On March 21, 2022, the SEC released a proposal for rules on climate-related disclosures stating that all publicly traded companies will be required to disclose greenhouse gas (GHG) emissions. They will also be asked to disclose a qualitative write up of climate-related risks, governance and risk management climate goals, and note to the financial statements quantifying the impact of climate related events and transition activities. While the rule directly applies to public companies, it may also apply to many private companies that are in the supply chains of larger public companies.
Financial institutions should be on high alert because banking regulatory bodies will likely also enact mandates for environmental sustainability. Not long after the SEC proposed rule was released, the FDIC requested comment on a statement of principles for climate-related risk management for large financial institutions. Some organizations aren’t waiting for a regulatory mandate and have chosen to enact ESG policies and take action against climate change. Many have found that because of their new policies, they have attracted and retained customers.
For banks that are considering an ESG policy, it may be difficult to find a starting point. Measuring environmental impacts can be vague, and sustainability cannot be addressed by a few paragraphs in an annual report. Consider taking the following steps:
Organizations may also choose to develop strategies – such as refusing to renew loans for customers/borrowers whose actions have a negative impact on the environment – in order to reduce exposure to entities that do not meet certain ESG criteria.
Developing a strategy and response to ESG involves multiple parties across an organization, and both the board and management must be aligned on each of their specific roles.
Organizations may also consider using a materiality assessment – a method to identify and prioritize which ESG initiatives have the most impact and influence on stakeholders. The results can serve as a guide to determine what an organization should focus and/or report on for ESG. Utilizing this method increases the chances of better meeting stakeholder requests and demands, identifies topics to measure and improve, and analyzes business risks and opportunities.
Once an ESG strategy is in place, rating agencies such as S&P and Bloomberg may examine an organization’s ESG practices and risk exposure to determine its long-term sustainability. Scores from this examination are used by investors and other stakeholders when making important decisions concerning an organization’s future. Though there is currently no specific standard or industry guideline for measuring ESG ratings, and no formal governance code currently exists in the U.S., the SEC is narrowing in on formal rules, especially for environmental disclosures.
Don’t get caught off guard. It’s never too early for banks to begin to develop their ESG strategy – get ahead of the game with critical advice from our ESG advisors.