Financial services organizations serious about delivering on their lending and investment strategies related to environmental and social issues need to be just as serious about creating solutions to address catastrophic climate change and social inequity.
In 2021, Minneapolis-based U.S. Bank created an environmental, social and governance (ESG) vertical for its fixed income and capital markets business as part of a strategic commitment to bridge economic and social gaps exposed by the May 2020 killing of George Floyd.
Within months of being hired to lead the new unit, veteran investment banker Marcus Martin and his team structured a first-of-its-kind, $30 million “racial-equity bond.” It is designed to ensure that all housing contracts from the bond’s proceeds go to developers who are Black, Indigenous and people of color (BIPOC).
U.S. Bank, with $554 billion in assets, teamed up on the private debt offering with Enterprise Community Partners of Columbia, Maryland, to support BIPOC developers building multifamily affordable housing. Enterprise, a nonprofit entity, owns and operates 13,000 affordable housing units.
“It was a great opportunity for us in our continued role as a trusted adviser to engage Enterprise with a very intentional focus on creating social-impact outcomes,” Martin says. “We were very proud to be a part of that. The client walked away with the exact financing they were looking for.”
Martin anticipates that other organizations will take a page from U.S. Bank’s initiative. “We expect this transaction will inspire other organizations, including corporations, municipalities, not-for-profits and more community development financial institutions, to issue similar bonds that address critical social challenges.”
According to US SIF, a nonprofit focused on sustainable and responsible investing, total assets in sustainable funds rose to $17.1 trillion in 2020, a 42% increase since 2018.
The part of ESG that attracts the most attention, Martin says, is the “E,” possibly because of the global focus on the Paris Agreement on climate change. But he and his team are fielding the most questions from clients about the “S” component of ESG, primarily because clients are not sure how to measure their success in the social sector.
Metrics matter, says Ivan Frishberg, first vice president-commercial banking for New York City-based Amalgamated Bank. The $6.6-billion-asset institution is among more than 150 banks that have created an alliance with the Partnership for Carbon Accounting Financials to assess and disclose the greenhouse gas emissions of their loans and investments. Nearly a quarter of Amalgamated’s loan portfolio is directed toward climate solutions, according to Frishberg.
Measuring the environmental impact of loans is not difficult, he says. “Like anything you are measuring, you have to decide to do it, you have to decide how to do it and you have to have systems that support it. … It’s not that hard, and it’s meaningful for our investors and our clients.”
If a client or a prospective client approached the bank about a potentially lucrative loan opportunity that flew in the face of its ESG principles, Frishberg says, the bank would not even consider it. But, he adds, the hypothetical scenario is essentially moot.
“We are blessed to be in a situation where clients with similar values and outlooks come to us because of our alignment,” he says. “We have a bounty of clients looking to solve the world’s problems, and looking to partner with us.”
MORE on ESG (ENVIRONMENTAL, SOCIAL and GOVERNANCE)
Amalgamated, the largest union-owned financial institution, is one of the nation’s most progressive banks, so lending to a fossil-fuel concern would be a betrayal of the bank’s core values and strategic mission, Frishberg says. He’s heartened that progressive causes like social justice and environmentalism, which Amalgamated has long championed, are being integrated into the strategies of more traditional financial services organizations.
Frishberg offers this advice to banks and credit unions ready to go all in on ESG: “First, if it matters, then measure it – figure out rigorous and consistent measurement systems around your ESG priorities. Second, ESG is something that clients care about. The public cares about it. And the regulators, when it comes to climate risk, increasingly care about it.
“Think about this as central to what you are doing as an institution. And it should not just be a marketing initiative or an add-on activity. When we think about climate risk now, it is absolutely central to who we are and, across the board, ESG is critical to running a good business. The banking industry has come to fully accept that.”
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