AdSlot 1 (Leaderboard)

Businesses unaware of sustainability fraud risk

Businesses are now recognising the benefits of making their operations more sustainable, but leaving themselves open to fraud by not applying due care and attention to their sustainable activities.

This is the view taken by PwC in a recent report, How to assess your green fraud risks, which issues a warning to businesses not to engage in the sustainability game without considering the fraud risks. The report cautions that “the potential for fraud tends to be greater in new markets, when information is imperfect, standards of measurement and verification are not harmonised and governance is weak. The sustainability marketplace, taken as a whole, is all of these things.” It also highlights a “surge” in green fraud, citing emissions trading, including voluntary offsetting, project-based fraud and non-financial reporting as being particularly problematic for many companies.

A spate of cyber attacks on the European Union’s carbon market earlier this year first drew attention to green fraud. Carbon credits worth an estimated €30m (£25m) were stolen, forcing carbon registries across Europe to close their doors to business. The registries cannot reopen until they have provided guarantees of their levels of protection to the European Commission, but fears over the resale of stolen credits have kept the market sluggish even as the registries have started trading again. In February, thousands of companies were sent emails from fake emissions registries in a phishing scheme that saw credits worth more than €3m (£2.5m) transferred into fraudsters’ accounts.

In the past, the market has also suffered due to widespread carousel fraud, whereby traders use front companies to sell carbon credits, before pocketing the VAT charged on those trades and closing down the companies. This practice cost European Union member states up to €5bn in lost tax revenue before a crackdown last year.

This should be enough to put any company off sustainability efforts. But PwC forensic services’ Jonathan Holmes tells Financial Director that it is relatively simple to protect a business against these schemes.

“The scams are not new – just being applied to a fresh market,” says Holmes. “So knowing your customer and applying the same due diligence and data security a business would to any financial transaction should be sufficient protection.”

 

According to Holmes, the same advice applies to companies that are voluntarily purchasing offsets from schemes including the Voluntary Carbon Standard to boost their green credentials. He also points out that the trading of credits from carbon-cutting or forest protection schemes – known as Reducing Emissions from Deforestation and Forest Degradation projects – is open to the same abuse, as well as problems of bribery and corruption. Additionally, a Point Carbon survey in March found 15 percent of respondents from organisations covered by carbon regulation had seen projects claiming greater savings than actually realised, multiple-selling of credits or offsets traded from fictitious projects.

All of this may garner no more than a shrug from many finance directors. After all, they do not always deal directly with the treacherous carbon markets.

Wrong, says Holmes. While the carbon markets may be particularly susceptible to these pitfalls, he advises any company branching out into sustainability to be cautious, as getting it wrong can be a reputational catastrophe.

Emissions reporting is practised by 98 of the FTSE-100, but there is no hard and fast measurement standard. Companies can switch from being a victim of fraud to being its perceived perpetrator simply by changing methodologies.

“The risk is that if you report one year with a perfectly reasonable standard and then next year use another perfectly reasonable standard, you can be accused of manipulating the numbers because you have changed the basis of measurement,” warns Holmes. “The reputational damage can be enormous, and you do not want to be associated with it.”

 

How to protect against green fraud

1 Extend ‘business as usual’ attitude “Companies need to apply the same diligence to their sustainable business activities as they do to their core financial reporting and controls,” says Holmes. In fact, existing processes are more than capable of dealing with these scams, so they should not deter companies from green practices

2 Warn staff Boards are well aware of the dangers, but staff are less informed. PwC conducted a fake phishing test that convinced 20 percent of employees to click through to a fake
web page

3 Report sustainability consistently Companies need to define specific criteria and design a consistent approach to communicating outcomes, either through an annual report, sustainability report or their website. Defra has published guidelines for businesses

Related reading

CFO Agenda 2016
/IMG/235/338235/fd-windtoy
/IMG/936/255936/city-of-london1a
/IMG/009/258009/ftse88