Environmental, Social and Governance (ESG) Issue Update

Issue Update

Environmental, Social and Governance (ESG – also often referred to as “sustainability”) issues are an increasing area of focus for banks of all sizes, driven by attention from regulators, investors, customers and employees. ESG can include a wide range of existing issues critical to banking, such as CRA, customer privacy, and data security. Additionally, emerging ESG issues include climate change, “responsible lending” (such as for fossil fuels, gun manufacturing/sales, and private prisons), and Diversity/Equity/Inclusion (DEI) in corporate governance and employment. We anticipate the Biden Administration and Congress to take aggressive actions on a number of ESG related issues, especially climate change and DEI.

Why It Matters

Increasingly companies, including banks, are focusing on ESG in response to customer and investor demand. ESG-related opportunities include the expansion of emissions trading and “carbon credit” markets aimed at using market mechanisms to drive industrial and commercial entities to lower emissions, ESG-focused asset management services, as well as targeted (“Green” and DEI) investing.

ESG challenges lie ahead. As policymakers focus on ESG issues, the potential arises for inappropriate governmental intervention into banks’ business decisions and board governance. This can include board composition, restrictions on or requirements for lending to specific industries, unreasonable regulatory capital and stress testing treatment, and requirements that banks assess or disclose ESG factors within their lending and investment portfolios in an effort to limit or regulate that lending and investment.

Governance of banking entities should consider size, complexity, and regional norms. Efforts to use bank regulation to regulate other industries indirectly (either to discourage lending and investment or to force it) are inappropriate and harmful to the economy, consumers and free market. Overall, banks have positive stories to tell on ESG-related issues and sharing those stories more widely will better position your bank with customers, employees, investors and regulators.

Recommended Action Items

• Oppose efforts to force banks to regulate other industries indirectly. Tell your elected representatives to oppose efforts like Operation Chokepoint seeking to cut off bank funding and investment in some industries, and the OCC’s Fair Access rulemaking seeking to force banks to do business with industries regardless of business judgment or reputation risk.
• Join ABA’s ESG Working Group to learn more about pending and expected ESG issues facing the industry, learn how your peers are approaching these issues, and share your bank’s ESG experiences.