2021 was a record year for environmental, social and governance investments, and the trend shows no sign of slowing down this year. ESG-related concerns are also growing for banks and credit unions.
“For our bank clients, we saw more ESG investments in 2021 than in any previous year, and we have already received commitments from bank clients for even larger ESG investments in 2022,” says Bryen Alperin, director of renewable energy and sustainable technologies at Foss & Co., a San Francisco-based tax equity syndicator and fund sponsor.
Manuel Antunes, an impact investment associate at MSM, an early-stage generalist impact fund based in Lisbon, Portugal, also expects to end this year with continued momentum. “We’ve seen a boom in social and environmental investments, with more assets managed by impact funds than ever before,” he said. “We’ve felt it ourselves, and we expect this trend to continue.”
In a fast-changing world, the banking industry doesn’t have much of a choice. But, at the same time, their path forward is still not clearly defined.
“North American banks face increasingly complex sustainable finance considerations in balancing the needs of investor mandates and returns, the transition to carbon neutrality, and the advancement of social goals, while grappling with regulations and data gaps,” according to New York-based Fitch Ratings.
“Despite increasing disclosure around ESG factors, banks continue to be challenged by a disparity or a lack of robust and granular forward-looking data for their borrowers and counterparties,” Fitch adds. “This also makes it difficult to assess and report on their ESG frameworks. While data and taxonomy will likely coalesce around industry standards over time, banks need to prepare for increased data and disclosure demands from stakeholders.”
Some might think that ESG is so popular that it’s racing ahead of rules and regulations, leading to a Wild West-like atmosphere. This is one reason why many eyes are on Washington, says Gary R. Levante, senior vice president of corporate responsibility and culture at Boston-based Berkshire Bank. There are several microtrends that are top of mind for banks, including regulatory guidance on ESG disclosure and reporting requirements from the SEC and other regulators, he says.
Industry watchers expect many metrics now considered voluntary to become required in a format that is consistent and comparable now and over time. “With continued investor demand for quality and comparable data, I would expect to see greater harmonization of ESG reporting methodologies and a push for greater transparency from rating agencies,” Levante says. “This has the potential to shape ESG priorities, particularly for banks, in the years ahead.”
Alperin says that, instead of being reactive to regulatory requirements, Foss—which deals in tax credit investments that align with the ESG goals of banks and other institutional investors—wants to take a leadership role in providing reporting and disclosures related to ESG and climate risks.
At Berkshire, Levante says the benefits of its ESG include strengthening its risk management practices; placing the company at the forefront of critical issues “directly impacting our communities and pushes us to set an example or standard;” improving employees’ outlook on the company’s value position; and giving employees greater purpose by demonstrating how each of their daily activities contributes to the broader ecosystem of meaningful impact in their communities.
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“Our ESG priorities are how we put our purpose into action and drive triple bottom line—people, planet and performance results,” he says. “We prioritize efforts across four areas that we know are key to the health and vitality of our communities and business: community financing and philanthropy, financial access and empowerment, funding environmental sustainability and fueling small businesses. These priorities help support strong risk management practices, enhance reputation and uplift neighborhoods across our footprint.”
Antunes, meanwhile, also sees a bottom-line impact for ESG and impact investing. “The businesses solving the world’s most pressing environmental and social problems ultimately have a lot of stakeholders benefiting from their solving, leading us to believe there is a meaningful investment case behind these businesses.”
Alperin agrees: “We tell our clients that ESG is not just something we are doing to appease shareholders or get a good public opinion. It’s also good business.”
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