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Sustainability and impact, Environmental, Social and Governance (ESG), Net-Zero – all terms that continue to feature prominently as topics of interest for consumers, politicians, business leaders and regulators.
Increasingly businesses are under pressure from regulators and stakeholders to demonstrate their ESG performance and are being required to report on ESG strategy (with a particular focus on climate disclosures), as part of their annual reporting.
The Insurance sector is also in the spotlight right now with the lobbyists seeing the industry as potentially having the power to curtail the trading ability of those operating in ‘ESG-negative’ commercial markets, such as fossil fuels.
But the issue itself and the consequent messaging is complex and cannot be inauthentic, otherwise it can backfire badly. So, it makes sense to look at how those efforts are being communicated by taking a look at the “Three Greens”- Greenwashing, Greenwishing and Greenhushing.
What is Greenwashing?
There are many definitions, but at its core Greenwashing happens when a business overstates its sustainability credentials, whether unintentionally or deliberately. When Greenwashing is discovered there can be significant impacts from a reputational and regulatory perspective.
In a recent study from KPMG Over half (54%) of consumers say that they would stop buying from a company if they were found to have been misleading in their sustainability claims. Brand damage is bad enough, but financial penalties are also on the rise as regulators continue to formalize rules for ESG claims and disclosures in many markets. In the last three years alone Goldman Sachs, DWS (a unit of Deutsche Bank) and BNY Mellon have paid multi-million-dollar fines to settle charges with the US SEC over misstated ESG claims in asset management products.
These regulatory pressures are only set to grow as regulators in the UK, Singapore, Canada, France, China and the EU (just to name a few) all continue to refine their approaches.
Greenwishing can occur unintentionally when financial institutions truly believe in ESG but fail to achieve the communicated, intended impacts and results. This phenomenon is particularly prevalent where the rapid growth of new regulations outpaces market players’ ability to comply.
There can be a temptation to express desires or intentions to be environmentally friendly without taking concrete action. This can lead to empty promises, grand aspirations, and lofty rhetoric without the substance to back it up. It involves using vague language and making sweeping commitments without any real plans or efforts to create meaningful change.
Greenhushing is a response to the growing scrutiny of consumers and the markets. This happens when companies downplay or reduce external communication about climate commitments to avoid critique for failing short on them and extends to those doing legitimate sustainability performance improvements. It is the result of both the heavy criticism directed at climate-claims as well as a lack of aligned methodologies and governmental guidance on an industry-wide frameworks. The desire to stay relatively quiet about these efforts, until firms are confident of results is understandable.
For those looking to avoid the pitfalls of the “Three Greens” there are steps you can take.
· Be transparent. Highlight efforts within your company that are genuine and not contradicting.
· Admit imperfection. Reporting that admits faults and describes meaningful improvements can help.
· Adapt to new regulation. Even with stricter regulations on greenwashing coming don’t be stricken by panic or inactivity.
· Choose your partners carefully. Good advice can help avoid the pitfalls of either greenwashing or greenhushing.
Regulators have made it clear that greenwashing is now a ‘material risk’ and supervisory action will be taken against firms found to be misleading customers, investors, and other key stakeholders over the sustainability of their product offerings or transition plans.
The risks are compounded for those in the insurance market, and greenwashing risk can arise inadvertently. Without appropriate governance and oversight, insurance firms are particularly susceptible to the actions of third parties in the value chain.
Consistent Data and reporting standards are key to mitigating greenwashing risk. We are seeing the industry respond by creating new tools, such as the September announcement of a collaboration between Lloyd’s and Moody’s Analytics to develop a solution that will help to quantify greenhouse gas (GHG) emissions across managing agents’ underwriting and investment portfolios. This solution will aid managing agents in meeting expected regulatory reporting requirements.
ESG and sustainability efforts present insurers with challenges and opportunities around their investment strategies, underwriting activities, regulatory reporting, and reliance on third-party reporting and ratings. We would be happy to talk more about communicating these efforts effectively.
Bill Yelverton, Director, Brandex Financial
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