Greenwashing and Fraud

This week an important claim was made against JBS was filed with the SEC. Mighty Earth, a small activist group, filed a whistleblower complaint against JBS with the US Securities & Exchange Commission (SEC) over JBS's USD2.3 billion Sustainability Linked bond.

 

For context, JBS is the world’s largest meat processor with operations in over 20 countries.

 

In 2021 JBS issued green bonds to investors.The bonds were linked to to the company's sustainability goal, to wit achieve net zero by 2040.

  

The problem is that, in setting the benchmark environmental goal, JBS never included its Scope 3 emissions. In fact, the Second Party Opinion issued in respect of the securities concluded that the bonds “were not material to the whole corporate value chain as the KPI does not include Scope 3 emission...” 

The kicker here is that for JBS, Scope 3 emissions are responsible for an estimated 97% of the company’s footprint and therefore the non inclusion of Scope 3 in the metrics and targets means that the metrics are understated and the organization therefore green-washed itself for potential investors.

The question is, was this fraud?

This is what Mighty Earth is alleging in their filing. They are relying on among other things the Third Party Opinion filed with the securities.

JBS has operated the green bonds for 3 years and in that time, might earth argues that the emissions actually have increased.

The matter is likely to raise important questions related to green washing:

- Investors need standardized climate financial risk disclosures - JBS relies on self reporting.

The role of the Board of Directors - Fraud is in many jurisdictions ground for lifting the corporate veil for purposes of criminal and civil liabilities.

- The role of Financiers in Green Bonds.

Why firms must improve their capacity to identify and measure their scope 3 emissions.

 - The tracking of upstream and downstream emissions is notoriously complex - scattered data, legacy systems, duplication, incomplete data, contradictory data and measurement methodologies, bad data etc. 

Beyond green bonds, the quality and reliability of sustainability disclosures in annual reports must improve. 

The sustainability reports cannot be tick box exercises undertaken by communications teams without an understanding of their legal impact as they can be a source of liability to organizations.

JBS has disputed the allegations and has stated that USD7 billion would be channeled to sustainability even as it outlines more plans linked to its net zero plans.

It is expected the International Sustainability Standards Board is expected to release two proposed standards mid this year which requires the reporting of Scope 3 emissions in climate disclosures.

This is a matter worth following for the issues that will be deliberated from it.