Canadian firms are risking investor lawsuits due to ESG fraud

KPMG in Canada reports high levels of concern about a growing issue

Canadian firms are risking investor lawsuits due to ESG fraud
Steve Randall

The growing responsible investing space in Canada is good news for companies with strong ESG credentials, but what if the data was being misrepresented?

While greenwashing is commonly called out by investors and consumers, a more sinister and potentially damaging trend is emerging, ESG fraud, and its scale is highlighted in a new report from KPMG in Canada.

As part of a survey of Canadian organizations which have been victims of fraud, KMPG found that 24% of those firms that have experienced fraud in the past five years have discovered ESG fraud. This typically involves the exaggeration, embellishment, or distortion of ESG data by parties including the victim’s employees or suppliers.

With 89% of respondents revealing they are under pressure from stakeholders to demonstrate progress on ESG targets, and a similar share is concerned that these pressures increase the risk of ESG fraud. Eight in ten are concerned that their organization may inadvertently commit ESG fraud.

An emerging risk is litigation with investors and activists potentially filing lawsuits if they find inconsistencies. This is likely to be exacerbated by the proposed disclosure requirements of the Canadian Sustainability Standards Board (CSSB), which have been backed by the CSA.

"Once the CSSB standards are finalized – and if adopted by the Canadian Securities Administrators as law – one of the potential consequences of non-compliance will be litigation, so adhering to the new standards will help organizations mitigate that risk," said Conor Chell, KPMG in Canada's national leader of ESG Legal Risk and Disclosure.

Among the companies that have already experienced ESG fraud:

  • 9% 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% 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% report that they are experiencing or have experienced internal and external 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," said 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.”