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ESG: Why Should Community Banks Care?

ESG: Why Should Community Banks Care?

The media is reporting on ESG matters ubiquitously, and that should spark the interest of your community bank board. It’s been hard not to take notice of the recent climate-related events such as extreme floods, massive wildfires, tornadoes, and hurricanes everywhere in the world. The fact that investors have put four times more money into ESG investment funds in 2020 than the previous year is another clue that community bank boards should consider the impact of ESG initiatives.

The growing interest in ESG is putting more pressure on organizations of all kinds to develop a culture around ESG and be transparent about ESG data and reporting. If your board isn’t already having discussions about ESG, it’s time to get organized and starting makes strides with ESG.

To help you get started, we’ll help you understand what ESG is and the impact it has on community banks.

What Is ESG?

ESG is a commonly used acronym for environmental, social, and governance. It’s an umbrella term that covers sustainable investing, socially responsible investing, mission-related investing, and ESG screening. Essentially, ESG is a melding of financial and ESG factors for lenders and investors.

To get a better understanding of ESG, let’s look at the individual parts of the ESG definition.

The environmental part of the equation refers to climate change. Specifically, it refers to how organizations negatively or positively contribute to the climate and what steps they take to mitigate negative environmental effects. Environmental encompasses things like the use of natural resources, pollution, waste, and leveraging environmental opportunities. A focus on environmental concerns reflects whether organizations are being good stewards of the planet.

The social aspect of ESG pertains to an organization’s approach toward making its community a better place to live and work. It also encompasses the importance of diversity, equity, and inclusion. Social refers to things like human capital, product liability, social opportunities, social responsibility, product liability, stakeholder engagement, and being a good corporate citizen.

Governance incorporates corporate governance, business behavior and integrity, corporate culture, and social media practices.

The bottom line is ESG is a hot issue for all industries including community banks.

Why Are ESG Initiatives Important for Community Bank Boards to Consider?

Community banks follow many of the trends of larger banks, and they share many of the same concerns as big banks as well. In recent times, big banks have notably been stepping up their ESG efforts, and that’s a trend that small businesses including community banks are following.

Some of the largest banks like JP Morgan, Wells Fargo, Bank of America, and Fifth Third all have instituted measures to strengthen their commitments to ESG initiatives.

Brian Lehman, Head of Green Economy Banking at JP Morgan Chase, says, “The path to a more sustainable future heavily depends on our actions today. At JPMorgan Chase, we’ve seen a growing number of clients and industries whose foundations are built upon reducing greenhouse gas [GHG] emissions.” Lehman’s team provides dedicated banking services and expertise to companies that produce environmentally friendly goods and services and those that focus on environmental conservation.

As a community bank, a variety of people may be looking at your ESG efforts. Here are some of the sects that may ask for ESG reports and other data:

  • Donors
  • Regulators
  • Investors
  • Benefactors
  • Lenders
  • Stakeholders
  • Vendors

Setting Standards for ESG Across Industries

The Value Reporting Foundation lists SASB standards for investors evaluating ESG efforts and classifies them by industry.

The goal of SASB is to improve ESG performance by virtue of improving transparency, so investors have access to data that’s consistent and reliable. The SASB standards provide a common language for companies and investors to talk about sustainability issues.

The standards identify the subset of issues that impact the financial performance in each industry. SASB sets standards for 77 different industries. The reason for this is that various industries face different sustainability issues, and the issues manifest differently between industries.

Benefits of ESG for Community Banks

Your bank will benefit in several ways by improving ESG practices. You’ll improve your results with strategizing, risk management, and stakeholder loyalty. All of these things are important for improved governance, which is a reflection on the quality of your bank.

By incorporating ESG initiatives into your board’s annual strategy, you’ll be able to evaluate opportunities and risks over the short and long terms. You’ll also be able to assess the impact of ESG on your financial planning strategies. By being intentional about ESG, your bank will be able to be more resilient in the event of an unprecedented climate crisis.

When your bank’s board takes a proactive stance regarding ESG management, you’ll be able to identify and assess climate-related risks. You’ll also be able to describe how you integrated ESG processes into your overall risk management plan, which is something stakeholders are interested in. As a result, stakeholders will put greater trust in your bank, and your bank will develop a reputation as a local business that drives change through sustainability initiatives.

Today, stakeholders and investors are typically interested in ESG transparency so they can evaluate how your board manages ESG oversight and how your management team assesses and manages ESG risks and opportunities.

Tips for Community Banks to Get on Board With ESG

ESG may be a new topic of discussion for your board, and we’ve got some valuable tips to help you get the ball rolling with ESG initiatives.

  • Set up events that focus on financial wellness education to get directly involved with your community.
  • Ensure that you have a designated social media director who’s responsible for monitoring all social media outlets and responding to comments.
  • Check out peer banks. Review their websites and read their annual reports.
  • Consider getting your buildings LEED certified.
  • Find ways to reduce or eliminate paper across all processes.
  • Consider the value of replacing bank-owned vehicles with electric or hybrid models.
  • Explore opportunities for project investments such as affordable housing.
  • Consider providing grants or lending capital to local Community Development Financial Institutions (CDFI) at an attractive rate.
  • Get organized by implementing a board management system.

With a BoardEffect board management system, you have unlimited storage capacity for all your ESG reports. It’s a secure platform that enables your board to keep accurate ESG reports. Your board members have access to them at any time and share them transparently whenever they’re needed.

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