Environmental, social, and governance (ESG) is more than a buzzword. ESG has gained increasing traction globally as a way to gauge an organization’s profitability, environmental sustainability, and social impact.
Major institutional investors now expect companies to commit to ESG criteria, and regulators are putting rules in place to hold publicly traded companies accountable for the effect their activities have on the climate. At the same time, policymakers in more states are trying to discourage companies from using ESG metrics.
Focus
- Environmental, social, and governance (ESG) factors are growing in importance due to increased regulatory scrutiny and consumer demand.
- Mounting evidence suggests a high commitment to ESG correlates with stronger financial performance.
- Board focus: Sound governance is fundamental to a credit union’s ability to fulfill its mission of serving its member-owners.
While its origins are in sustainable investing, ESG is becoming increasingly important in financial services because:
- Regulators and policymakers are paying attention to it.
- Consumers, especially young adults, and employees increasingly demand more equitable, ethical, and sustainable organizations.
- The discipline represents a set of risks and opportunities that are becoming more salient for financial institutions.
Credit unions can use ESG as a competitive differentiator and as a means to deepen Financial Well-being for All™ and advance the communities we serve.
From a macro perspective, ESG represents an approach toward a more holistic and balanced approach where businesses 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 connections between good governance, environmental sustainability, and social responsibility.
ESG factors were previously considered outside the purview of traditional corporate responsibilities. But a transformation has occurred over the past couple of decades. Outside of government mandates, many companies have begun to work with stakeholders to address issues of mutual concern.
The pandemic, social unrest, and environmental and climate-related events have added to the pace of change. According to Korn Ferry, 86% of employees and consumers want to see a more equitable and sustainable world post-pandemic, and 43% of employees are reconsidering their current jobs because their employers aren’t doing enough to address social justice issues.
Mounting evidence suggests a high commitment to ESG is correlated with stronger financial performance by attracting top talent and customers and reducing costs (e.g., lower energy consumption) and regulatory and legal burdens, McKinsey & Co. reports.
In this context, it’s not surprising that ESG and sustainability considerations are increasingly incorporated into organizations’ strategies, risk calculations, performance metrics, 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 credit unions explicitly consider both environmental risk mitigation and ways to maximize environment/climate-related opportunities in their strategies, planning, and metrics.
Credit unions know the environmental and climate risks well. When natural disasters and weather events hit, they are often among the first responders for their members, staff, and communities.
Credit unions have been taking these issues into account since our formation as we continue to make loans to farmers and ranchers, as well as small businesses, across the nation.
Nevertheless, we can do more by, for example, proactively managing these risks and doing more to take advantage of opportunities to expand our portfolio of green lending 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 stress and injury to employees, members, and the community is reduced.
Environmental events can result in economic disruption, infrastructure damage, loss of assets, and health impacts for members, which affect how they engage with their financial institution. Often the impact hits the most vulnerable populations hardest.
This means credit unions must be prepared for delayed payments, loan defaults, and the need to provide emergency financing to rebuild homes or provide access to shelter and other basic requirements.
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 reduce their carbon emissions, providing financing for less carbon-intensive energy sources for homes and businesses, and connecting individuals who desire socially responsible investment opportunities to green projects located in low-income areas.
Other opportunities include financing projects that support access to affordable housing, clean water, and affordable and healthy food.
NEXT: A fundamental consideration
What is ESG?
Environmental, social, and governance (ESG) metrics are interconnected. An organization can’t move the needle on the environment without impacting people and communities, and it takes good governance to advance change in these areas:
Environmental factors consider how well an organization safeguards and is impacted by the environment (e.g., an organization’s energy use, waste discharge, and recycling; and its impact on the environment, climate change, greenhouse gas emissions, water scarcity, and deforestation).
Social factors consider relationships organizations have with people and communities, as well as organizational practices that have a social impact on both (e.g., diversity, equity, and inclusion; working conditions; workplace health and safety; supplier diversity; well-being; and impact on vulnerable and marginalized communities).
Governance factors consider an organization’s internal system of practices, controls, and procedures for governance, decision-making, compliance, and meeting stakeholder needs (e.g., leadership and leadership diversity, executive compensation, board diversity and structure, ethics, and risk management).
