ESG: A significant opportunity for banks

Steps banks can take to prepare for expected ESG regulations.


The banking industry faces several challenges due to recent economic, geopolitical and regulatory developments. KPMG has identified the top 10 issues facing banks in 2022 and beyond, and in this article we examine the topic of ESG.
 

A significant opportunity for banks

Sustainable, socially responsible behavior is already expected of banks by an array of stakeholders – customers, regulators, industry analysts, and credit-ratings agencies­ who demand measurable assurance that banks take ESG factors into account when deciding to make loans, offer investment products, and conduct day-to-day business.

However, standardized ESG reporting in 2022 will, in all likelihood, continue to be mostly voluntary and limited. But that doesn’t mean that banks shouldn’t provide specific details when stating how they plan to meet their ESG goals - and how the goals will be measured and reported.

Banks’ ESG reports too often contain only high-level statements about a commitment to a better environment, social justice, and robust governance standards. While these reports state bold ambitions to provide stakeholders with ESG information, it appears few of these statements or reports have been assured by an independent third party. We encourage banks to have their ESG reports undergo an assurance review and to provide information about interim ESG targets and other information supporting its commitments. Banks should be aware that it is likely that such information may shortly be expected by regulators.

Stakeholders want clarity and details about banks’ activities regarding how they are managing existing portfolio companies, for example, as it relates to those companies’ carbon footprints and plans to better manage those demands. Further, stakeholders may want more concise information on such issues as a bank’s plans for investments in renewable energy businesses or nuclear power businesses. It is important to note that increased shareholder value could be tied to ESG disclosures and performance.

John Cotes, head of the Securities and Exchange Commission’s (SEC) Division of Corporate Finance, said, “SEC action on ESG is overdue … nobody else is waiting. The rest of the world is moving forward (on stiffer ESG regulation) pretty rapidly.’’1 Current expectations are that the SEC will propose rules related to ESG disclosure requirements in the early months of 2022.2


Taking Action in 2022 - ESG

Click on each section below for actionable steps you can take now

Reporting readiness

As regulators such as the SEC, increasingly indicate interest in creating mandatory climate risk disclosure rules we would expect that banks would want to review their readiness to meet such rules.

Banks will want to understand whether they have the capabilities needed to provide measurable data. In order to understand if they have such capabilities, they’ll need to examine the sophistication of the controls and procedures they would need in order to meet those requirements.

Better reporting capabilities also may produce ancillary benefits, such as improved investment returns and operational performance, and it also could result in having comparatively lower cost of capital than peers with lesser ESG ratings. It also may improve customer and regulatory relationships. By addressing stakeholder concerns around ESG, management teams also may increase their chances to improve shareholders’ returns.

Getting up to speed on financed emissions

Now that a small percentage of banks have begun to follow the suggestions outlined in the Partnership for Carbon Accounting Financials, we suggest more banks follow suit. A primary goal of that organization is to encourage banks to improve their education on how to best measure and disclose the emissions generated by the businesses they lend to and invest in.

Banks seeking to meet proposed rules on greenhouse gas emission targets as it relates to their own institution and the institutions with which they do business can follow information outlined in so-called “scope 3 guidelines.’’ Adhering to those guidelines can provide banks with information to assess net zero emissions, including reduction goals. Scope 3 disclosures also are intended to help investors understand the extent to which a bank is invested in “high-emissions industries,’’ which may run counter to policies and technologies focused on a low-carbon economy.

Carbon literacy

CEOs and CFOs should be prepared to discuss details about how their ESG strategy is actionable. They should be able to provide stakeholders with clear and detailed information about how the bank monitors, measures, and reports on climate risk / carbon emissions. Management should examine whether their organization is capable of providing such information … and, if the bank is not yet capable, management should start now on creating a program to provide such information.

Continued literacy efforts to benefit clients, investors, employees, and other stakeholders about the bank’s current actions and especially its carbon-emission-mitigation efforts are critical. In addition to promoting literacy specifically about carbon emission, there also are considerable benefits associated with efforts to promote overall diversity, equity, and inclusion.

Shifting to a higher gear
Download the full report to learn about all of the key issues impacting banks in 2022 and beyond

Footnotes

  1. “SEC to Move ‘Promptly’ on ESG Rulemaking in 2021,’’ Bloomberg Law News, April 30, 2021
  2. “The ESG Regulation Picture for 2022. Five Key Questions for Business,’’ The Wall Street Journal, January 6, 2022


Connect with KPMG

Steven Arnold

Steven Arnold

Financial Services Advisory Leader, KPMG US

+1 213-430-2110