Environment, social and governance (ESG) is more than a buzzword. ESG has gained popularity globally as a way to assess an organization’s profitability, environmental sustainability and social impact.
Major institutional investors are now expecting companies to commit to ESG criteria, and regulators are putting in place rules to hold listed companies accountable for the effect of their activities on the climate. At the same time, policymakers in more states are trying to discourage companies from using ESG measures.
- Environment, social and governance (ESG) factors are gaining prominence due to increased regulatory scrutiny and consumer demand.
- More and more evidence suggests that a high commitment to ESG is correlated with stronger financial performance.
- Objective of the board: Sound governance is essential to a caisse’s ability to fulfill its mission of serving its member-owners.
While its origins can be traced back to sustainable investing, ESG is becoming increasingly important in financial services because:
- Regulators and policy makers are paying attention.
- Consumers, especially young adults, and employees are increasingly demanding more fair, ethical and sustainable organizations.
- Discipline represents a set of risks and opportunities that are becoming increasingly important for financial institutions.
Credit unions can use ESG as a competitive differentiator and a way to deepen Financial well-being for all™ and advance the communities we serve.
From a macro perspective, ESG represents a move towards a more holistic and balanced approach where companies strive to be ethical, socially and environmentally responsible and able to serve communities beyond their shareholders and management teams.
It is also a more holistic approach that recognizes the links between good governance, environmental sustainability and social responsibility.
ESG factors were previously considered outside the framework of traditional corporate responsibilities. But a transformation has taken place over the past two decades. Outside of government mandates, many companies have started working with stakeholders to solve issues of common concern.
The pandemic, social unrest, and environmental and climate-related events have accelerated the pace of change. According to Korn Ferry, 86% of employees and consumers want to see a more equitable and sustainable post-pandemic world, and 43% of employees are reconsidering their current jobs because their employers aren’t doing enough to address social justice issues.
Mounting evidence suggests that a high commitment to ESG is correlated with stronger financial performance by attracting top talent and customers and reducing costs (e.g. reduced energy consumption) and regulatory and legal burdens, reports McKinsey & Co.
In this context, it is not surprising that ESG and sustainability considerations are increasingly integrated into organizations’ strategies, risk calculations, performance measures and public reporting. According to KPMG, 90% of North American companies report on their sustainability efforts.
“There is a clear opportunity for credit unions to use ESG as a competitive differentiator and a means to advance financial well-being for all.”
ESG risks and opportunities
An ESG approach means that credit unions explicitly consider both environmental risk mitigation and ways to maximize environmental/climate related opportunities in their strategies, planning and actions.
Credit unions are familiar with environmental and climate risks. When natural disasters and weather events strike, they are often among the first responders for their members, staff and communities.
Credit unions have considered these issues since their inception as we continue to lend to farmers and ranchers, as well as small businesses, across the country.
Nevertheless, we can do more, for example by proactively managing these risks and doing more to take advantage of opportunities to expand our portfolio of green loan products.
The benefit of proactively managing these and other climate-related risks is that these losses and the impact on credit union balance sheets are mitigated and the stress and injuries to employees, members and the community are reduced.
Environmental events can lead to economic disruption, infrastructure damage, loss of assets, and member health impacts, which affect how they interact with their financial institution. Often, the impact hits the most vulnerable populations hardest.
This means credit unions must be prepared for late payments, defaults, and the need to provide emergency financing to rebuild homes or provide access to housing and other basic needs.
In addition to addressing environmental risks, credit unions can support affordable and sustainable green and clean solutions to environmental and climate challenges.
This includes working with industry leaders to help them reduce their carbon emissions, funding less carbon-intensive energy sources for homes and businesses, and connecting people who want opportunities. socially responsible investment with green projects located in low-income areas.
Other opportunities include funding projects that promote access to affordable housing, clean water, and healthy, affordable food.
NEXT: A fundamental consideration