Financial institutions have already been gearing up this year for tougher regulatory oversight on their climate risk management plans. Now they are also having to contend with potentially damaging investigations from prosecutors and law enforcement as firms are held to account for their environmental, social and governance (ESG) claims. In this fifth and final part of our climate risk blog series, we examine two emerging trends that will impact financial institutions if they take their eye off the ball when it comes to climate change risk management.

Greenwashing fines

Global regulators such as the US Securities and Exchange Commission are increasingly launching investigations and imposing million-dollar fines on financial institutions for making misleading claims or omitting relevant information about their ESG credentials. Regulators are seeking to clamp down on this process, better known as greenwashing, where a financial product or investment opportunity is promoted as being greener than it actually is, whether that claim is intentional or not. Over the past few months, we have seen the first material financial penalties levied on financial institutions for greenwashing. With the heightened awareness around climate change, investors are increasingly insisting that banks and asset managers factor in all ESG considerations—particularly climate risk—during the investment decision-making and selection process. Against this backdrop, financial institutions need to ensure they have the relevant risks and controls in place to safeguard against accusations of greenwashing and to prevent climate risk management errors. That means making sure ESG statements are backed up by verifiable evidence and that promotional materials don’t accidentally (or otherwise) omit information that may have a bearing on the overall green credentials of a particular product or investment.

Litigation risks

It is not just financial regulators that are ramping up their scrutiny of climate risk, public prosecutors and law enforcement agencies are also taking action against financial firms for climate risk management failures. This can involve headquarters of banks and asset management firms being raided by police seeking evidence of wrongdoing, specifically around greenwashing. Even if climate failings are unintentional, the image of police raiding corporate premises unannounced can cause significant reputational damage. This is the first year that we have seen large-scale coordinated action between regulators, prosecutors and law enforcement to tackle climate risk failings—and it is only likely to intensify as ESG claims are increasingly placed under the microscope. These investigations are often sparked by investor complaints or environmental activist groups making allegations about misleading statements in annual reports or other public statements. One only has to look at other industries for a glimpse of how this latter trend might shake out: this month the Dutch subsidiary of Air France KLM was sued by a group of Dutch environmental campaigners over claims about how sustainable the airline’s flights are.

While greenwashing is easy to define, it is harder to spot—and even harder to get right in an environment where financial institutions must retrospectively justify financial product and investment-selection decisions based on a climate risk backdrop that is constantly evolving. By adopting a comprehensive climate risk management framework that outlines the range of appropriate risks and controls needed across the business, financial institutions can ensure they are keeping their eye on the ball. Not only will that help avoid any costly legal complications, it also means clients can be confident about the veracity of any green labelling while helping maintain the integrity of ESG products in the marketplace.

For more information on climate-related risk management or to revisit the previous blogs in our climate risk series, click here.