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MIT Sloan Management Review

Sustainable finance: 7 steps to manage reputational risk

<p>Here&#39;s how to develop a framework to assess projects and organizations for funding.</p>

Banks and insurers have a special role to play in the health of our global ecosystem over both the short- and long-term.

Their decisions about what projects and organizations to fund essentially make them gatekeepers for sustainable development. That means assessing, managing and reporting on the risks involved in all those decisions.

But how do they develop their decision-making policies and procedures -- the framework that will guide how they make decisions and satisfy all their stakeholders? According to Olivier Jaeggi, co-founder of Ecofact, a consultancy specializing in risk management analysis for commercial and investment banks, translating the "how" can be summed up in a set of seven best practices.

The firm developed these recommendations for banks and insurers concerned with managing environmental and social risks, but are worth consideration by any business:

1. Build on existing foundations

Specifically, root the risk management framework in the institution's corporate values and overall risk management systems. This requires support from top management, ideally from the CRO, the CEO, the board or another top management committee. It will be difficult to implement the framework without their backing.

2. Know your environment

Understand the regulatory requirements and the relevant international standards. Monitor and engage with relevant stakeholders to understand their issues and interests. Manage and shape their expectations. Reach out to peers and learn from them.

3. Start with a lean system

Improve and expand it over time. A formal management cycle can help. Consider having it certified according to ISO 14001 or a similar management standard.

Image by carlos castilla via Shutterstock.

4. Plan for effective communications

When you launch your framework, have a communication strategy in place for clients, employees and other key stakeholders. Think carefully about public pledges. Demonstrate a genuine commitment to sustainable development, but make sure your institution can follow through to avoid accusations of greenwashing.

5. Hire subject matter experts

Consultants can support development and implementation, as well as day-to-day operations, but decisions have to be made in-house. Make sure your E&S risk experts have the authority to question and to escalate business decisions. They need to have reasonable reporting lines and access to risk control and compliance.

6. Do your homework

If tools don't fit into existing processes, they won't be used. Develop guidelines together with business units to ensure you get the units' buy-in early on. Provide sufficient opportunity for discussion and feedback. Support the business units during the implementation phase with things such as guidance documents, a training course and a communication plan.

7. Do your diligence

In other words, do all the other things that need to be done, such as reviewing policies, guidelines and tools regularly. Monitor and measure the system's performance. Report to internal and external stakeholders. Celebrate achievements, whether large or small. This is not a one-time task; it needs to be habitual.

This article originally appeared at MIT Sloan Management Review. A full-length article developed for the United Nations Environmental Program Finance Initiative (UNEP FI) will appear in a forthcoming issue of RepRisk's Insight e-zine.

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