ESG strategy for banks: A checklist to get things started

To be successful, a bank’s ESG strategy must be carried out as an ongoing, coordinated process, not just a series of events. So, rather than launching a random series of disconnected activities, it is important to begin with a clear vision for the overall ESG strategy and desired outcomes along with a comprehensive, structured approach.

The major components of such an approach are outlined here, and it is important to recognize that many of these functions need to be pursued concurrently, not sequentially. These elements include:

Vision and objectives

Early in the process, banks need to establish their overall approach and risk appetite toward ESG issues. Is the ESG program driven primarily by regulatory and compliance concerns? Is it a response to pressure from investors, customers, or employees? Or is it viewed as being core to the bank’s mission and a strategic differentiator? The answers to these questions will establish the scope, tone, and pace of the overall ESG strategy.

Governance and organizational structure

Another important early component is assembling a broad and cross-functional team that includes chief executive and chief financial officer representation as well as executive team leaders in risk and compliance, finance, investor relations, marketing, sales, customer service, legal, human resources, and data governance and management. The team also needs members with specific expertise in ESG issues, and if such specialized resources are not available internally, qualified third parties can be engaged.

Materiality assessment

After the team is assembled, it should engage with stakeholders including board members, investors, customers, employees, and communities in order to understand their ESG priorities. Topics can be identified by consulting the Sustainability Accounting Standards Board standards, the Global Reporting Initiative standards, and the Stakeholder Capitalism Metrics. The team then should align these priorities with the overall strategy and with applicable measurement and reporting standards.

A deliberate materiality assessment can provide useful analysis of the bank’s scope, vision, and values from the stakeholders’ perspectives while also establishing a platform for further engagement with stakeholders to confirm ESG priorities.

Benchmarking

Measuring and demystifying the components of ESG can be challenging, but doing so is critical to setting appropriate strategy. To identify where they are – and where they want to go – banks should inventory the steps they are already taking, including various community initiatives, green products, and fair-lending, consumer protection, and anti-money laundering compliance programs.

Additionally, banks should begin identifying data sources for conducting a thorough carbon inventory of their own energy consumption and emissions (Scope 1 and Scope 2 emissions under the Global GHG Accounting and Reporting Standard). Banks larger than $100 billion in assets also should be identifying sources of information to gather Scope 3 emissions data in their lending and investment portfolios.

Road map development

The benchmarking effort will help establish a starting baseline for developing a prioritized road map of new ESG initiatives along with the key performance indicators (KPIs), data requirements, and reporting frameworks that will be used to measure and communicate results.

Data and process management

The data requirements associated with ESG initiatives are significant, and banks often find themselves struggling with large volumes of data sourced from multiple, disparate systems. In many instances, there is limited confidence in the accuracy and integrity of the data that is extracted and reported. Banks need to mobilize existing data and identify critical data gaps in order to accurately and meaningfully tell their ESG story.

An important early step toward achieving this is a thorough evaluation of data maturity and reporting processes, based on the identified KPIs and reporting needs. It’s an iterative approach: As banks report on more ESG components, they will need to start capturing metrics around accuracy and defining processes that govern them to further improve upon trust over time. An effective ESG strategy is dynamic and can adjust to new demands from stakeholders as well as operational changes in the organization, such as mergers and acquisitions and new markets.

Integration into strategy

An effective ESG program is not a one-off project or event. The banks that succeed in this effort will be those that integrate ESG objectives into their overall strategic plans and that incorporate specific ESG initiatives into both their core business functions and enterprise risk management practices. Various activities such as energy use and carbon inventories, diversity in hiring initiatives, and loan portfolio reviews should be structured in a way that integrates them into the broader bank strategy.

Goal setting, alignment, and implementation

Building on the materiality assessment, prioritized road map, and data gap analysis, the ESG team should establish specific goals and targets and then implement priority actions. In addition to aligning performance against KPIs, the team also must launch a mechanism for ongoing feedback, recognizing that each step of the process likely will generate additional new requirements.

Internal audit participation

Internal audit should be brought in as a consultant to the ESG program as early as possible, ideally as an active participant in the initial structure. Internal audit’s insights and expertise can be helpful in identifying the appropriate governance frameworks and in developing effective controls under those frameworks. Further, consulting with internal audit can help integrate sustainability and other ESG measures into future internal audit plans, helping banks make ESG considerations a consistent and permanent component of their ongoing operations.

Disclosure preparation and assurance

The ultimate outcome of a bank’s initial ESG efforts should be the development of regular external disclosures of ESG performance indicators in accordance with recognized standards. To meet stakeholder expectations, banks should consider establishing external assurance processes to validate the measured outcomes of their efforts as their programs mature.

As noted earlier, the development of these components is not a linear process. Instead, the entire process is ongoing, recurring, and continually improving. Although some elements build on the outcomes of other activities, many of these actions need to be carried out in concert with others.

Knowing where and how to address ESG issues can be a difficult challenge for any organization, especially for banks, which are already highly regulated, closely scrutinized, and under growing pressure from new competitive forces with vastly different business models. Moreover, the far-reaching impact of ESG issues and the comprehensive nature and scope of the overall ESG strategy can be overwhelming.

Within the confines of an overall strategy, here are eight steps banks can take to kick-start their ESG programs:

• Review the bank’s current strategy (both written and informal) through the lens of ESG and identify specific elements of the strategy that have environment, social, or governance implications.
• Evaluate the materiality of specific ESG topics and document their value to the bank enterprise and their potential value to various stakeholders.
• Engage stakeholders to validate the bank’s understanding, either through a formal materiality assessment or an internally driven outreach program.
• Formalize and confirm the governance structure for addressing ESG issues, including board ownership, management leadership, and reporting mechanisms for decision-making.
• Identify the data requirements for measuring and reporting ESG issues and data gaps and establish a plan to fill gaps while addressing data quality issues.
• Determine baselines and start documenting existing ESG efforts such as compliance with fair lending and consumer protection requirements, anti-money laundering and fraud prevention compliance, community outreach programs, and sustainability and green initiatives.
• Update senior management regarding the critical and growing importance of ESG concerns; educate employees and team members about their roles in ESG initiatives; and inform all other stakeholders about already-existing ESG efforts and upcoming programs to address their priorities.
• Stay informed on ESG issues and stay abreast of ESG reporting requirements, which are dynamic and rapidly changing.

While regulators’ attention focused initially on large, national organizations, regional and community banks can expect to encounter comparable scrutiny on ESG regulatory and reporting requirements in the near future. Additionally, consumers, employees, and investors can access a wide range of data regarding a bank’s impact on environmental and social issues, as well as its governance, fraud prevention, and data security measures. Thus, for both regulatory and reputational reasons, establishing an effective ESG strategy is critical.

The components and steps listed here provide a starting point for banks to begin integrating ESG initiatives into their core business strategies and planning.