The Association of Chartered Certified Accountants is cautioning accountants about the risk of greenwashing when reporting on a company’s environmental efforts.
The ACCA released a report Wednesday in conjunction with Global Ethics Day on ethical issues in sustainability reporting. The move comes as more companies around the world adopt sustainability reporting in response to demands from investors and regulators. Separately on Wednesday, members of the European Parliament in Brussels advanced plans to adopt European Sustainability Reporting Standards, which will now apply to 50,000 companies starting in January.
The ACCA report was written in partnership with academics from Warwick Business School in Coventry, U.K. and aims to equip both accountants and non-accountants with ways to deal with dilemmas in sustainability reporting presented by the risks of “greenwashing” (inflated claims by companies about their environmental efforts) as well as weak processes, lack of technical knowledge and compromises in objectivity and independence.
Courtesy of ACCA
“Ethics underpin everything that professional accountants do,” wrote Mike Suffield, director of policy and insights at the ACCA, in the introduction to the report. “In work related to sustainability reporting and assurance, whether performed by accountants or non-accountants, being alert to risks and behaving ethically will be fundamental to establishing trust in the information published.”
The report includes a checklist of questions to drive better application of the International Ethics Standards Board for Accountants Code principles, including professional skepticism and curiosity. The guide tries to help users avoid the consequences of poor-quality reporting, including greenwashing, a loss of trust and faulty decision-making.
The ACCA released a YouTube video Wednesday on the report featuring a conversation between Lisa Weaver, a professor at Warwick Business School who co-authored the report, and Sharon Machado, ACCA’s head of sustainable business, who collaborated on the report.
“We have a collective obligation to future generations to operate in a sustainable manner, both individually and as organizations, and it’s great to see more and more businesses embracing sustainability reporting,” Machado said in a statement. “But we need to be alert to the risks and ensure quality and consistency. For professional accountants, this is an opportunity to provide strong leadership and insight, in turn helping to drive ethical and sustainability-focused decision making. This guide will help accountants and other professionals to create balanced reports that are a fair reflection of organizations’ performance and impacts.”
The report noted that sustainability matters are of interest to a wide-ranging audience, creating many greenwashing opportunities for using the content to influence stakeholder behavior. Accountants are required to comply with the IESBA Code of Ethics and will need to consider questions such as ensuring reporting is true and fair, and balancing their duty of care between different stakeholders.
“The scenarios contained in this report provide opportunities for individuals and teams to explore some of the ethical tensions that can arise in the complex arena of sustainability reporting,” said Weaver and report co-author Darren Sparkes, associate professor at Warwick Business School, in a statement. “As professionals, we have a moral duty to uphold the ethical code and to champion good practice, within our profession and with professionals from diverse backgrounds, working together to enhance credibility in sustainability reporting.”
The tendency to exaggerate a company’s environmental accomplishments is something that skeptical accountants and auditors should be on the lookout to deter.
“I think greenwashing is definitely a big issue,” said Weaver in the video. “Individuals working in a business could be influenced, either consciously or subconsciously, to perhaps paint a pretty picture and to maybe detract from the reality of what’s going on in the business. For me, this is really an issue of integrity and objectivity. Professional accountants really need to make sure that they’re not unduly influenced to have greenwashing in their reports.”
She acknowledged that individuals may rationalize the greenwashing by a company or client by believing a green image would perhaps attract more investment, grow the company and secure jobs. So there is sometimes a rationalization, a very conscious thing.
“We mustn’t compromise here,” said Weaver. “We must make sure that we act with integrity when we’re producing these disclosures.”
It’s important for accountants and auditors to provide verification or assurance of the sustainability reports. However, firms need to find experts who know what to look for in this area and they need to be wary of independence considerations. “We have some evidence that really suggests the talent pool capable of doing sustainability reporting at this time is pretty small,” said Weaver. “Therefore, I guess there’s a risk that one might be involved on the preparation side, and then find themselves having to verify what they have prepared.”
Independence and objectivity are a significant issue, she noted. “The firms that are providing this assurance or going to be providing assurance on sustainability reporting need to really carefully consider how serious these threats are and put safeguards in place if necessary,” said Weaver. “The obvious one would be using separate teams, if possible, but also making sure there’s no self interest, making sure that they don’t offer services that really they’re not competent to do.”
EU sustainability standards
Separately on Wednesday, members of the European Parliament rejected a resolution calling for limitations to be introduced on European Sustainability Reporting Standards, paving the way for final adoption.
The Global Reporting Initiative, whose standards interoperate with ESRS, welcomed the outcome and said it would enable the standards to apply to 50,000 companies starting in January 2024. ESRS is a central component of the European Union’s Corporate Sustainability Reporting Directive and will apply to all large and listed companies in the EU. Starting in 2028, non-EU companies operating in Europe will also need to report their impacts using the ESRS or equivalent standards. The International Sustainability Standards Board’s recently approved standards will be applied by many companies as well.
GRI said it is currently finalizing interoperability tools, including a digital taxonomy and multi-tagging system, to simplify the reporting process and support companies to report in accordance with both ESRS and the GRI standards within a single sustainability report.
“The endorsement of the ESRS by the European Parliament is welcome because it signals the transition from political debate to practical implementation for these new rules – which are a game changer for corporate accountability, in the EU and globally,” said GRI CEO Eelco van der Enden in a statement Wednesday. “The close alignment achieved between the ESRS and the GRI standards underlines the increasing influence of GRI as the global enabler for transparency on impacts.”
U.K. guidance on nature risk for pensions
The United Kingdom has also been encouraging more companies to do sustainability reporting. The Accounting for Sustainability initiative, founded by King Charles, released guidance for pension fund chairs and trustees on managing nature risks and investing in opportunities. The guide provides five top tips from pension fund chairs and trustees who are currently embedding nature into their investment and strategic decision-making processes:
- Deepen your, and your board’s, understanding of nature-related risks and opportunities.
- Get started by identifying one key risk and opportunity.
- Manage the portfolio risks.
- Enhance at both a micro- and macro- stewardship level.
- Invest in the opportunities.
“I know that the impact of these risks will be felt throughout my portfolios – directly or indirectly,” said Russell Picot, chair of the HSBC Bank (U.K.) pension scheme and chair of A4S’s Asset Owners Network, in a statement Wednesday. “Therefore, understanding how my investee companies are addressing the nature-related risks (as well as climate-related) in their business will give me one angle. Knowing also how these risks affect the planet will be another, essential, angle to consider.”
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