t is now common for companies to regularly report their corporate social responsibility perform-ance. Such CSR reports include information on environmental performance (e.g., emissions, water consumption, recycling initiatives, use of green suppliers, etc.) and social performance (e.g., work-place safety training, diversity hiring practices, involvement with local charities, etc.). This trend is generally considered to be a very positive change relative to a sole focus on financial performance. However, critics have suggested that some companies are engaging in "greenwashing," whereby they are using CSR reports to appear more environmentally responsible than they actually are, or to exag-gerate claims about the extent of their social responsibility. These concerns have merit, because un-like financial reporting CSR reporting is not regulated by law or subject to mandatory audits by a third party.

Required: 1. What incentives do companies have to engage in greenwashing or to overstate their claims about being socially responsible?

2. What controls could management put in place to increase the likelihood that the company actually engages in environmentally and socially responsible activities?