ESG: A significant opportunity for banks

As regulators such as the SEC, increasingly indicate interest in creating mandatory climate risk disclosure rules we would expect that banks would want to review their readiness to meet such rules.

Banks will want to understand whether they have the capabilities needed to provide measurable data. In order to understand if they have such capabilities, they’ll need to examine the sophistication of the controls and procedures they would need in order to meet those requirements.

Better reporting capabilities also may produce ancillary benefits, such as improved investment returns and operational performance, and it also could result in having comparatively lower cost of capital than peers with lesser ESG ratings. It also may improve customer and regulatory relationships. By addressing stakeholder concerns around ESG, management teams also may increase their chances to improve shareholders’ returns.

Now that a small percentage of banks have begun to follow the suggestions outlined in the Partnership for Carbon Accounting Financials, we suggest more banks follow suit. A primary goal of that organization is to encourage banks to improve their education on how to best measure and disclose the emissions generated by the businesses they lend to and invest in.

Banks seeking to meet proposed rules on greenhouse gas emission targets as it relates to their own institution and the institutions with which they do business can follow information outlined in so-called “scope 3 guidelines.’’ Adhering to those guidelines can provide banks with information to assess net zero emissions, including reduction goals. Scope 3 disclosures also are intended to help investors understand the extent to which a bank is invested in “high-emissions industries,’’ which may run counter to policies and technologies focused on a low-carbon economy.

CEOs and CFOs should be prepared to discuss details about how their ESG strategy is actionable. They should be able to provide stakeholders with clear and detailed information about how the bank monitors, measures, and reports on climate risk / carbon emissions. Management should examine whether their organization is capable of providing such information … and, if the bank is not yet capable, management should start now on creating a program to provide such information.

Continued literacy efforts to benefit clients, investors, employees, and other stakeholders about the bank’s current actions and especially its carbon-emission-mitigation efforts are critical. In addition to promoting literacy specifically about carbon emission, there also are considerable benefits associated with efforts to promote overall diversity, equity, and inclusion.