By Nir Kossovsky, CEO, and Denise M. Williamee, VP of Corporate Services, Steel City Re
Social and political winds are swirling, and it seems like banks are going to be on the hot seat no matter what they do. Their reputations depend on them getting it right while “right” is a moving target.
Activists pushing an agenda of environmental stewardship, social justice and dutiful governance (ESG), along with environmentalist politicians, want banks to stop financing fossil fuel companies and projects. But with sanctions on Russia and rising prices at our gas pumps, some of those same advocates are pushing for more domestic production.
Some states are passing abortion bans in anticipation of a Supreme Court decision overturning Roe v. Wade. For banks with a national footprint, should they continue doing business in those states? What do their customers and employees expect of them? What’s the cost of getting it wrong with an offensive policy?
Our society is grappling with many important issues right now. Abortion rights. Voting rights. Gay rights. Gun rights. Climate change. Communities. Black Lives Matter. The “Me Too” movement. All issues at the forefront of the collective conscience.
But why are banks’ reputations linked to their response to these social and environmental issues?
In another example of something “seeming like a good idea at the time,” industry leaders encouraged and elevated the importance of these diverse interest groups. Beginning with the aspirations of corporate social responsibility, they have put themselves in the position of tying their reputations to the expectations of wide-ranging stakeholders culminating in the 2019 Business Roundtable pledge that redefined the purpose of a corporation as promoting “An Economy That Serves All Americans.” Since then, rarely has a day gone by without corporate advocacy for “stakeholder capitalism” and the courting of investors with the pursuit of ill-defined “ESG rankings.”
So now, expectations for banks and financial services companies have changed. Accustomed over the years to understanding and meeting the needs of regulators, politicians and community leaders on issues like fair and equitable lending and fostering community development, they now have given greater weight to new groups of stakeholders.
We are now facing a scenario where some of these stakeholders expect that they, rather than the board and executive leadership, have the right to define what is mission critical for a business. Adding to the complexity is that, with an expanding definition of “stakeholder,” it’s more likely than ever that the interests of different stakeholder groups are going to conflict with each other.
When big issues collide, as in the Russian war on Ukraine, will last year’s environmental issues give way to today’s social priorities? How does a bank that does business with companies in the energy sector prioritize the need to invest in alternative energy against the need for short-term energy independence? Will stakeholders now give banks a pass if they finance fossil fuel drilling projects?
The typical corporate planning strategy for reacting to hot button issues is too slow in the face our 24-hour news cycle and a lightning-fast social media climate. Banks need to be proactive, recognize the link between stakeholder expectations and their reputations, and make enterprise-wide reputation risk management a priority. Mindful of the materiality of 10K disclosures and the costs of alleged greenwashing, this is much more than merely a marketing challenge.
It is a process challenge. Banks need a process for gathering ongoing intelligence about the expectations of all their stakeholder groups, including employees, customers, community leaders, investors and regulators, so that they can recognize changing facts on the ground, assess corporate values and capabilities, and decide on a response in real time. Can they meet expectations? Or are their gaps? If there are gaps, they need to calculate the potential cost of disappointing any given segment and the benefits of either meeting or managing their expectations. And for those costs, they need insurance.
Most international banks have some sort of process for sweeping timely geopolitical or legislative intelligence. For them, a reputation risk intelligence overlay that captures stakeholder expectations should be relatively simple to deploy.
Creating such a process – and communicating about it in advance of a crisis – is more than merely a defensive move. A recent analysis by Steel City Re found that companies with strong processes in place to manage social risks see their stock price outperform their peers. But when they communicate publicly about that process, their “reputation premium” doubles.
Telling this simple, compelling story and confirming its authenticity through the underwriting underlying reputation or ESG insurance, provides strong protection. Talking publicly about reputation risk management strategies builds stakeholder confidence in that process. When there’s an understanding of the process, there will be greater acceptance of its outcomes.
Predicting the next year’s reputational challenges will always be imperfect. It’s the process – along with third-party validation – that matters. Building that process will benefit shareholders as well as the plethora of stakeholders whose views on reputation have a greater impact than ever.
Global Banking & Finance Review
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