Ironing out the details: What finance teams can do to address greenwashing

This blog has been informed by discussions with the A4S Expert Panel as well as the insights A4S accesses through our extended networks and technical experience. We would like to thank members of the Expert Panel for their contributions.

This is the third part of our greenwashing series. Read our first greenwashing blog to see what greenwashing is, why it happens and the impact it has, and our second greenwashing blog to explore the role of regulation in tackling greenwashing.

The finance team has a vital part to play in tackling greenwashing

Within organizations, finance teams have a role to play in identifying and addressing financial risks – including greenwashing. The potential consequences of greenwashing include significant fines (as we explored in our previous greenwashing blog) and reputational damage that may result in loss of revenue. This means that greenwashing should be a concern for finance and the wider organization, not left solely to sustainability teams to handle.

Accountants have an important role in modelling high standards of professional integrity and ethics, too. The International Ethics Standards Board for Accountants (IESBA) sets out five core ethical principles in its Code of Ethics for Professional Accountants, which include integrity and objectivity¹. Accountancy bodies worldwide have based their own codes of ethics on the IESBA principles. Greenwashing is an area where accountants can provide ethical leadership, championing the importance of all sustainability claims being credible and well supported.

Finance teams also have a central place within an organization and a set of skills, experience and knowledge that puts them in a strong position to act, including skills in: regulatory compliance, data collection and critical analysis, design of internal controls and processes, preparation of internal and external reporting, assurance, and the communication of complex data and concepts.

When combined with finance’s strong commercial awareness and professional scepticism, this is a powerful set of skills that will be vital for strengthening the quality of sustainability information and reporting for all organizations. Finance teams can use their expertise to bring a similar level of rigour to sustainability information as is currently applied to financial information – and can help organizations enhance their approach over time, as standards develop.

“For me, the role of finance teams is all about how they position and communicate the risk of greenwashing within their risk, control and reporting processes and documentation.” – Helen Slinger, Executive Director of Knowledge and Learning, A4S

Working with other teams across the organization, finance can take practical steps to bring sustainability considerations into existing organizational activities that will be relevant to addressing greenwashing:

• Risk management
• Procurement
• Management information
• External reporting
• Training and capacity building

Risk management

Led by the CFO, the finance team should stay informed about relevant developments by monitoring the regulatory landscape – horizon scanning – and be alert to the potential for greenwashing within the organization. From there, finance teams can play a key role in quantifying the risks and putting in place policies, procedures and controls for addressing them.

Risk mitigation could include:

• Fraud and social media policies – greenwashing is a form of fraud. A fraud policy should explain what fraud is (including greenwashing), outline the expectation that all employees will act with integrity, and establish systems for preventing, detecting and reporting fraud. A social media policy should set out how your organization expects employees to use social media and explain the need to take care when making claims about the organization on social media. Policies should also detail clear and appropriate consequences for breaches.
• Training on greenwashing – ethics and fraud training for employees can include specific content on what greenwashing is and how and why to avoid it. Specific training and ongoing guidance is likely to be needed for staff working in internal and external communications functions. Communications professionals need to understand the risks involved in claims about sustainability activities and performance and take care with the language they use – especially as other staff may follow their lead when engaging with other external stakeholders.
• Governance, accountability and compliance procedures – strong governance should be in place over internal and external sustainability reporting, including clear accountabilities covering different elements of the reporting process.
• External assurance – getting external assurance over your sustainability disclosures can be a good way to check that your organization is making well-supported claims. This also functions as a signal to investors, customers and other stakeholders that your disclosures have been subject to external scrutiny.

Beyond these, the finance team can also use its awareness of greenwashing and its role in resource allocation and budgeting to make sure that enough funding is provided for credible action on sustainability, allowing ambitious claims to be substantiated in practice.

Procurement

Much of an organization’s sustainability impact goes beyond its direct operations – for example, scope 3 emissions often make up the largest share of greenhouse gas emissions for organizations. Many organizations make claims about sustainable sourcing or other forms of social and environmental sustainability across the supply chain, including scope 3 emissions. It is important to be able to support these claims – which relies on being able to access credible information from and about suppliers.

Procurement teams, supported by finance, should establish internal systems and controls to record and assess sustainability claims made by suppliers, including a review of the supplier’s sustainability disclosures. As part of your due diligence processes you can also seek out – from the supplier or through other means – the following information before awarding a contract:

• Documentation that supports the supplier’s claims about its sustainability credentials, such as recognized certifications
• Evidence that the supplier’s green or sustainable financial instruments are credible, such as renewable energy certificates, power purchase agreements or verification of sustainability performance targets (SPTs)
• Details of any legal action related to greenwashing or sustainability issues that has been brought against the supplier
• A description of the controls the supplier has in place to prevent greenwashing

Once contracts are awarded, you should regularly review the supplier’s compliance with relevant sustainability regulations.

Management information

The finance team can play a leading role in embedding sustainability into management information and making sure that controls over sustainability information are robust. Relevant, reliable and comparable sustainability information can help to strengthen decision making across the organization and the ability to manage risks and opportunities.

In preparing management information, finance teams can use their analytical skills to interrogate sustainability data, while also providing a source of challenge for sustainability claims made by other teams.

For organizations that are raising sustainable finance, the finance team can collaborate with the sustainability team to make sure that proposed KPIs and SPTs align with corporate strategy, are appropriate and will represent meaningful progress – for example, making sure that proposed targets are ambitious and haven’t already been achieved.

External reporting

Sustainability disclosures are becoming increasingly expected by investors and other stakeholders, with some jurisdictions having already introduced mandatory requirements. Establishing strong processes and controls over sustainability disclosures is now essential for organizations who want to avoid legal action and penalties related to greenwashing.

75% of investors surveyed by PwC agree that “how a company manages sustainability-related risks and opportunities is an important factor in my investment decision-making”, yet 94% believe that “corporate reporting contains at least some level of unsupported claims (i.e. greenwashing)”. – PwC Global Investor Survey 2023

Finance teams can help to strengthen processes for developing corporate sustainability disclosures, drawing on their strong skills and experience in preparing external financial reporting. They can play a part in making sure that disclosures are:

• Compliant – using finance’s experience in interpreting and following reporting frameworks
• Transparent – documenting clearly any assumptions and helping to assess and report on data quality
• Robust – helping to strengthen the quality of disclosures by ensuring that appropriate governance, processes and controls are in place for sustainability information
• Substantiated – making sure that sustainability claims are supported by good data, with a clear audit trail
• Assured – helping to put in place a transparent appointment process for appointing a reputable assurance provider and providing support through the assurance process

Training and capacity building

Many people and teams will be involved in preparing internal and external sustainability reporting, or in making public claims about an organization’s sustainability more broadly. This means that an awareness of greenwashing will be needed across the organization. Training and capacity building will be particularly important for staff working in internal and external communications, corporate reporting, investor relations, and marketing.

With their skills in data analysis and reporting, and their ability to communicate complex information clearly, finance teams are in a good position to upskill colleagues across the organization. Finance teams can provide training to ensure that employees have an up-to-date understanding of what greenwashing is and how to avoid it – including relevant regulations and stakeholder expectations. This training can supplement the policies discussed above.

For employees most closely involved in collecting and disclosing sustainability data, finance can also provide specific training and ongoing capacity building activities focused on data. Those in key roles would be better equipped to approach data processes and reporting with a critical eye, helping to enhance the rigour of the sustainability reporting process.

What can organizations do to support this?

Fundamentally, the best way to tackle greenwashing is to make sure that sustainability is truly embedded into strategy and decision making at all levels.

The ‘tone from the top’ will be vital for establishing the importance of sustainability, including the quality of sustainability claims and disclosures. Setting long-term goals and targets on its own is not enough – these goals and targets should be supported by transition plans, with appropriate oversight over progress.

CFOs can play a key part in making sure that sustainability is truly an organizational priority at the most senior levels of the organization.

Further information

Financial institutions can find out more about getting started on measuring a baseline for financed and insurance-associated emissions in our top tips guides.

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