ‘green’ fund you now need substantial documentation that those funds are living up to their name,” says Sarkar. “You need to look at the metrics you are using, how up to date the information is and whether it is disseminated appropriately and compliantly.”
Climate reporting and crises
Corporate reputations and the careers of CEOs are quickly destroyed by public disclosures of a say-do gap, and those reputations will be even more closely scrutinized as rigorous disclosure obligations on a company’s ESG performance come into force. Any companies facing scrutiny on disclosures, deeper analysis between peers and more cross-border enforcement should understand how they can validate (through strategy, data, and reporting) public-facing statements. Without that grounding, the reputational risks may be tantamount to greenwashing, regardless of a statement’s intent. “With ESG, it’s much harder to see where the threat is going to come from and how to respond,” says David Higginson, Partner, Forensic & Integrity Services, Ernst & Young LLP. “The ability to manage a greenwashing issue quickly and effectively needs to be moved further up the Board agenda.” He cites EY research showing that 58% of board directors/members and 37% of other employees would be “fairly” or “very concerned” if their decisions came under public scrutiny.20
Integrity can be a difficult concept to define, not least because organizations face different ethical dilemmas. It’s about making the intangible tangible, about committing to the interdependence of business and society by embedding integrity into the culture and behaviors of the organization. But fewer than half those EY surveyed for the 2022 Global Integrity Report are using the basics of integrity enhancing measures such as providing regular training on regulatory issues (43%) or ethics (38%), applying sanctions to address behaviors (32%) and conducting due diligence on suppliers (30%) or customers (28%).
Suppliers, it should be noted, are exposed to the same pressures, and can be enticed by equally favorable opportunities and will rationalize these decisions in similar ways to their clients and customers. In other words: The very same fraud triangle exists, so the very same risks of greenwashing are present and the impacts can be felt up the supply chain.
Organizations should take a “tell me, now show me” approach to ESG with facts to the fore. Board members need to be on top of this strategy, because regulators increasingly are. Some are already employing data science to ensure, for example, that the claims made in glossy CSR reports match official ESG accounts.
Harmonized and mandatory reporting will help reduce ambiguity and provide more confidence in reporting. And make no mistake: Organizations will increasingly need to communicate externally – often with external assurance – on key sustainability matters and metrics applicable to their activities, like greenhouse gas emissions, as pressure from all stakeholders increases. This communication is the foundation of an organization’s social contract with all stakeholders. Moreover, putting sustainability at the heart of company strategy pays financial dividends. In a recent survey of more than 500 companies committed to improving their environmental performance, 69% report that they capture higher financial value than expected from their climate initiatives.21
Recommendations and actions