Approaches for quantifying the financial impacts of reputational damage from climate change

Abstract

Climate change is an existential threat to humanity. As such it has the potential to create uniquely severe reputational damage for financial institutions by significantly altering both their stakeholders' expectations and their perceptions of firms. Changes in the behaviours of the current (or future) providers of capital, funding and revenues to financial institutions would have the most direct and significant influences on the financial performance of firms. These impacts can be systematically assessed, through scenario analysis, by evaluating the effects in terms of the scale, financial sensitivity and duration of stakeholder responses. For prominent reputational risk events, the consequences may be simultaneously felt across five different financial impacts, although the responses of different stakeholders may vary. As there is uncertainty as to how stakeholders may respond, and a scarcity of climate change data, then non-climate change related reputational risk case studies are used in this paper to illustrate the scale and duration, where known, of the financial impacts. As with all forms of scenario analysis, the value obtained from these activities for climate change related reputational risks may ultimately arise as much from the greater understanding gained through the process, rather than the precision of the predictions. This paper sets out more systematic approaches for evaluating this reputational risk by detailing: the nature of reputational risk, including sources of negative stakeholder perceptions, and the differing abilities of stakeholders to act upon their negative perceptions by changing their behaviours; the nature of the risks posed by climate change, and how they may lead to reputational damage for financial institutions; and how these changed stakeholder behaviours/reputational damage may translate into five different categories of financial impacts, and how each may be assessed.