Are Financial Services In Danger of Green Washing?
Financial services are lagging behind other industries when it comes to climate change disclosures. A recent report by Datamaran compared the Task Force on Climate-related Financial Disclosure (TCFD) financial services signatories to other (nonfinancial services) sector signatories and explored how they disclose on climate change-related risks in their annual financial reports.
The report revealed that twice as many nonfinancial services signatories report with a high emphasis on the joint issues of climate change and air quality compared to financial services.
This is despite the fact that financial services make up 50 percent of the Task Force signatories.
Financial services are one of the biggest sectors in terms of market capitalization, approximately $17 trillion. Their potential impact on climate change is far-reaching.
Are They Green Washing?
The TCFD was established in 2015 by the governor of the Bank of England, Mark Carney, in response to a G-20 request to better understand the financial implications of climate change. Since then, it has pushed companies to publicly disclose their climate-related risks and opportunities. Companies that have signed the TCFD have an average market capitalization of $44 billion and include the likes of Zurich Insurance, ING Group, Diageo, PepsiCo, Unilever, Morgan Stanley, BHP Billiton, Kering, Shell, M&S, and EDF Energy.
When responding to nonfinancial, climate change related issues suddenly becomes a box-ticking exercise to appease shareholders and society at large, that is green washing. According to the research, financial services seem more reactive than proactive to climate change disclosure. This raises an important question: Are they green washing, or do they simply not understand how climate change can impact them?
Financial services have seen improvement, rising from 19 percent to 53 percent of signatories reporting with a high emphasis on climate change between 2014 and 2018. However, three years since the TCFD recommendations were released, financial services still lag behind other sectors: The percentage of nonfinancial services putting a high emphasis on climate change reporting rose from 31 percent to 68 percent in the same time period.
Businesses need to stay ahead of the curve when it comes to climate change—just to maintain good business.
Only a Matter of Time
The evolution of accountability shows it is only a matter of time before the TCFD recommendations are integrated into mandatory regulations. As such, being ahead of the curve will help mitigate any backlash. The EU Nonfinancial Directive is a good example: It started as a voluntary initiative, then took the form of a mandatory regulation in 2018.
The world has seen a number of mainstream industry associations urge business to take action to manage environmental, social, and governance risks and opportunities. In the last year alone, organizations such as the TCFD, the World Federation of Exchanges, the World Economic Forum, and joint work by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and the World Business Council for Sustainable Development (WBCSD) have all published their recommendations on how they expect companies to manage nonfinancial risks.
The Green Pipeline
At the recent Association of Chartered Certified Accountants (ACCA) event, “Empowering Businesses To Engage with Sustainable Finance and the SDGs,” Rhian-Mari Thomas, managing director and chair of the Barclays Green Banking Council, commented that the pipeline for green finance was large and mostly unexplored. There is a great opportunity for growth when it comes to climate change and also a great opportunity for risk mitigation to ensure business resilience.
However, many organizations are not factoring in their sustainability team’s knowledge, and rarely is this knowledge being integrated into a company’s strategy. There are also pressing issues, such as lack of consistency between nonfinancial and financial climate change disclosure.
Integrating Climate into Enterprise Risk Management
Although rare, there are already examples of companies managing nonfinancial risks as part of their enterprise risk management (ERM) framework. Dutch financial services and banking corporation ING is one of the early adopters of the ERM framework by COSO. The company’s framework for nonfinancial risks supports and governs the process of identifying, measuring, mitigating, monitoring and reporting nonfinancial risks following the stages outlined by COSO.
All these indicators are showing that businesses need to get to grips with and even stay ahead of the curve when it comes to climate change—just to maintain good business. By listening to the sustainability team and integrating nonfinancial issues as part of ERM and into corporate strategy, companies will ensure resilience of their business.
The complete Datamaran brief is available here.