When it comes to the “social” element of ESG, few industries under any legal obligation to be proactive. But banking is an exception.
Under the Community Reinvestment Act of 1977, large, FDIC-insured banks are required to serve all segments of their local communities. The goal is to encourage banks to lend to populations that historically have been marginalized, without mandating ratios or benchmarks.
Over the past four decades, this social obligation has evolved to include “sustainable finance,” which is any type of financing that promotes positive environmental or social change. Typically, it aligns with the Paris Climate Agreement and the UN’s Sustainable Development Goals, so it maps neatly to the social responsibility factor of ESG.
For example, Bank of America unveiled a new ESG Issuance Framework last November to support its issuance of green, social, and sustainability bonds. It builds upon the bank’s 2020 commitment to financing that promotes equality, economic opportunity and environmental sustainability such as providing “people of color or women with expanded access to essential services, including affordable housing or business capital.”
BOA says it has issued almost $10 billion in green, social, and sustainability bonds since 2013. JPMorgan Chase plans to allocate $1 trillion to “green initiatives” over the next 10 years and Citigroup has committed $1 trillion to sustainable finance by 2030.
While addressing social equity issues, sustainable finance also offers the potential to confront environmental challenges, because research shows people of color and others in underserved communities are disproportionately affected by pollution and climate change. So, sustainable financing could, for example, help families and businesses recover from extreme weather events, if properly allocated, by providing mortgages, small business loans, community development investments and financial education.
That’s not to say the banking industry is immune to the threat of climate change.
“How climate risks translate into credit, market and liquidity risk for banks is an area of growing focus for regulators, with some arguing that much more research and work is needed,” says Thomson Reuters in a special 2021 report. “At some large banks, scenarios are being developed to incorporate future events such as a worldwide tax on carbon emissions…”
Next year, the Federal Reserve will begin working with six of the largest banks in the US on a pilot program to assess climate-related financial risks for banks and, by extension, the US economy. In addition, many large US banks are members of the Net Zero Banking Alliance, a group committed to holding loan and investment portfolio that produce net-zero emissions by 2050.
They have their work cut out for them. The world’s 60 largest banks have poured $4.6 trillion into the fossil fuel industry since the Paris Agreement was created in 2015, according to BankTrack.org.
To measure their progress, banks will need high-quality data, both financial and non-financial.
“The search for consistency remains a priority,” says KPMG in a report about sustainable finance. “The key to achieving [net-zero emissions] and to enabling the development of reliable market data, will be standardized definitions of E, S and G, globally.”
