If it seems like you’re hearing a lot more about environmental, social and governance (ESG) issues in banking these days, it’s not your imagination—the topic has rapidly gained prominence across the industry in 2021 and will likely become even more important in years to come.
The growing focus on climate risk has spurred banks (and their regulators) to more closely examine their environmental exposures—how rising sea levels and changing weather patterns might affect their existing loan portfolios. They’re also reconsidering their support of companies and projects that generate substantial carbon emissions.
Increasingly, banks are focusing initiatives on their stated social values, including diversity, equity and inclusion in hiring and promotion; equitable pay scales; and providing greater access to capital in long-underserved communities.
The industry recognizes the merit of addressing ESG issues. Their success in doing so will depend in large degree on their strength of their culture and management—i.e., governance.
A key challenge is to develop an approach to ESG that leads to meaningful change while accounting for today’s realities in running a business. How to balance those competing interests is among the questions we take up in our latest BAI Executive Report.
In our lead article, BAI contributing writer Dawn Wotapka discusses the upswing in interest around ESG and outlines one of the main barriers preventing banks from fully understanding the issues: a dearth of detailed, forward-looking data. As a Fitch Ratings report put it, “While data and taxonomy will likely coalesce around industry standards over time, banks need to prepare for increased data and disclosure demands from stakeholders.”
Among those stakeholders are heavy-hitter regulatory bodies—including the Securities and Exchange Commission and the Consumer Financial Protection Bureau—that are interested in how financial institutions are handling climate risk, accessibility to financial products and services, and other issues.
Amelia Pan, an ESG veteran at PJT Partners, a leading investment-banking advisory firm, says their banking clients are concerned about what might be coming. She says PJT is getting a range of ESG questions, including how to structure an ESG function across an organization and how to get buy-in once it’s in place.
“Banks, specifically, are struggling to understand all of the potential unintended consequences of their shift toward more ESG-related business strategies. It’s much more complicated than just saying ‘we’re getting out of fossil fuels,’” Pan says in our Q&A conversation. “As long as those assets continue to generate profits for the bank, bank executives will need to balance their duty to finance the ESG transition against their fiduciary duties to shareholders.”
Some banks are further down the ESG road than others. BAI contributing writer Ed Lawler focuses his article on two banks that have made considerable early progress: U.S. Bank and Amalgamated Bank, the nation’s largest union-owned financial institution.
U.S. Bank committed to addressing economic and social gaps highlighted after the 2020 killing of George Floyd, just a few miles from its Minneapolis headquarters. The bank’s efforts include a novel bond issue to support developers who are Black, Indigenous and people of color (BIPOC).
Amalgamated, based in New York, is part of a consortium of banks that disclose the greenhouse gas emissions of their loans and investments. A bank executive told Lawler that close to 25% of its loan portfolio is directed toward climate solutions, and the percentage may go up. “We have a bounty of clients looking to solve the world’s problems and looking to partner with us,” the executive says.
How banks can measure hidden ESG risks: Dennis Gada from Infosys writes that financial institutions need a new approach, along with a spirit of cooperation, to take advantage of new, ESG-related opportunities. Among other steps, he says, banks should team up to create auditable data standards to reduce the risk of “greenwashing” and to educate customers about the importance of ESG metrics.
Green banking for a competitive edge: Stephen Kuhl of Western Union tells us that promoting sustainability can be a competitive differentiator for community banks and credit unions. He says smaller institutions that serve local entrepreneurs and families could benefit as consumers seek to align their environmental views and their financial decisions.
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