This blog explains what greenwashing is, and provides some helpful tips for how to create an effective greenwashing scenario to help ensure your business is prepared to deal with this increasing area of focus.
The tips in this blog are taken from the recent Greenwashing Scenario Development Handbook, developed by the ORX Scenarios team to give financial organisations all the information they need to create robust operational risk scenarios for greenwashing.
What is greenwashing?
Based on the research carried out in developing the Scenario Development Handbook, greenwashing is currently viewed in the industry as a broad transition related risk linked to and impacting a range of established risk categories.
The definition of greenwashing used for the purposes of the handbook is:
- Misconduct and misrepresentation related to marketing, selling or financing products or activities that are labelled as green
- Deceit exercised in the marketing of Environmental, Social, and Governance (ESG) commitments and policies
- Deceit exercised in ESG and sustainability reporting to regulatory bodies
Greenwashing scenarios are often reported as serving more than one purpose; for example, support with regulatory capital, economic capital, risk management and stress testing.
What are the benefits of establishing a specific greenwashing scenario?
The majority of our ORX Scenarios service subscribers are reporting a significant increase in pressure to develop a dedicated scenario for greenwashing. The benefits for doing so include:
- Enabling you to identify how it may occur within your organisation
- Understanding the causes, the impacts, and the likelihood of a greenwashing event occurring
- Assigning internal risk ownership to ensure it is managed closely
- Enhancing controls
- Responding to regulatory concerns
Five top tips on how to build a greenwashing scenario
1. Take a proactive and holistic approach to data sourcing
Though data is limited in this area, through continual internal and external data monitoring, horizon scanning, regular knowledge sharing and leveraging internal expertise, institutions can monitor exposures and develop effective triggers for identification and assessment purposes.
2. Define the operational risk component of your greenwashing exposure...
… such as marketing control weaknesses, product design risk, disclosure governance. This will help you to avoid duplication of scenario work across different primary risk functions, for example, mis-selling potentially falling under Credit risk.
3. Define the scope of the scenario
Consider whether your greenwashing exposure affects multiple business lines and geographies or whether country- or jurisdiction-specific entities should develop separate greenwashing scenarios.
4. Aggregate at a group level where possible
Consider whether and how to aggregate your institution’s multiple business- or entity-level scenarios to form a group-level scenario.
5. Consider an effective and flexible scenario ownership model
Consider who should own the scenario and whether a joint (1LOD/2LOD approach) is more appropriate given the complexity and emerging nature of this area. Furthermore, consider how scenario owners should interact with colleagues across the organisation that have access to emerging climate risk data.
Three examples of greenwashing scenarios
Here are three examples of greenwashing scenarios and how they would be categorised by the ORX Reference Taxonomy (which is available for free to members, and to purchase for non-member financial institutions):
Scenario example 1 – Misleading advertising
New marketing campaign falsely depicts the institution’s ESG credentials and fails to acknowledge the institution’s contribution to climate change through its relationships with non-sustainable counterparts.
ORX Taxonomy Level 2 – Risk Event Improper distribution/marketing
Scenario example 2 – Mis-selling
The investment division failed to implement and validate adequate ESG rating processes when designing its new products, compounded by a lack of adequate training, leading to the provision of unreliable investment information.
ORX Taxonomy Level 2 – Risk Event Improper product/service design
Scenario example 3 – Misreporting
The misreporting came about because of collusion between the Finance team and the existing auditors, who were not properly qualified to opine on ESG declarations.
ORX Taxonomy Level 2 – Risk Event External financial and regulatory reporting failure
More information
If your firm already subscribes to ORX Scenarios, you can access the handbook for free. If not, then find out more about the ORX Scenarios service and how you could become part of our global community of scenario practitioners.
