Environmental criteria assess how a company manages natural resources, emissions, and climate risks. Social criteria examine treatment of workers, equity practices, human rights, and community impact. Governance focuses on internal accountability, transparency, board composition, and integrity in leadership.
A global study by Capital Group in 2022 surveyed over one thousand institutional and wholesale investors across nineteen countries. 89% of respondents disagreed with the notion that ESG is a passing trend. The study highlights a global recognition of ESG as a durable framework that is reshaping market behavior and stakeholder expectations. As a result, firms are expected not only to measure their ESG performance, but to report on it with precision and credibility.
What Is ESG Fraud
ESG fraud refers to the intentional misrepresentation or concealment of material facts related to an organization's ESG activities or performance. This may involve overstating sustainability achievements, hiding environmental or labor violations, or manipulating governance disclosures to present a false image of ethical responsibility. ESG fraud can occur in both private companies and public institutions and may be committed internally by executives or externally through third parties such as vendors or data providers.
The objective is to mislead stakeholders and create a perception of ESG compliance or superiority that does not reflect reality. Such misconduct erodes market integrity, misallocates capital, and introduces systemic risk into financial ecosystems. When fraud is committed knowingly and involves material misstatements, it is subject to civil and criminal penalties under securities law. Given the increasing enforcement pressure and public scrutiny, firms that misstate ESG progress expose themselves to financial penalties, investor litigation, and long-term reputational damage.
Examples of ESG Fraud Schemes
Fraudulent practices span across all ESG domains:
- Environmental fraud includes inflating carbon offset values, faking emissions reductions, or concealing illegal deforestation.
- Social fraud can involve exploiting labor, providing false diversity data, or masking supply chain abuses.
- Governance fraud includes falsified board oversight, conflicts of interest, or fraudulent use of ESG-linked compensation schemes.
Greenwashing is the most pervasive example, where firms exaggerate or fabricate sustainability efforts in public communications. ESG-related misconduct may appear in financial filings, proxy statements, sustainability reports, or marketing materials.
In each case, false or unsubstantiated claims violate disclosure expectations and present direct compliance risks.
ESG Fraud Taxonomy
Grant Thornton and the Association of Certified Fraud Examiners introduced a comprehensive taxonomy for classifying ESG fraud risks. It extends the traditional fraud tree into four categories: corruption, asset misappropriation, financial statement fraud, and non-financial reporting fraud. (The fourth category is unique to ESG and addresses falsification or misrepresentation in sustainability claims, progress reports, and stakeholder communications.)
This expanded model allows organizations to apply targeted assessments and strengthen internal controls. Greenwashing, virtue signaling, and harvest mixing all fall under this framework. In each case, identifying fraud requires accurate data systems, documented ESG policies, and proactive oversight of third-party disclosures. Without these safeguards, firms risk misalignment between what is reported and what is actually practiced. This misalignment is now closely monitored by regulators and investor groups.
SEC Oversight and Risk Alerts
In 2021, the United States Securities and Exchange Commission issued a formal Risk Alert through its Division of Examinations. The alert identified common deficiencies in ESG disclosures and warned firms against inconsistencies between stated ESG practices and actual operations. The SEC stressed that marketing materials, regulatory filings, and client reports must be accurate, substantiated, and aligned with internal strategies. The alert also cautioned that some firms were promoting ESG strategies without having mechanisms to implement or monitor them effectively.
This oversight has rapidly evolved into active enforcement. The SEC's Climate and ESG Task Force, launched in 2021, monitors disclosures from issuers and asset managers and investigates ESG misstatements. In 2022, the SEC proposed rule changes under the Advisers Act and Investment Company Act requiring enhanced ESG disclosures.
The U.S. Securities and Exchange Commission (SEC) has disbanded its Climate and ESG Task Force, which was established in 2021 to monitor disclosures from issuers and asset managers and investigate ESG misstatements. This move reflects a shift in the SEC's approach to ESG enforcement. Despite the disbandment, the SEC continues to pursue ESG-related enforcement actions. For instance, the agency has taken action against companies for misleading ESG statements and violations of related policies and procedures. The SEC emphasizes that while the formal task force no longer exists, the expertise developed by the task force now resides across the Division of Enforcement, and the agency remains committed to holding violators accountable for ESG-related misconduct.
Identified Compliance Failures
Examinations by the SEC revealed systemic failures in ESG-related compliance. Firms often lacked documentation for ESG investment decisions, failed to reconcile proxy voting policies with public statements, and misrepresented alignment with international ESG frameworks. Marketing materials made claims that were vague or unsupported, while compliance staff were sometimes unaware of the firm’s actual ESG strategy. Inadequate internal coordination led to gaps between disclosures and practice.
These failures reflect deeper governance issues. ESG oversight requires clearly defined policies, assigned responsibilities, and integrated compliance reviews. Successful ESG programs embed data integrity, independent verification, and internal controls into every stage of the reporting process. Without this foundation, ESG disclosures become legal liabilities and risk eroding investor trust.
Best Practices and Effective ESG Oversight
Effective firms maintained tailored ESG disclosures that clearly articulated their approach. They documented ESG metrics across the investment process and involved compliance teams from policy formation through marketing review. Successful organizations developed rigorous portfolio management protocols, especially when employing multiple ESG strategies. They also aligned with international standards such as the Global Reporting Initiative, the Sustainability Accounting Standards Board, and the United Nations Principles for Responsible Investment.
Firms that demonstrated ESG credibility built robust internal programs. These included whistleblower protections, anti-fraud training, supply chain audits, and ESG-specific risk assessments. Reporting systems were designed to be audit-ready, with data sources mapped and monitored. These firms treated ESG as a financial control function, not as a branding tool.
Materiality was central to these practices. Organizations defined ESG materiality not solely by financial risk but by stakeholder relevance and reputational impact. This included identifying risks in third-party relationships, documenting how ESG claims were substantiated, and correcting errors when they arose. Transparency was maintained through investor presentations, annual reports, and regular updates to ESG frameworks. When ESG was treated as a corporate governance obligation rather than a marketing theme, compliance improved and fraud risk declined.
SEC Enforcement Example: Vale S.A.
In one of the most significant ESG enforcement cases to date, the SEC charged Vale S.A., a Brazilian mining company, with fraudulent ESG disclosures. The company issued false safety certifications for the Brumadinho dam, which collapsed in 2019 and killed 270 people. Although internal records showed the dam failed to meet international safety standards, Vale assured investors that its facilities were stable and compliant. The disaster caused more than four billion dollars in market capitalization loss and revealed a broad misalignment between internal knowledge and public ESG statements.
This case highlights how ESG fraud directly threatens both human life and financial markets. It also underscores that ESG misstatements are not theoretical risks. They lead to material loss, legal exposure, and irreversible reputational damage. Firms must adopt a preventative posture, recognizing ESG fraud not as a compliance footnote but as a top-tier enterprise risk.