5.2.4 Reputational risks

Reputational risks arise when financial institutions engage in non-sustainable business practices, which are no longer accepted by clients, consumers and other parties. As the Dutch Authority for the Financial Markets (AFM) has noted, this is increasingly the case.1 Liability risks and reputational risks are often intertwined.

Reputational risks may arise when financial institutions do not comply with climate-related rules and regulations (see paragraph 5.2.2). In addition, not committing to and/or complying with sustainability Codes and Guidelines may also result in reputational damages. This is illustrated by the cases of Rabobank and ING mentioned in paragraph 5.2.3.2

As public attention for climate change increases, society will increasingly expect financial institutions to take their responsibilities and fulfill their obligations and commitments made. This means that financial institutions which are not capable of realizing a successful and timely implementation of their sustainability policy in their businesses, may face reputational damages.

The financial sector, in other words, is expected to live up to its promises and expectations. In this respect, DNB specifically warns financial institutions to guard themselves against the risk of greenwashing. Green financial products, like green bonds, green investment funds and other green financial products, are gaining in popularity and this creates economic opportunities. Should these products however prove to be less green than they appeared to be or were said to be, this could cause reputational damage and potential liability risks.

The impact of reputational risks should not be underestimated. In the past, misselling scandals (e.g. regarding unit linked-products and derivative financial instrument sold to SME’s), have not only resulted in considerable financial damage to individual financial institutions, but have also led to a loss of public trust in the Dutch financial sector as a whole. Restoring this trust, which is key to the effective functioning of the financial sector, may take a long while. As they say: trust can take years to build, but only a second to shatter.