Since pre-industrial times, carbon dioxide levels have increased 50% to 421 ppm, the highest level in 2MM years. Oceans, once a net source of carbon, now act as a carbon sink and have so far absorbed about 90% of the heat generated by rising emissions. However, this comes at a cost, as the resulting ocean acidification is threatening marine life and bringing many species to the brink of extinction.As environmental, social, and governance (ESG) issues continue to dominate the conversation, financial institutions (FIs) of all sizes are seeing the importance of developing and communicating a green and socially responsible strategy. Larger FIs are going a step further — reporting on ESG metrics has become a business imperative. But some have taken this too far by overstating their ESG credentials, a process known as “greenwashing”, and the regulators have started to act.Having fined a Bank of New York Mellon Corp. investment unit $1.5MM for making untrue statements about ESG quality reviews on some mutual funds in an official document, the SEC is now looking into whether some of Goldman Sachs’ funds meet their advertised ESG metrics. Many observers believe this is just the beginning of a wave of interventions by the regulators to set new standards in this area.Alongside greenwashing, “social washing” — adopting altruistic rhetoric while making lending decisions that penalize disadvantaged communities — has also been attracting attention. Recent research has shown that banks with high ESG ratings issued fewer mortgages in poor communities, both in quantity and dollar amount, counter to the 1977 Community Reinvestment Act call for more equitable lending.A Morning Consult survey shows that consumers have picked up on the greenwashing and social washing phenomenon: over half of respondents said they do not believe that FIs are making genuine efforts to be socially and environmentally conscious in their practices, although 61% believe that FIs are sincere in their efforts to operate equitably.Impact on Your Institution
With their focus squarely on the communities they serve, community financial institutions (CFIs) are well-positioned to stand out through their ESG stories and appeal to consumers and businesses who are increasingly expecting their values to be reflected in the institutions they partner with. Here are three steps to achieve this.
With their focus squarely on the communities they serve, community financial institutions (CFIs) are well-positioned to stand out through their ESG stories and appeal to consumers and businesses who are increasingly expecting their values to be reflected in the institutions they partner with. Here are three steps to achieve this.
1. Assess your ESG footprint and benchmark against peers. Before you can shout about your ESG credentials, ensure they can stand up to scrutiny. This means gathering and analyzing quantitative, material data to understand how the institution performs on ESG metrics, in its product and service offerings, and within its communities. CFIs need to be able to demonstrate that they can walk the walk. You may want to use an external provider to conduct the analysis and provide benchmarking data.2. Double down on ESG initiatives. Having assessed your ESG footprint and identified areas for improvement, plan steps to finetune your operations. Among others, consider getting your buildings LEED (Leadership in Energy and Environmental Design) certified, find ways to eliminate paper, or purchase in bulk to reduce waste and shipping resources. Progress on the digital transformation journey also adds to a CFI’s sustainability and its credibility.Some CFIs address ESG issues through their product offerings, either by directly supporting underprivileged communities or by helping their clients become more sustainable. For example, a $9.4B OR-based CFI offers discounts on loans for solar panel installations and hybrid or electric cars. A $1B-asset CFI based in the District of Columbia prioritizes loans for multifamily affordable housing, nonprofit community facilities, and small businesses located in low-to-moderate-income communities — these account for 70% of its new loans.3. Tell your story. Green initiatives are now widespread, but they are still newsworthy. Engage with local media, and eco-based organizations. Promote your sustainability efforts in your annual report and quarterly earnings reports. You might even consider running financial wellness events to help community members navigate their finances and plan for the future. As one executive from a New England-based CFI says: “We may not have called it ESG or DEI-type initiatives in the past, but we’ve always done it. It’s really just taking the things we’ve done in the past and translating that into what makes an impact.”
At a time when large FIs are increasingly under pressure to support a move to a more sustainable world, CFIs have great potential for providing community value and meaningful ESG stories. They should capitalize on their engagement with their communities and market their environmental and social efforts, enhancing their brand reputation and increasing customer loyalty.
