ESG Adoption for US Commercial Banks Where Should You Be in the Journey

The topic of environmental, social, and governance (ESG) has gained a lot of attention in the last few years and S&P Global is committed to providing data, analytics, research, and thought leadership for best-in-class ESG insight. During a recent webinar moderated by Lindsey Hall, Head of ESG Thought Leadership for S&P Global Sustainable1, a panel was asked to weigh in on a number of topics related to ESG adoption for U.S. commercial banks.

How has the importance of ESG in banking changed over the past two years?

When it comes to the financial services industry ESG is increasingly involved. Historically, the banking ecosystem has been driven by macro regulations, but now there’s starting to be more and more of a human capital component and it’s becoming more societally motivated. As Brandon Koeser, Senior Manager, Financial Services Industry Senior Analyst with RSM US LLP explained, “today I see much more openness and willingness and frankly, an eagerness from those in the industry to begin engaging in an ESG conversation. And I'm encouraged to see the openness from those in the industry, including community or small regional banks, engage in this important topic.”

Jeremy Newell, Partner at Covington & Burling LLP said, “From a bank regulatory perspective, it’s all about understanding, assessing, and ultimately navigating the complex requirements to include both laws and regulations that are established by the regulating agencies, but also the quieter supervisory expectations that are communicated to banks by their examiners.” He went on to explain how, “Two years ago, there wasn't a whole lot of intersection between bank regulation and ESG. But generally, ESG was broadly more thought of as an investor/stakeholder set of questions that regulators really weren't that interested in. Today, we see regulators incredibly interested in and focused on numerous aspects of ESG as they impact banks.”

What is driving this push for sustainability? 

Jennifer Rushing, SVP, Head of Environmental & Social Risk Management & NFRM Execution with Regions Bank, explained, “I would say all banks are trying to be mindful of being better advisers for their customers as it relates to various topics within the space. And depending upon the makeup of your workforce, it's not uncommon to see that you've got associates that are also looking more so at the values of the corporations that they're working for in addition to policy and regulations.”

Jeremy Newell saw it a bit differently as he focused more on risk. “The overarching approach to climate or net-zero commitments from a much more traditional bank regulator who is focused on risks. They are now considering how climate change poses risk to the bank in terms of an actual source of loss.” He went on to say, “With new regulatory scrutiny flowing through the full suite of the traditional risk management approaches in terms of risk governance, setting risk appetite around climate change and so on.”

S&P Global Head of ESG Advisory, Michael Taschner, made the point that up until recently clients have been interested in sustainability but for the most part, were unwilling to compromise on any sort of return on investment. However, the current interplay between regulators and markets is such that clients are seeing sustainability much more from a risk point of view, especially quantifying that risk. That starts with institutional investment managers both in the U.S. and in Europe especially.

There are disclosure frameworks for the E and the G in ESG, but less so for the S. What should banks be disclosing related to social issues?

“I'd point to the Sustainability Accounting Standards Board (SASB) because they have some unique metrics that are applicable to respective industries. And there are some that are laid out that banks can look at and understand with more ease, which might be meaningful or at least easier to start wrapping their minds around,” said Rushing.

Jeremy Newell went on to say, “the comparison with Europe is especially important here for a couple of different reasons. I think first, the regulation of the S component is just inherently more complicated than it is on the climate or the environmental side. And so, I think that's already a headwind that we will see in the U.S. relative to what both the SEC and the bank regulators are doing around climate.” He went on to say, “the other reason I may be a little more skeptical of robust S regulation in the U.S., whether it's out of the SEC or the U.S. banking agencies, at least in the near term is, again, in contrast to Europe, where there's a pretty strong political consensus, both on E issues and S issues in Europe, both of those are politically fraught and lack widespread consensus here in the U.S.”

How are U.S. commercial banks navigating this landscape of contrasting international vs. federal vs. state-level laws and regulations?

The panel was in consensus that a lot of the issues that the U.S. is coming to terms with now were squarely on the agenda in Europe several years ago. But some of the regulatory fragmentation is now substantive. It was pointed out that the U.S. Securities and Exchange Commission’s (SEC) recent climate disclosure proposal has a lot in common with the Task Force on Climate-related Financial Disclosures (TCFD) framework. Rules and regulations are also relatively bespoke and idiosyncratic along the West Coast of the U.S. Newell said, “So, when banks with a global footprint are looking at a future world where you've got different disclosure requirements, different disclosure frameworks, different taxonomies for different parts of your operations across the globe - that's going to be an enormous challenge.”

Where should U.S. commercial banks be in the journey towards ESG adoption?

The panel was aligned on one major challenge: data. Data continues to come up as a challenge in terms of the immaturity of the data sources, data about different metrics, and data as it pertains to all organizations being climate confident. Another concern is how you deal with multiple sources of data. And in the end, data comes back to quantifying risk. Or as Michael Taschner put it, “we cannot quantify anything without having underlying data, therefore, the collection of data is key.”

An audience poll asked the question, “Where is your bank in the ESG adoption journey” and while the responses were mixed, Brandon Koeser explained, “I can assure those that may be thinking about the idea of an ESG journey or exploring it, that this is something that most definitely will be coming. So, at least starting to create some awareness in your institutions is going to be incredibly important.”

This sentiment was echoed by Taschner who said, “it's also necessary and it's important that this topic is being perceived as an opportunity rather than as a burden. It's not a regulatory exercise, which you have to do and which only costs money. This is also something where you can earn money as a traditional business. And it’s very much about anticipating what your customers want to get. Because even though demand from clients might not be high as of now, it is for sure an upcoming request.”