ESG at the Core of Community Banking

Chances are that by now you have heard about Environmental, Social, and Governance (ESG) – it has been a rising topic of interest amongst business leaders and boards. Now more than ever, boards, investors, customers, and other stakeholders are asking for increased transparency about the sustainability of organizations they are involved with. But how do ESG initiatives fit into the context of community banking?

The goals of ESG are well aligned with the core values of community banking – building better communities and emphasizing the importance of personal relationships. Community banks already have many of the building blocks of an ESG program in place but may not have formally linked these efforts to global ESG programs and sustainability standards.

Where do you start? An ESG program starts first and foremost with evaluating the priorities of your community stakeholders alongside the current sustainability practices of your organization. Launching an ESG program will not be easy, but doing so will provide leadership teams with an understanding of climate-related risks, the carbon footprint of the bank and any financed emissions, as well as other environmental and social sustainability gaps and pitfalls.

Environmental

The environmental component relates to how organizations impact the climate, and actions they take to mitigate adverse effects on or from the environment. Climate risk can come in the form of acute physical threats like hurricanes and flooding, but there are many chronic physical threats (e.g., rising sea levels and rising surface temperatures) and transitional threats (e.g., public opinion and greenhouse gas [GHG] reduction costs) that may threaten your organization’s continuity or render physical assets worthless and impair financial asset values. Awareness of the specific climate-related risks to your organization is the first step to knowing where to apply resources. It will help you identify key risk indicators that monitor whether your organization is staying safe and where it is vulnerable to emerging threats.

Environmental efforts for community banks go beyond risk management and into strategic action including:

• Purchasing securities in green bonds or companies that focus on environmental sustainability, like reducing greenhouse gas (GHG) emissions.
• Lending to companies that produce environmentally friendly products or focus on environmental conservation.
• Offering loan products with lower interest rates for energy-efficient homes.
• Investments in solar tax credit projects.
• Buying bank-owned vehicles that are hybrid or electric models.

Social

The social component of ESG focuses on how an organization strives to improve relationships with employees, financial stakeholders, and the local community.

Social initiatives for banks may include the following:

• Incorporating diversity, equity, and inclusion in hiring practices
• Donations to local charities and sponsoring community events
• Offering Small Business Administration (SBA) loans
• Investments in low-income housing tax credits
• Supporting programs around employee health and real-living wages

Governance

The governance aspect is about managing the business in a responsible way – with a positive corporate culture, strong business integrity, and ensuring that decisions are aligned with the best interests of shareholders.

Early steps of establishing an environmental, social, and governance framework include assigning an executive to lead the efforts, developing a management committee charter to ensure ESG programs receive corporate governance and approved resources, and publishing an initial policy and corporate mission statement for both internal and external constituents. Banks will need to maintain effective board oversight and procedures to monitor and control ESG risks.

Although ESG initiatives may seem daunting, there is also opportunity – opportunity for community banks to tell their story about the positive impacts they have on the communities they serve. Community banks already have many of the pillars of ESG in place, as ESG relates directly to the mission of community banking. Now is the time to re-energize your initiatives surrounding serving your communities in sustainable ways.

To help companies stay ahead of Environmental, Social, and Governance’s impact, Wolf offers a variety of services aimed to provide relevant and actionable consulting conforming with ESG reporting frameworks.