Positioning ESG at banks as good business in 2023

Environmental, social and governance considerations are growing in importance at banks and credit unions.

Gary Levante, who heads the ESG effort at Berkshire Bank, explains why banks should view embracing ESG as a way to gain a competitive edge.

A few takeaways from the conversation…

• Levante expects to see is more standardization in the ESG disclosure framework for banks and also that the issue will become more politically divisive around the country.
• He advocates for a couple of other ESG-related initiatives: More focus on capital deployment to underserved communities and more work to promote a low-carbon future.
• The SEC is proposing new climate disclosure requirements for publicly traded banks, but non-traded institutions will have to adhere to similar standards to be competitive.

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INTERVIEW TRANSCRIPT

Gary Levante, senior vice president for corporate responsibility and culture at Berkshire Bank, welcome to the BAI Banking Strategies podcast.

Terry, thanks for having me.

Gary, please get us going by telling us a little about Berkshire Bank and your role as head of corporate responsibility and culture.

It’s our vision to be a high performing, leading, socially responsible community bank so we can unleash the potential that’s within our community. In my role as head of corporate responsibility at Berkshire, I have the privilege of helping to lead our enterprise environmental/social governance strategy and ultimately work with all of our partners throughout the business, throughout our communities, our investors, to develop strategies that are enhancing value for our business and also elevating our impact in the community.

So in your role, you are helping to shape and oversee Berkshire’s implementation of ESG policies. At a high level, can you give us an overview of how your bank thinks about ESG and where it fits in among the many competing priorities that you no doubt face?

We really take a holistic approach to sustainability, a holistic approach to ESG at Berkshire, and our strategy is focused on topics that are material to our stakeholders, whether those stakeholders be our employees, our customers, our investors or our broader communities. And we focus on those material topics to really create an ecosystem of positive impact in value because we know that positive impact in value drives our commercial performance, first and foremost, and that creates capacity for us to invest more in our communities, all in support of that vision to be that high performing, leading, socially responsible community bank. So when we see ESG, we don’t see ESG as being misaligned or against anything that we do as a business. We actually see it as core to the DNA of the organization and see it as a key strategic lever in driver that helps us in every area of our business operations.

So that’s how you think about ESG, and clearly it’s a priority at Berkshire, but what are a few of the specific things that you’re doing to put your policies into action, be it in the environmental area, be it social, be it governance, and what kinds of early results are you seeing?

There’s a number of things that we’re doing to enhance our environmental impact, to enhance our social impact and to ensure that we continue to have strong governance systems in place that are so critical to banking in general. You have to be ethical, you have to have trust with your consumers and with your broader stakeholder groups. So we’ve really kept each of those elements central to the work we’re doing. We have a responsible and sustainable business policy, which really outlines our operating commitments as an organization across environmental, social and governance topics. That ranges from human capital and how we expect to treat our employees and how we expect our third parties to treat their employees, to data privacy and cybersecurity and consumer financial protection, really focusing in on those specific topics to make sure that we have the right controls in place, the right standards in place that are aligned with best practice, that are aligned with our values and what we want to achieve as an organization. And really even beyond that, we’re really integrating that work into other areas of our business. And I think in banking, what you see and what you hear about most often is, “Do you have lists of business entities or companies that you lend to or don’t lend to?” And we do, for environmental and social reasons. There are companies and industries that we’ve chosen because of the risks that it pose to our business and to our stakeholders to not lend to, and that includes the firearms industry. We were one of the first banks to exit our exposure to the firearms industry a number of years ago, which proved to not only be a smart decision in response to stakeholders and expectations, but also ultimately a smart business decision from Berkshire mitigating potential credit and other impacts that could have happened to any bank as a result of some of the increased focus and regulatory pressure on those industries.

You mentioned firearms as one example, and I’m wondering are there other industries that you can talk about that you also have on your “do not lend” list?

Fossil fuel extraction is another area that Berkshire has focused on, but we really believe that ultimately to build a more just equitable and sustainable economy. The solution can’t just be exclusion. The solution can’t just be that banks, whether Berkshire or other banks exclude certain industries. I think we have a fundamental responsibility to work with those industries to help shepherd in a more just and sustainable future, and provide our expertise to help those industries transition to a way that’s lower risk to the environment and lower risk to their business models.

You bring up a good topic here and one that’s really kind of core to the debate that we’re hearing about ESG within banking. Berkshire, like every other bank is a profit-driven enterprise. How do you think about the balance between the social and environmental responsibilities of the bank on one hand and the business imperatives on the other? You kind of went down that road a little bit in the previous answer, but let’s explore that a little bit more.

It’s a great question because I think it gets to the position that you see in the news media right now, and it’s always framed as an either-or conversation. You either are an ESG-friendly bank with exclusions and strong policies that are supportive of positive environmental and social outcomes, or you’re not. And I do not view those as competing priorities. I actually view them as one and the same and really don’t just believe, but have seen that environmental, social and governance programs that are done successfully not only drive the social impact or positive environmental impact, but they actually drive commercial performance. They actually drive enhanced business value, and we’ve seen that in the case with Berkshire through our own experience as well. You have to do your own scenario analysis to understand as you make decisions, what are the impacts of that to your community, what are the impacts of that to your customers? What are the impacts to your own bottom line? And I think the banks that have done that type of analysis and have done it successfully have instituted ESG policies like some of the ones that I mentioned that we have at Berkshire that have really not just protected the environment, but really have driven bottom line impacts to their financial performance as well.

I want to take our conversation now in the direction of our advertised theme for today, which is what might happen in the ESG space in 2023. So, as a setup to that, Gary, can you recap for us at a high level some of the key things that happened in ESG last year, in 2022, not just at Berkshire, but across the industry?

I think we saw more banks embracing ESG, particularly more banks within the small and mid-cap space here in the U.S. Of course, we also saw the SEC propose their climate risk rule in March of last year, which I think honored a lot of attention from banks who may not have been thinking about climate risk, who may not have been thinking about the opportunities that they have to positively address climate change with their own operation. I also think we saw a couple other unique trends in 2022. We saw an acceleration and deeper integration within globally leveraged reporting frameworks, whether that be the Global Reporting Initiative, or SASB becoming part of the ISSB or TCFD, the Taskforce for Climate-Related Financial Disclosure. We’re seeing a lot more integration of those reports both in how reporting frameworks and how banks are using them, but also more alignment, which I think is going to be a benefit to the investor audience. It’s no secret, speaking of the investor audience, that there continues to be increased focus and attention from the investment community on ESG issues because they understand that ESG is a critical enabler and driver to financial performance.

With those past achievements recognized here, I’d like to ask you to do some forecasting now. So what do you expect to see in the ESG space in 2023, so far as building on those gains that you mentioned before or building up some momentum in other directions?

I think you’re going to see a continued acceleration and a continued consolidation in the reporting space. I think that we are clearly moving in a direction, as it relates to ESG disclosure, where individuals, and where companies more broadly, will have fewer more standard globally accepted reporting frameworks. Quite frankly, that’s just going to produce better, more quality-comparable and consistent information – particularly for investors, but also for the broader community. I think the other interesting trend we’re seeing here, and I expect to only grow in the U.S. is really this politicization of ESG that we’re seeing between some red states and blue states. And I, for one, always welcome constructive dialogue on ESG, but that is a trend that I think is particularly worrisome as an ESG professional because it’s a trend that loses sight of what ESG is really about, which is managing risk within your organization and unlocking opportunities within your organization that drives better financial outcomes for your shareholders, for your customers, your employees, and give you more resources for your community. So I’m hoping that’s a trend that reverses, but my expectation is that’s a trend that is going to continue to build in momentum in 2023.

That political trend that you’re talking about, I assume what you’re referring to is incidents like in West Virginia, where the government of that state punished banks that were not willing to loan to the energy industry, that sort of thing?

Whether you’re talking West Virginia or Texas or Florida or Arizona or even Kentucky, we’ve seen state legislators and even at the federal government, politicians opining about the SEC’s purview to implement their proposed climate rule. And again, I think it’s a disservice to not just ESG as a topic, but really the ultimate goals of ESG are so very aligned with open capital markets and driving effective positive outcomes in those financial markets and for communities. Those are the types of issues that I think ultimately become distractions from what is really important for financial institutions and the critical role financial institutions play in our communities.

So that’s what you think is coming this year. Now let me create a world where you alone, Gary Levante, are in charge of setting the agenda for bank ESG initiatives in 2023. What do you think should be on that agenda that’s not already in motion?

First and foremost, there needs to be standard disclosure requirements for all financial institutions, all banks, regardless of whether they are publicly traded or not, so that the investment community, so that our broader stakeholders can truly evaluate performance and separate leaders from laggards. That to me is a critical enabler for all the other work that needs to be on the ESG agenda for 2023. A couple other areas that are top of mind, I think, particularly for banks. Banks play an immensely important role in deploying capital, and deploying capital toward projects in neighborhoods across their footprint. And I think that there needs to be an even higher focus from banks on how they’re deploying that capital to truly lift up and elevate historically marginalized groups, as well as neighborhoods that have been often overlooked. Whether those are called a “low- and moderate-income neighborhood” or an “opportunity zone,” that’s something that’s got to be on the bank ESG agenda. And the third topic is banks can play such an important role working with their customers and helping to build a more sustainable and low-carbon future. And banks, with their capital, can really help their clients usher in that era where we get closer to net zero, we get closer to stopping the impacts of climate change.

You’ve been talking about climate a little bit on this call here, and climate related aspects of banking seem to be the most talked about component of ESG, which is really not surprising given the global focus on climate change that we’re seeing. I have an idea of how the SEC climate rule can impact publicly traded banks like Berkshire, but the vast majority of U.S. banks aren’t public. So how does this stand to impact them in 2023?

That’s something I think about, not just when talking about U.S. banks, but talking about all of the companies out there that aren’t publicly traded. But because of the SEC rule on publicly traded companies and publicly traded banks, you’re likely to see downstream impacts on both non-publicly traded U.S. banks, mutual banks or credit unions who, either by necessity or because they are competing for the same consumers as publicly traded companies, are really going to have to adopt very similar standards and programs. Because what we see in the data, when we look at Gen Zs or we look at millennials, and really I think broader than that, people want to bank with companies that share their values. They want to bank in a place that is going to deploy their assets to projects that are contributing to the greater good. And with standard requirements for publicly traded and large banks, they’re going to have to tell that story in a more concise way. So if I’m a small bank, not publicly traded and I know that my performance is stronger than my competitors, I’m going to want to get ahead of that and probably adopt some of these standards. So although the formal SEC rule may only apply to publicly traded and larger institutions, I think all U.S. banks are going to have to step up as a result of it.

So we’re getting to the end of our time. So one final question for you. It seems like now the regulators have the upper hand, the strong hand, in pushing ESG considerations in banking, but when you look out a little further into the years ahead, do you see that continuing to be the key driver? Or do you think at some point the market will play a larger or even a dominant role in ESG adoption?

I think the market, transparently, is going to play a bigger role. I just referenced some of the trends that you see in consumer preferences across different demographics. And as those demographics become more of the majority in the U.S., I think market demands are going to drive companies to be more environmentally and socially conscious to enhance their impact in communities, to mitigate the risk associated with their operations, whether those be environmental or social risk. There’s going to be an expectation that you treat your employees right. So I think what regulation does, it’s going to bring consistency and comparability to ESG reporting, in this case with the SEC climate. But I think ultimately where we’re headed is the market is going to drive higher and ever-increasing expectations on business.

So Gary Levante, senior vice president, corporate responsibility at Berkshire Bank, many thanks again for joining us on the BAI Banking Strategies podcast.

Thanks so much, Terry. Glad to be here.