Mitigating Greenwashing: The Role of Audit Committees and Internal Audits in ESG Reporting Assurance

Abstract

Greenwashing refers to businesses making misleading ESG disclosures (Burbano, (2011). In response to rising expectations from regulators, investors, and the public, a growing number of businesses are under pressure to publish ESG reports. Financial losses, damaged brand reputation, and even corporate failure can result from greenwashing behaviour on the part of businesses if their ESG information is inaccurate.
ESG reporting has been a significant area of development in corporate reporting over the last two decades with different names and scopes. However, ESG reporting assurance (hereafter ‘ESG assurance’) is a relatively new area of practice, and there is limited research and understanding of its effectiveness. Existing studies in this field have mainly focused on the external audit role in the assurance process. The aim of this study is to gain an understanding of how the audit committee and internal audit can assist the board in fulfilling its oversight role of mitigating greenwashing by ESG assurance, based on direct evidence from the assurance providers. To achieve this aim, semi-structured interviews were conducted with 47 participants from various countries, representing a diverse range of global perspectives. The interviews lasted an average of 60 minutes, were recorded and transcribed, and analysed using reflexive thematic analysis.
Results suggest that competent audit committees should play an active and important role in ESG assurance. Internal audit is perceived to play an important role in ESG assurance. Respondents identified greenwashing as a real and significant risk to both businesses and the environment. They further emphasized that ESG reporting must be credible and well supported in order to gain investors' and the public's trust and meet their sustainability expectations. Results also showed that ESG reporting governance is poorly defined, limiting assurance, and that most boards lack ESG expertise and may underestimate the importance of ESG assurance.
This study provides empirical contributions on ESG assurance to mitigate greenwashing through direct engagement with boards, audit committees and assurance professionals. It also offers a framework to help better understanding some of the causes and consequences of greenwashing. In addition, it provides recommendations to boards, audit committees, internal audit, researchers and other assurance providers confronted with multiple challenges in this rapidly evolving domain.