When Boston-based Berkshire Bank adopted environmental, social, and governance practices, its leadership made it clear that the move was not a marketing gimmick or about checking a box. The $11.6 billion-asset financial institution wanted to reinforce its 176-year commitment to customers and their communities, and to maintain its position as an employer of choice.
In September 2021, Berkshire launched a three-year, $5 billion BEST Community Comeback initiative aimed at strengthening communities in four areas: Fueling small businesses; community financing and philanthropy; financial access and empowerment; and environmental sustainability. As part of the initiative, the institution will lend and invest $2.5 billion in low- to moderate-income neighborhoods and move to 100% renewable electricity usage.
Berkshire’s leadership believed in doing more than investing money in ESG practices. For them, banks need to quantify initiatives, allowing customers, employees, investors, and communities to understand the scope of their work. To that end, Berkshire issued a Corporate Responsibility Report to communicate its ESG performance and accomplishments.
But Berkshire is only one of many banks to realize that ESG is crucial to its future growth and performance. In a recent governance survey, 82% of U.S. bank CEOs and board directors acknowledged the importance of ESG. Still, only 44% said their board and management team had developed or were developing an ESG strategy. The onus is on bank executives to identify specific steps to track, report, and take action on ESG.
The Three Pillars of ESG
ESG is a strategic framework designed to identify, assess, and address organizational objectives and activities in the following areas:
- Environmental: Energy use; waste and pollution; and environmental risk assessment and management.
- Social: Managing relationships with employees, suppliers, customers, and communities.
- Governance: Internal controls, practices, and procedures systems.
A bank’s ESG framework is increasingly important to socially responsible investors wanting to invest in companies, with a high ESG score determined by third-party firms. ESG scores and ratings show a bank’s performance in the three pillars above. Banks typically have a good handle on both the social and governance areas, but environmental practices are where they have the most significant opportunity.
Business Value and Opportunity
Today’s consumers are increasingly more selective about the brands they support and expect companies they associate with to share their values. In a PwC survey, 80% of consumers and 84% of employees said they preferred purchasing from or working for an organization that actively supports the environment; 76% of consumers reported discontinuing relationships with organizations that treated employees, communities, or the environment poorly.
Younger generations favor banks and investment funds with measurable records in ESG and research shows 76% of Millennials consider a company’s social and environmental impact before accepting a job offer. Strong ESG practices and strategies help attract and retain quality employees and increase motivation.
Institutional investors are increasingly demanding banks and other companies demonstrate their ESG credentials. The plethora of opportunities in ESG is evident in the tremendous growth of investments in sustainable funds over the past few years.
According to Bloomberg, ESG assets soared to an unprecedented $37.8 trillion by the end of 2021. By 2025, ESG assets may grow to $53 trillion — a third of all global assets under management. Berkshire Bank introduced a suite of socially responsible investment portfolios to meet market need in December 2021.
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While ESG reporting is not mandatory in the U.S., several European countries, including the U.K. and Switzerland, have enacted laws around ESG and climate reporting. There are signs, however, that the U.S. may move soon on ESG.
The Financial Stability Oversight Council is exploring ways to assess climate-related financial risk. The Federal Reserve and the Office of the Comptroller of the Currency are considering requiring banks to measure climate risk. The Securities and Exchange Commission proposed guidelines for public companies to disclose ESG-related risks, but they are still under review.
While regulators initially focus on large national organizations, regional and community banks can soon expect to face ESG regulatory and reporting requirements.
Customize ESG Initiatives
While big banks such as Bank of America, JPMorgan Chase, Fifth Third Bank, and Wells Fargo have established ESG practices in the last few years, copying the strategies of larger institutions is not the best approach for community and regional banks.
Each institution must develop an ESG strategy aligned with its purpose and mission. The effect is cumulative, so banks can start small. Some begin with something as simple as replacing fluorescent bulbs with LED lights or reducing paper usage.
Realizing it couldn’t do everything, Berkshire Bank sought to understand the initiatives most important to its business. The first step was a materiality assessment in which leadership reached out to its investors, employees, and communities, as well as regulators, for input. The result was the BEST Community Comeback initiative.
From the assessment, the bank identified six pillars for its ESG efforts:
- Leadership and governance
- Human capital management
- Responsible banking
- Community investment
- Environmental sustainability
- Financial access and empowerment
In addition, the bank established an Environmental Management System to track its ESG strategy and measure its performance. By 2021, Berkshire had achieved its target of being among the top 25% of U.S. banks in the leading ESG indexes.
Berkshire Bank had some ESG-related programs prior to 2021 but didn’t use the acronym. The first step toward a more comprehensive strategy is categorizing and highlighting all programs that fit into an ESG framework. Then, banks can review their strategy and identify programs with specific ESG elements.
The ESG Advantage
Consumers, employees, and investors can already access a wide range of data on a bank’s impact on environmental and social issues, and its governance. If a bank fails to establish an effective ESG strategy, it exposes itself to regulatory, reputational, and financial harm. Disclosing your institution’s progress on ESG demonstrates to investors, communities, regulators, customers, and other stakeholders that the bank walks the walk where it matters.