Climate Risk: Reputation risk and the impact of greenwashing

Another day and another raft of damning greenwashing headlines for some of the world’s biggest banks. With consumer climate education, interest and activism all growing at a rapid rate, financial services firms are increasingly finding themselves in the crosshairs over potential disconnects between their climate related pledges and the actions they are taking.

The Rainforest Action Network’s (RAN) ‘Banking on Chaos’ 2021 report

This year’s RAN report may cause some uncomfortable reading for larger organisations. The headline statement is that, in the 5 years since the Paris Agreement, the world’s 60 biggest banks have financed fossil fuels to the tune of $3.8 trillion.

What makes this more impactful is the fact that the very same businesses have extensive, and often quite impressive, climate and sustainability disclosures on their websites highlighting all the proposed actions they have taken or are intending to take.

On the face of it, this does appear damning for these firms.  However, in partial mitigation, several banks in the report have made recent policy changes that will not have flowed into the numbers for this year’s report. As an example, in early March 2021, HSBC vowed to phase out coal financing by 2040. This would put a dent in the $3.5bn coal power and coal mining it financed in 2020 but still leaves another $20bn of fossil fuel financing to mitigate each year, showing the scale of the challenge.

Mandatory disclosures and the impact on reputational risk
Accusations of greenwashing and the potential harm to a business’s reputation may have a knock-on effect through customer brand perceptions, thereby impacting retention of existing customers and sales to new customers as green preferences rapidly emerge.

Mandatory disclosures, particularly when included in auditable annual reports, only increase the visibility of a firm's climate claims and allow the interested reader to start unpicking the details with regards to green credentials.

Taking steps to manage the potential perception of greenwashing

  • Alignment – Ensure there is consistency between the firm's Climate & Sustainability Policy and actions taken to deliver this, and the firm's relevant risk appetite and limits, particularly across lending to customers in perceived ‘brown’ sectors

  • Understanding – Ensuring the business fully understands the scale and scope of potential exposures, both from its own activities and that of its financing operations

  •  Realism – As tempting as it is to emphasise the firm's green credentials, ask whether these are backed up by the facts. This will only come with an awareness of their actual and potential exposures

Next steps

FourthLine now runs 90-minute climate risk awareness workshops for our financial services clients. Please click here to find out more

For further insights on getting started on implementing your climate risk framework, please download our insights deck here

For any questions or to set up a call with our Talent Director, Daniel Waltham, complete the form below

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Topics: Featured, Flexible, Financial Climate risk

March 25, 2021
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Ross Molyneux
Written by Ross Molyneux

Ross specialises in risk management and regulation. He has worked extensively across non-financial and financial risk management engagements in his time in consulting in both the UK and New Zealand.