The views and opinions expressed in this article are those of the thought leader as an individual, and are not attributed to CeFPro or any particular organization.
By Jacobo Munoz Agra, Managing Director, Head of Compliance UK & Europe, Rabobank
ESG is a critical business topic that can be linked to an organisation’s financial performance and that can bring a financial and reputational risk or gain. As ESG topics are more established in day to day (corporate) life and they are further integrated into Annual Reports, the likelihood for individuals and/or corporations to make use of ESG efforts for their own benefit becomes greater. Basically when stakes are high, individuals and/or corporations can more easily be tempted to commit fraud. Greenwashing, as a form of ESG fraud or misconduct, is no exception.
Addressing the misrepresentation of ESG activities is becoming more and more relevant in the agendas of the regulators across the globe. As such, corporations misleading customers, investors and other key stakeholders over the ESG-label of their product offerings or their ESG transition plans are amongst the key risks to consider when green investing. Take as an example the risk of mis-selling due to lack of clarity, inconsistencies and/or clear omissions in fund’s documentation and adverts. As the FCA clearly stated, financial institutions need to put consumers at the heart of their businesses, offering products and services that are fit for purpose and which they know represent fair value. The question here is whether all players in the market follow the letter and spirit of this expectation.
ESG matters such as climate change, D&I, social inequity, etc. are global issues demanding global solutions. Guidance and collaboration from regulators is therefore key, not only due to the interconnectivity of the financial systems and the world’s vulnerability to ESG matters, but also due to the fact that the number of ESG regulations and standards across the globe has increased tremendously during the last years. If one of the key intentions of financial regulations is to create transparency, nurture trust and protect investors, regulatory agencies have a role to play in bringing more standardization and harmonisation in the ESG space for example through product labelling and additional disclosures requirements.
First of all it is important to note that each misconduct case is assessed on its own merits; and depending on the circumstances and the seriousness of the case, we would impose different levels of disciplinary action. Having said this, if an investigation and disciplinary hearing would confirm a fraud in the form of providing false or misleading green metrics or any sort of false information or any other act of dishonesty, this would be considered gross misconduct. And in cases of gross misconduct, the dismissal will usually be summary -i.e. without notice or payment in lieu of notice.
A number of stakeholders such as investors, consumers, regulatory agencies, workforce (talent), etc. are continuously assessing if corporations are living up to their ESG promises. If those promises fall short, the threat of reputational damage can diminish competitive advantage and have a negative impact on market value. Additionally, the reputational risks could also result not only in loss of income but also in reduced prospects and customer base, the inability to engage with reputable vendors and/or build alliances with key strategic value partners; and certainly, in not being able to retain or attract talent. Corporations really need to build ESG reputational resilience on an enterprise-wide level if they want to succeed in current and future market.
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