Banks are currently expected to maintain responsible and sustainable business practices by an array of stakeholders – customers, investors, regulators, industry analysts, and credit-ratings agencies—who demand measurable assurance that, like other business risk and opportunity calculations, banks take ESG factors into account when deciding to make loans, offer investment products, and conduct day-to-day business.
Plan to purchase assets in carbon markets to meet ESG goals
Say setting achievable ESG goals and reporting compliance are priorities
Say they lack the tech solutions necessary to achieve their climate ambitions
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 or nuclear power businesses. It is important to note that increased shareholder value could be tied to ESG disclosures and performance against ESG goals.
Banks’ ESG reports often contain only high-level statements about their commitment to a better environment, social justice, and robust governance standards. While these reports are intended to provide stakeholders with banks’ ESG-related ambitions and other information, few of these statements or reports appear to 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 commitments.
In fact, 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.’’ In March 2022 the SEC proposed rules intended to enhance and standardize climate-related disclosures for investors to better evaluate climate-related risk; in May 2022, the SEC separately proposed rules for funds and advisers that would enhance disclosure of how they incorporate ESG into their investment practices, products, and advisory services.
“ESG reporting in 2022 will, in all likelihood, continue to be mostly voluntary. 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,” according to Alysha Horsley, KPMG financial service audit partner.
Banks must also consider that the regulators will be looking at their management of risks related to ESG, and in particular climate, across specific areas, such as governance, strategic planning, data/measurement, and scenario/stress testing analysis , as well as multiple risk pillars (e.g., credit, liquidity, operational, compliance).
Amy Matsuo, KPMG regulatory and ESG insights leader, says banks, in preparation to adhere to evolving regulatory expectation around ESG, should take specific actions to meet the expected demands from regulators as well as stakeholders. “Banks would be well-served.’’ Matsuo said, “by setting metric and control governance, assessing current and target data and risks, and operationalizing and demonstrating continuous improvement to their varied stakeholders and regulators.”
“The ESG Regulation Picture for 2022. Five Key Questions for Business,’’ The Wall Street Journal, January 6, 2022
