The Institute of Internal Auditors presents all things internal audit. Join David Petrisky, director of Professional Standards at the IIA, as he dives into the hot topic of greenwashing with Edith Wong, managing director at FTI Consulting, and Brian Wilmont, attorney at Paul Hastings. In this episode, they unpack the challenges of navigating environmental claims, share eye-opening cases, and offer practical tips for auditors tackling greenwashing and other ESG related risks.
Today we're talking about greenwashing, and that's a pretty specific term, uh, that many people may not be familiar with. Can you tell me a little bit about, you know, what do you, what do you mean when we talk about greenwashing? Sure. So, um, greenwashing is a specific term, but it would be a term that we will also say doesn't really have a universally accepted, um, legal definition yet.
So for things like fraud and corruption, you have a definition, you can say exactly what those are, but for now, greenwashing is more of an umbrella term that just generally refers to the practice of where companies are. Perhaps, um, you know, enga make certain environmental claims, but don't have the, the data to necessarily substantiate those.
Some of those claims may be more aspirational in nature, um, but in real life, in practice, they're actually just kind of going on with business as usual and don't really have an, haven't really changed their approach in their practices to actually substantiate those, those claims. And are you seeing, uh, those types of cases come up where, uh, people are, um, bringing actions against companies for their, uh, environmental claims?
Yeah. This has, this has been a pretty active area and it's, it's likely to get, I think, more active as well. Uh, a lot of the earlier litigation activity, regulatory activity, I think is focused more around kinda the more adv avatar advertising marketing space and what people are saying. But now, uh, there's a lot more activity and a lot more, uh, the greater obligations that are being imposed on companies regarding disclosure and reporting.
So what I expect, you start to see more about, you know, what people are saying to investors, you know, what they're saying in their, their securities filings, uh, you know, what, whether they're, you know, holistically reporting about what their operations are and, and how they're addressing sustainability issues. Yeah.
And are, are there any like significant examples of, you know, um, that you can point to to say, well, here's one, you know, well-known, uh, case that was brought, or one well-known, uh, you know, incident of greenwashing? Sure. So there is one that we were talking about earlier in our panel where it's not necessarily greenwashing. I mean, it, it's, it's kind of falls within fraud generally, but it does involve environmental claims.
But it involved a company who was working in the automobile industry and, um, they were apparently providing false data and misrepresenting their, um, carbon emissions within their vehicles. And so, um, you know, this was discovered and it, it, it resulted in a very large fine for the company. Um, but since then, the company has, you know, identified what went wrong.
And it's also, um, done a great job in terms of now, um, you know, being able to implement their compliance programs and set up so that they're actually now making sure they're identifying these risks and have become a really, you know, a good example of how to kind of turn it around and make sure that their, their claims, um, really are verifiable and have been fully vetted. Yeah. And it's, you know, pretty well known example. I think I know what you're talking about there.
Um, are, are there any other types of, uh, you know, possible actions or, or statements that companies make that could, uh, be lead them to some exposure for greenwash? I think a big category that we've seen a lot of activity around is where companies are making kind of vague statements about what they're doing to address sustainability concerns.
Uh, you might see that in a circumstance where, you know, they may be a big emitter of greenhouse gases and they wanna be seen to be doing something to address that.
And then questions become, you know, whether, whatever they say they're doing, whether it's investing in renewable energy or, uh, trying to reduce some of the climate impact of their, the products that they manufacture, that sometimes it's seen as, oh, you're trying to hide or distract from the other part of your business, where a lot of those emissions are, are kind of on an ongoing basis. So I think that's one area you see a lot of, a lot of focus on, you know, is those types of situations.
I think what's also interesting about greenwashing is you can kind of see a range. So for example, you know, there could be a, a company that can make a certain claim about how much of their product is made with recyclable or recycled materials. That's something that you can very much test. 'cause you can say, alright, X percentage of this product is made out of recycled materials. You can test it's, it's either correct or it's either incorrect.
Um, but there are gonna be other claims where you can say, you know, we are environmentally friendly, we are green, we are natural. So those ones are a little bit more, you know, ambiguous and vague in nature, and those ones are harder to test, but at the same time would be subject to the same level of scrutiny.
Because if you are misleading consumers towards making choices to purchase or use services by your company based on these environmentally friendly kinds of statements, but in reality, you're, you're not really doing much to substantiate these, that that is a concern and opens you up for all types of risks and negative impact to your company. And I think this is like really an evolving space that you, everybody from companies out there who are trying to figure out what they can and can't say.
But also the regulators themselves and, you know, litigants, you know, the public at large are still trying to figure out, you know, what, what is reasonable, you know, what, what, what is, you know, an appropriate representation to make about what you're doing to address your sustainability, environmental, you know, impacts you're having. So it, I think it's really something that we'll see continue to evolve.
So what we see today that this may change, we may start to see more specific representations as the data gets better to support it. Um, and then there may be more challenges there, and it may focus on, well, how can you base that on this piece of data or that piece of data? And, you know, you'll start to see, you know, companies more questioned on, you know, all of their diligence that they're doing to reach their conclusions and their representations they're making.
Yeah. That's where I was gonna go with my next question is how, how much of this is related to, uh, you know, the non-financial reporting that the companies are doing and the requirements around that? Uh, versus like other, you know, um, corporate communications or marketing statements. It's really, it's really both. Uh, you, I think if you have, uh, I think you could describe a number of buckets.
You have kind of the marketing aspects, you know, whether it's your labeling of your products, it could be the, uh, the, your representations and advertising that you're making about your products or services. Uh, it could be reports you're publishing on your website about, you know, what you're doing, promotional materials, et cetera. I think that there's that category. Then there's disclosures, and some of those are increasingly being mandated by regulators.
And we're saying, you need to disclose what you're doing to address climate emissions and what are your climate emissions? And if you're offsetting, what are your projects that you have going on related to, you know, climate emissions?
Uh, and you know, that's a different set of, you know, types of considerations there, uh, that raise, you know, more specific, um, regulatory concerns separate from the marketing piece, which fits into a little bit more traditional framework because you, you have to be accurate about what your products are, whether they're safe, et cetera.
What they can do and can't do Are, are, are you starting to see more requests, uh, from companies about vetting their, uh, their reported non-financial information or, uh, trying to be in conformance with various standards or frameworks around, uh, you know, environmental reporting? Yeah, I think companies are definitely realizing that there is now this much higher standard to their regular regulatory requirements, um, for reporting.
Um, you know, their, their, their claims and, and how supportable it is. Um, they're realizing that there is scrutiny coming in from various stakeholders.
Um, it's not just, um, necessarily necessarily the, the regulatory agencies, but you have stakeholders ranging from the consumers, from investors, from NGOs, um, it's just really coming from all different places because, um, there's just, there's just this increasing attention to, um, how, um, you know, a company is necessarily, um, approaching its environmental impact, um, on
through its operations and it's, it's company. Yeah, A lot of, I think there's a lot of compliance areas that are more mature, and so everybody has, you know, at least a more comfortable view of what they need to do to meet expectations. You know, if you have this type of issue, what do I need to report about it? Well, how do I need to respond? I think here everybody's still kind of figuring it out.
So a lot of companies are looking for some guidance on how do I navigate this environment, particularly when there's both kind of those parties who want to increase the amount of reporting and increase focus on, you know, sustainability considerations. And then there's also those who think we're going too far, uh, and are kind of pushing back on that trend. So, you know, sometimes for, you know, some companies, it can be a tough balance to, to manage.
Are, are there any significant, um, like, you know, global authoritative bodies that are, um, or I'll, I'll just say, you know, uh, in practice have, uh, some leading frameworks kind of risen to the top and or that get noted or, or mentioned most frequently? So It, you know, we are seeing it from all different places, from all different countries around the world. Um, uh, there's certain educational frameworks.
So tcho is an organization, um, that had developed what's called the seven Sins of Greenwashing that provides consumers with an understanding of potential and common deceptive practices, um, that can be engaged by, by companies, um, here in the United States. Um, the Federal Trading Commission has, um, uh, developed the, what's called the Green Guides, um, that was developed really in the 1920s.
So it's been around for a long time, but obviously has been updated over time, um, given, you know, just advances in technology and the types of products that we're seeing and materials and things like that. So, I don't know, I don't know, Brian, if you would disagree, that's like a leading framework. I don't think there's something, a leading frame.
There are some standards organizations that, you know, I think we're seeing some, uh, adoption of sustainability considerations like the IFRS standards. I think you're seeing various jurisdictions starting to adopt, you know, principles based on, you know, that framework. I think even the, you know, the, um, the us you know, regulators are looking at, you know, how they can integrate some of those principles into, you know, for us public companies, et cetera.
There's also developing reporting frameworks too. So there's, like the GRI, the Global Reporting Initiative, there's also a SB, which is the sustainable, um, sustainability Accounting Standards Board. Um, they actually have come together recently to try to provide a more, um, kind of united framework for reporting. So there is, there is a lot out there in terms of the different frameworks that are available for companies to consider.
It also depends really on their industry and jurisdiction to see what's most relevant and what might be most material for your particular organization. So it's a lot of different areas to, to consider. And in your discussions with the chief audit executives, have they talked to you at all about how they're incorporating these risks into their audit planning, or how into their model of the organization's risks? I, I Think it's still the beginning stages.
Uh, you know, I think this is probably more on the radar of people in CSR organizations, maybe in the compliance organization. I don't think it has fully penetrated into a lot of the other functions that, you know, support. Like they can turn a audit that, that support analysis of the, the various risk areas you have as a company. I think it's increasingly getting there.
I think they're aware that they need to start doing that, particularly as the regulatory environment gets more complex and more formalized, uh, you know, so there's going to be formal obligations for you to actually check out some of these things. You know, I think it's, it's becoming, you know, a more serious interest. That's an interesting point.
Do you think companies are more protected if they have had an internal audit evaluate or an internal audit function, evaluate their, uh, their statements around, uh, their, you know, environmental objectives or, uh, you know, accomplishments?
I think from a compliance perspective, it's always better when you are actively testing and monitoring your, your company activities, your compliance activities, your, your business transactions, you know, regardless of what risk area they are, sustainability or otherwise. So I think, yeah, you know, if you can say internal audit was in and testing this, I think that's always better than having said no, we just never looked at it. I agree. I think it's highly beneficial.
Um, internal auditors are just uniquely positioned within the organization to be looking at this type of risk given their function. So they are objective, they're, um, they have the independence from operations management. Um, they are focused on risk and compliance. They're used to working with different segments of the organization from different functions. They're used to looking at data. So it's just the, the perfect, um, you know, uh, role for them.
And kind of along those lines, uh, what are some of the practices that companies are implementing to, uh, to try to prevent, uh, greenwashing or to try to, you know, make sure that their, uh, their statements are aligned with their operations and the results and all of that? I like, I think there's a range of things. You, I guess a few things I would highlight is, is starting to think about how you due diligence.
Uh, you, if you're particularly in the, the carbon offset credit world, you know, you're the various projects that are supporting those credits and offsets. You know, so what are, you know, what are you looking at the, either the validating organizations or if you're directly investing in projects, assessing those and making sure that those, those impacts are real.
Um, I think that's one area that people are starting to, like, think more seriously, which is a familiar process to most organizations because due diligence and a range of context is a very important step in that process. And really having that scrutiny up front to help you, you know, uh, provide some support later on when somebody questions it, you can, you have
a little bit of more of a defense there. Then Another, um, I think important component is having clear governance structure, having that, that kind of tone from the top to say that this is really important to make sure that our environmental claims are well substantiated, and that, um, you know, it's, it's gone through all of the proper vetting, um, procedures and that these are credible, real statements that we stand behind. That's, that's really important.
'cause it's gonna, um, you know, permeate throughout the organization so that employees know that when they're making a statement, especially when it's coming from a marketing de department who's, you know, are well intentioned, you know, they, they, they think they're, we're doing good. You know, they want to, um, increase sales. You know, they want to perhaps, you know, shed the company in a, in a more positive light.
They can be vulnerable to making statements that are potentially overstated or are exaggerated. So having that clear governance structure to say, all right, you know, we are committed to having, um, you know, environmental claims that are fully substantiated. We want, you know, needs to be fully vetted. We need to provide training to our employees to make sure that they're careful when they're making these
statements is really important. And, And I think what that also, that governance structure relates to, which I, I agree a hundred percent is one of the most important pieces, but it also facilitates kind of the assessment of what your organization's risk profile really is. You know? 'cause I think a lot of organizations could feel, oh, we need to rush to address this immediately. This is our priority.
And then you jump to another priority and it's, you know, first you kinda have to sit, stand back and say, well, wait, is it relevant to us? And where is it relevant to us? You know, if a company that makes a very highly complex product with, with lots of raw materials inputs probably has a much bigger task ahead of them than a purely services organization that might have much less exposure. So You're, you're already jumping into my next question, which are, are, yeah.
Yeah. All right. So are, are there any specific industries or, or sectors where, where you see this being a, a more prevalent problem or a more common uh, uh, concern? I, I, I think j just from, uh, a general public concern, I think anything in the more the higher carbon emitting industries is, is really going to be those that are getting a lot of focus from regulators and a lot of focus from the public.
Uh, you know, in your, you know, oil and gas industries, extractive industries, mining, uh, in transportation industry as well. You've already seen a lot of that with those kinds of companies in terms of scrutiny, scrutinizing their existing sustainability statements and the projects that they're advocating for.
But I, I would say, I, I think there'll probably be an emerging, you know, interest in other areas too that maybe don't seem as ripe for it, but still have like really large energy footprints, for instance, you know, certain tech sectors and things like that. I think there could be greater scrutiny there because, you know, they have, you know, a very significant impact that might not be readily apparent to it. Start starting to read about the power usage of artificial intelligence. Yeah,
Yeah, exactly. Let's, you know that, I think that is gonna be a further discussion topic as we go forward. Are any, uh, you know, final, uh, words of advice for internal auditors. Uh, you know, they, they may not have, uh, you know, audited, you know, in this area before.
Um, you know, so what, uh, tips or suggestions would you give having, you know, worked in litigation and seen, you know, what kinds of concerns get raised and, and what things, uh, are effective at, uh, you know, at counteracting those challenges? Sure. So, um, you know, as we've been saying, it's definitely an evolving area, but there are definite significant potential risks.
Um, whether it's financial risk, legal risk, operational risk, um, that's going to be, um, you know, prevalent as a result of, of potential greenwashing, um, actions. So I think just, you know, for auditors, just to start thinking about it, we're still in the early stages, so, um, educating yourself, um, being vigilant about being aware of what are the regulations, um, that are relevant to your particular company, to your industry, to your jurisdiction.
Um, just staying aware of all of that I think is, is a really good move at for, for many of, um, the companies out there. Yeah, I think, I think all I'd add is, you know, I think internal auditors play a critical role in any organization and kind of being a, a core line of defense in identifying issues early for organizations, but also being a source of expertise across various, you know, various areas.
So, you know, they, they cross over the, the, you know, the risk, the understanding of, you know, financial data and information and legal aspects. Sometimes through regulatory aspects as well where they can help legal communicate with, you know, other, other parts of the organization, but also be aware of the risk that is emerging from there. So I think they'll play increasingly a very important role here. Alright. Thank you both, Edith. Brian, it's been wonderful talking to you. Thank
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