By Karen KrollEarlier this year, Pacific Western Bank, with more than $40 billion in assets, issued its ESG report for 2021. Among other accomplishments: The bank recycled 281 tons of paper, or about 4,700 trees, and sends electronic statements to more than half its customers.
“Our people seem to embrace the idea that climate risk is real, and that we need to be good corporate citizens regarding our responsibilities in the area of climate, as well as social justice,” says David Sharp, SVP and deputy chief risk officer.
Like Los Angeles-based PacWest, a number of banks believe their institutions have roles to play in working toward a more sustainable planet. The same holds true for some regulatory agencies. In March, the SEC proposed for public comment amendments to its rules that would “require registrants to provide certain climate-related information in their registration statements and annual reports.” This would include information about climate-related risks “that are reasonably likely to have a material impact on its business, results of operations, or financial condition,” according to the SEC.
ABA in June warned that the agency is going far beyond its mandate and urged the SEC to significantly revise—or withdraw altogether and repropose—its proposal. The extensive climate risk disclosure framework for public companies prompted comparisons to the passage of the Sarbanes Oxley Act of 2002. Before banks could understand and comply with the requirements, they needed to invest time, money and resources to work through the learning curve, Sharp says. While the banks profiled here say they anticipate taking additional steps to comply with the eventual final rule, they also believe they are starting from a position of strength.
And while the announcement centered on climate-related disclosures it will bring “consistency and comparability” to the range of ESG data some banks are reporting, says Gary Levante, SVP for social responsibility and culture with $12.8 billion Berkshire Bank. Since reporting currently is voluntary, this can lead to differences in quality, he adds.
Driving ESG initiatives
Several factors are driving banks’ climate and social justice efforts. “We really believe as a company that we have a responsibility to make and build stronger communities,” Levante says.
To maintain its position as an employer of choice and ensure a strong risk management approach, it also was clear the bank would have to formalize its approach to its ESG efforts, Levante says. Berkshire, whose history stretched back 176 years, has always been committed to lifting up the communities in which it operates, although it hasn’t always used the ESG acronym, he adds.
A first step was a materiality assessment. Recognizing it couldn’t do everything, Berkshire sought to understand the dimensions most material to its business. Leadership reached out to its investors, employees, the communities in which it works and regulators. Drawing from their feedback, six pillars were identified as foundational to the bank’s ESG efforts: leadership and governance, human capital management, responsible banking, community investment, environmental sustainability, and financial access and empowerment.
In September 2021, Berkshire committed $5 billion to its BEST Community Comeback initiative, which focuses on strengthening communities in four areas, including environmental sustainability and fueling small business. Among other steps, the bank will lend and invest $2.5 billion in low- to moderate-income neighborhoods and move to 100 percent renewable electricity usage.
Berkshire followed this with the launch in December of a suite of socially responsible investment portfolios. The portfolios comprise companies with “solid track records across ESG metrics,” the company points out in a release.
Climate first: reimagining finance
The vision at Climate First Bank, a recently formed bank in St. Petersburg, Florida, is to “to reimagine finance as a force for good and become the most impactful bank contributing to the drawdown of atmospheric CO2,” according to its website. The bank will provide residents and businesses with convenient and specialized green loan options for rooftop solar systems and renewable energy systems, among other products.
Climate First is a “B1” bank, or a certified B Corp (benefit corporation) by B Labs and a member of 1% For The Planet, through which members commit to donating the equivalent of 1 percent of gross sales to environmental nonprofits through a mix of monetary, in-kind and approved promotional support.
That’s not to say this is easy.
“It’s kind of like running two entities at once: a for-profit and a nonprofit,” Founder and CEO Ken LaRoe says. For instance, residential solar loans are small dollar, yet require the same amount of work as larger, more profitable loans, he says. Climate First addressed this challenge by digitizing the product with auto-decisioning through artificial intelligence.
It also helps that the bank, which opened in June 2021, had these goals in its charter. And while the SEC’s proposal won’t immediately affect Climate First, which is privately held, leadership is trying to get ahead of the challenges so it eventually can go public, LaRoe says.
To that end, Climate First has been gathering data on its climate initiatives since forming its business plan. “We know we can’t change what we’re not measuring,” says Holly Bridwell, Climate First’s marketing director. Climate First follows the Partnership for Carbon Accounting Financials to report on greenhouse gas emissions of its loans and investments. It is also committed to the Net Zero Banking Alliance, aligning its lending and investment portfolios to achieve net-zero emissions by 2050. The actions underway at Climate First mean it can meet everything SEC is asking for, she says.
PacWest: measuring climate
While the proposed SEC guidance is daunting, “it’s concrete, in writing and we all can manage toward it,” Sharp says. Early in 2022, PacWest began working with a third-party adviser to assess the changes it would need to make to meet the SEC requirements.
To be sure, the current timeline is aggressive, Sharp notes. Assuming the SEC framework is finalized as proposed and not held up by potential legal challenges, PacWest, as a large accelerated filer, will have about 18 months to ensure its reporting complies with the SEC’s proposal. Moreover, measuring environmental metrics is currently “the untamed frontier,” Sharp says. “It’s a steep learning curve.”
In contrast, many banks already take a range of measurements that get at social issues, such as evaluating their loans against the requirements of the Community Reinvestment Act, to determine if they’re lending in low- and moderate-income neighborhoods. “We can do better, but that data is easier to mine,” Sharp says. Among other steps, Sharp says he expects to leverage the power of the industry groups to which PacWest belongs to brainstorm solutions regarding how to mine for the climate metrics needed.
Valley Bank: Starting with lighting
New Jersey-based Valley Bank began its journey toward environmental sustainability several years ago with the decision to switch traditional fluorescent for LED lights, says Tom Iadanza, president of the $41 billion institution. The bank is now installing occupancy sensors that turn lights on only when someone is in the room or area and daylight sensors that adjust interior lighting based on how much light is coming in from the outside.
In 2021, the bank established an ESG Council to bring together its various business lines, strengthen ESG efforts, raise awareness of climate change and collaborate on opportunities to mitigate its effects. Its 2020/2021 Environmental Social and Governance report notes that Valley is reviewing its credit practices to assess the impact of climate change on lending activities, while also recognizing that any changes to manage exposure to climate risk should not impact vulnerable communities.
The bank is also revamping its credit underwriting technology platforms to facilitate the collection of information on loans for renewable energy resources and support lending to LEED and other green-certified buildings. In June 2021, Valley began offering discounted financing for hybrid and electric consumer vehicles.
The bank is still absorbing the SEC announcement, Iadanza says. “We’re figuring out how to get the information, the administrative burden and cost of reporting.”
Climate reporting challenges
Even banks that have been building solid ESG programs will face challenges in their efforts to comply with the SEC’s proposal. One reason is that climate risk is difficult to define and quantify.
Like multiple greenhouse gas reporting protocols, the SEC breaks emissions into three categories:
- Scope 1: The GHG emissions a bank directly makes by, say, running its boilers.
- Scope 2: Emissions a bank indirectly makes due to its purchase of electricity. This would include the GHG produced on the company’s behalf for the electricity or energy it buys.
- Scope 3: The emissions produced by other companies within the bank’s value chain, such as the GHGs emitted to manufacture goods the company purchases.
For most companies, Scope 3 emissions will be the largest, as well as the most challenging to accurately measure and capture, given that this is outside their direct control, Levante says. For banks, a large portion of Scope 3 will come from the businesses they finance.
Moreover, it’s difficult to influence, let alone change, another company’s environmental policies. Instead, there needs to be a “just transition,” LaRoe says. For instance, banks that have loans to energy companies can’t simply call the loans, which are contracts.
GHG reporting also may affect banks’ compliance with other regulations. For instance, many communities that are most at risk for climate change also are low-to-moderate-income areas. “As bankers, we have a responsibility to lift up,” Levante says. Doing this while conducting business in an environmentally responsible way “will become both more complicated and more important,” he adds.
For many banks, complying with the reporting requirements will require investments in information systems and new processes. That could lead to further consolidation in the banking sector.
Moreover, many of the systems banks currently use for core processing aren’t able to track this information, LaRoe says. Climate First is building a proprietary system to handle this reporting and may make it available to other banks, he says.
While recognizing the challenges, these banks remain committed to operating in ways that are environmentally and socially responsible. “We have a responsibility to give back and do the right thing,” Iadanza says.
Karen Kroll is a frequent contributor to ABA Bank Marketing.