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Voice of the CEO: Is it Green? Show Me the Data

Blogs Anthony Pugliese, CIA, CPA, CGMA, CITP May 29, 2024

recent study estimates that climate change will cost the global economy around $38 trillion annually by 2049. This finding is consistent with the latest Global Risks Report from the World Economic Forum, which stopped listing climate change as an individual risk and started viewing it as an underlying structural force that’s already impacting other risk areas and contributing to the decline of the global economic output.

The heightened scrutiny over environmental risks is perhaps unsurprising, given that in 2023, we witnessed the hottest year in recorded human history, with historic increases in the number and severity of extreme weather events. The U.S. alone experienced weather and climate disasters costing $1 billion or more, according to the U.S. National Oceanic and Atmospheric Administration.

In this context, businesses, investors, and the public have shown an increasing interest in environmental, social, and governance (ESG) issues, with particular emphasis on the ‘E.’ However, while some organizations are moving the needle toward the greater good, others are making false and misleading claims — known as corporate greenwashing — to convince the public that the organization is more environmentally sound than it actually is.

The practice of greenwashing is unfortunately widespread. In 2021, the European Commission and other national authorities conducted a cross-sector study of websites to identify instances of public greenwashing. The findings show that in more than half of cases reviewed, organizations could not provide sufficient information for consumers to assess the accuracy of the green claims made. Last year, researchers at the Grantham Research Institute on Climate Change and the Environment revealed the number of greenwashing cases around the world had nearly doubled between 2020 and 2022.

Greenwashing isn’t simply an issue of ethics  it presents significant reputational, legal, and regulatory risks for corporations. In recent years, large publicly traded companies, including Amazon, Samsung, and Walmart, have made national headlines over greenwashing accusations. Misleading environmental claims can be costly beyond the loss of public or consumer trust. In a well-known case, Walmart was ordered by the U.S. Federal Trade Commission to pay $3 million after it falsely marketed rayon textile products as being made with sustainably-sourced bamboo. In an effort to curb the rise of false sustainability claims, the U.S. Securities and Exchange Commission (SEC) launched a task force in 2021 to identify ESG-related misconduct. The European Union (EU) also recently passed comprehensive legislation intended to ban a number of commercial practices related to greenwashing. The new regulations will become effective in roughly two years.

Internal Audit’s Role

The increased scrutiny by both regulators and the public highlights the importance of having strong internal audit functions to ensure ESG claims are both verifiable and accurate.

Internal auditors have a responsibility to enhance and protect an organization’s value by providing risk-based and objective assurance, advice, and insights. Here are a few ways internal auditors can help their organizations responsibly implement environmental initiatives and prevent greenwashing:

Stay informed about the evolving regulatory and risk landscape.Ensuring a solid understanding of the ever-changing regulatory reporting requirements for climate-related issues is the first step toward preventing or rectifying cases of greenwashing within your organization. The IIA regularly publishes reports and guides to help internal auditors keep track of new regulations and changes to existing legislation regarding climate impact and sustainability. For example, in March, the SEC released a climate-related disclosure rule, which has since been paused due to pending litigation. Following its release, The IIA published a statement on the final rule that reiterated the need for effective governance over climate disclosures. The IIA has also published its guide to understanding relevant environmental reporting requirements, which includes a rundown on climate-related regulations in the EU, as well as reporting frameworks that companies can choose from when developing their own reporting process.

Strengthen accurate organizational reporting standards. Transparency is your organization’s best line of defense against greenwashing. Internal auditors must work closely with boards and leadership teams to ensure that environmental initiatives and climate impact are being accurately evaluated and reported on a regular basis. This includes coordinating with the board to set actionable goals and develop comprehensive processes for regularly tracking, reporting, and publishing your organization’s progress. In instances where environmental-related tracking and reporting standards are already in place, your role is to challenge and verify the accuracy of your organization’s environmental data. The IIA provides a robust portfolio of resources to help internal auditors implement effective and transparent reporting standards to mitigate the risks of making misleading environmental claims.

Encourage effective communications that do justice (accurately) to your environmental efforts. Greenwashing becomes a significant risk during the communication and marketing phase within an organization. After all, it is the misalignment between what is being said and what is actually taking place that constitutes misleading environmental claims. How an organization communicates its sustainability initiatives and results can be just as important as the initiative itself. The role of internal auditors is to help companies have confidence that they’re accurately and impactfully presenting their sustainability efforts and achievements. Claims should be clear, easy to understand, and most importantly, supported by data — ensure there are proper internal controls in place to verify the claims based on what has been tracked and reported.

While the accuracy and verification of ESG claims is the priority, confidence from the assurance can prevent the organization from engaging in “green hushing,” or the decision to keep quiet about environmental initiatives to avoid scrutiny. If sustainability initiatives are a key part of your organization’s strategy, the company should feel confident communicating them to the public and to stakeholders. Expert buy-in also goes a long way — when touting your organization’s environmental bona fides, seek industry-leading input or testimonials from environmental and climate professionals.

You can also establish credibility via third party certifications, which are available for nearly every subject — from appliances and electronics (Energy Star) to food (Fair Trade Certified) and buildings (LEED).

Continue to stay up to date. As noted earlier, the regulatory and climate risk landscape is changing rapidly. Be sure that you and your organization stay up to date on the growing number of environmental risks and ESG reporting requirements. Publicly traded companies face unique and often complex reporting requirements, which creates added risks, given their responsibility to shareholders.

Internal auditors play a critical role in the ESG landscape, helping organizations ensure regulatory compliance while communicating their environmental impact accurately and transparently. As pressure grows from both regulators and the public to demonstrate progress on sustainability initiatives, so will the internal auditor’s role in safeguarding against the reputational risks of greenwashing.

For more resources on how to learn about and responsibly implement ESG initiatives, visit The IIA’s ESG Knowledge Center and watch the latest 5 Questions with Anthony video, where I expand upon these points and more.

Anthony Pugliese, CIA, CPA, CGMA, CITP

Anthony Pugliese is president and CEO of The IIA.