The views and opinions expressed in this article are those of the thought leaders as individuals, and are not attributed to CeFPro or any particular organization.
By Søren Agergaard Andersen, Chief Risk Officer, Nordea Asset Management
What reputational risks could an organization face if they are perceived to be greenwashing?
Reputational risk is by default a very difficult risk to manage. Even when you believe you are doing everything correctly, there will be people or organisations with different opinions that can challenge you. If an organisation is perceived to be greenwashing, it risks negative media exposure, which most likely would originate from regulators or NGOs. Both of these parties rightfully have their strong opinions and will monitor and control. Another effect is that an organisation will lose business – both directly and opportunities. Many market participants have defined strict policies and will of course have to be careful about which business partners they chose.
Most importantly an organisation risks to lose the trust that has been built up, and that part can be difficult to regain. Opinions are very strong when it comes to greenwashing, and if you are associated with this, it will take a long time to become a trustworthy market participant again in certain areas. Losing the trust with regulators also means that the organisation will risk further regulatory scrutiny.
How can an institution mitigate the risks associated with greenwashing?
Even if the regulation and the requirements are still being developed, it is important to focus on what the actual intention is. Why is all this being rolled out, and what are we trying to achieve. Organisations should have a proactive approach to the regulation with an eye on the ultimate goal. And the goal is not to bend the rules as much as possible, or stretch the definitions to an extent that becomes questionable.
Organisations need to understand and adhere to the intention of the regulation and have a clear strategy on what ESG means for them. They need to have documented and easy-to-explain methodologies, which the end-client can relate to, and be fully transparent.
Why is it important to align standards of labelling?
The complexity of working with more labels complicates the work of making easy-to-explain strategies and methodologies. Global organisations need to consider several standards, or define which standards to adhere to. By having to make these choices the organisations risk contradictions and misalignment in strategies, and in turn controversies with no clear right or wrong answer. There will be cases where an investment is ‘green’ under one standard, but ‘not green’ under another, and will the organisation then have to exclude it in order to be safe.
More standards of labelling will make it impossible to provide the best products for the clients. The complexity and resulting limitations will have an impact, and organisations risk losing business due to poorer performance.
More standards of labelling also opens for the risk of being accused of cherry-picking. Again it is important to be open and transparent about the strategy, but stakeholders will sometimes challenge the investments and when we don’t have a common reference, disagreements will be hard to settle.
How do you believe greenwashing requirements will develop across jurisdictions?
It is probably a very natural development that local regulators are working with different requirements, and then there is a move towards alignment – at least across Europe. I could easily see that even in the long run there will be different standards in the world, but aligned within regions or continents.
Greenwashing risk is however conceptually universal. Regulators will all have the same focus, and the actions to prevent greenwashing will most likely be alike.
Why is it important to verify and validate any data submitted?
This is still so new and we are all struggling to find the right, relevant and reliable data. The amount of data is exponentially increasing and it is crucial to be able to verify and agree on what data can be trusted and to what extent it can be used. The aim is at one point for these data to be available by companies themselves, and this will certainly add to the complexity.
The challenges are fully recognized by authorities, and e.g. we see that ESMA now has become supervisor of EU data reporting service providers, which will increase financial markets transparency.
