Measuring the impact of the environmental efforts of credit unions and their borrowers can help prevent false claims.
Across all industries, organizations are responding to consumer and investor concerns about sustainability and emissions standards. In financial services, regulators are even urging institutions to assess climate-related financial risks.
In fact, the Office of the Comptroller of the Currency recently identified the effects of climate change and the transition to a low-carbon economy as presenting emerging risks to banks and the financial system.
Credit unions are not exempt. National Credit Union Administration Chairman Todd M. Harper released statements at the end of last year citing the agency’s work on climate financial risk. However, the board emphasized in March that it will not micromanage credit union policies as credit unions consider the risks of climate change.
Regardless, financial institutions are being pressured to ramp up their environmental, social and corporate governance efforts, both internally to lower their carbon footprint, but also within their lending operations.
Credit unions are increasingly looking to lend more intentionally to organizations committed to sustainability. The problem is that it’s difficult for credit unions to determine which ones are taking actionable steps to improve and which ones are only claiming they are.
Naturally, as the demand to “do better” increases, organizations enroll their marketing teams to promote well-intended initiatives and programs, often without the necessary data to measure progress.
Consumers are inundated with jargon like eco, green, natural and sustainable, and other marketing claims are circulated without clear definitions. It becomes hard to cut through corporate messaging to determine who is actually living up to their sustainability efforts and who is not.
Why? ESG branding has largely gone unchecked, despite an uptick in enforcement. The latest buzzwords seem to change from season to season, and claims seem to become bolder with time.
A buzzword with staying power, however, is greenwashing.
Greenwashing Exposes Credit Unions to Greater Risk
First coined in the 1980s, greenwashing is when an organization makes unfounded or false claims about the positive environmental impact of its initiatives. Sometimes, this is due to a lack of understanding, but it is also often in hopes of reaping goodwill without investing in the necessary resources.
For a credit union, lending to organizations with unfounded sustainability claims can open them up to greater risks. For instance, a credit union may have a loan portfolio that isn’t really adhering to ESG standards as well as they think.
Not only does this not support their commitment to sustainability but there is the potential for reputational risk. If a credit union is presenting itself as an institution committed to working with organizations who are proactively taking steps to improve the environment, and those organizations are later exposed for greenwashing, it could lead to reputational damage for that credit union.
Additionally, as regulators increasingly expect institutions to transition toward green banking, greenwashing may prove problematic. Without measured progress, credit unions will be challenged with showing regulators that they’re investing in sustainable organizations.
Data Can Eliminate Greenwashing
To solve this problem, data is critical. Data-driven metrics can help credit unions know with greater confidence when they’re looking at greenwashing. Leveraging data also makes it considerably easier for credit unions to price risk and measure success.
For many institutions, however, collecting this information is a manual, time-consuming and error-prone process, especially for ag loans. In these cases, credit unions must have access to scientifically validated data like climate, crop production and land management practice information.
By leveraging technology and data, credit unions can do more than publish sweeping statements and instead measure the impact of their efforts and their borrowers’ efforts with greater accuracy and validity. Given the tools and innovations readily available, quite literally at the click of a button, there is no excuse for credit unions and their clients to continue the detrimental habits of making claims that aren’t backed by science.
Julia Lechner is director of business development at Agrograph.