ESG: a three-letter abbreviation we’ve added to our lexicon in the last couple of years. The concept of ESG – which stands for Environmental, Social, and Governance – has been around since the 1960s, and has gained momentum, thanks in part to an increased social awareness of the concept and subsequent discourse.
ESG has become somewhat of a polarizing issue, with some groups calling for increased disclosures and action by public companies from their investors, shareholders, and other stakeholders; and others circulating anti-ESG legislation in the form of prohibitions on financial institution discrimination against certain industries.
It’s become a complicated game of tit for tat. In the last several years, as public companies have developed pro-ESG policies in opposition to state leaders’ political beliefs, new legislation has been proposed to require divestiture from companies that institute ESG policies.
States have also proposed fossil fuel industry discrimination legislation in the same form. These bills prohibit business decisions by financial institutions based on standards such as social media posts, participation or membership in any clubs or associations, political affiliation, employer, or other social credit, environmental, social, or similar values-based criteria.
On the pro-ESG side, there have been proposals focusing on either additional taxation for lending to climate risk entities or promising tax breaks for financial institutions not lending and supporting these industries.
Collaborative Efforts Resist ESG
The Heartland Institute and the Texas Public Policy Foundation have worked with ALEC to advance legislation and model policy barring state officials from dealing with businesses moving away from fossil fuels or considering climate change in their investments. Additionally, Texas enacted legislation in May 2021, SB 13, that prohibits Texas from investing in ESG financial products that boycott Texas energy companies.
A group of 15 state Treasurers sent a letter to the banking industry signaling their intention to pursue legislation to divest and prohibit future investment and interaction with financial institutions that boycott the fossil fuel industry. Twenty-four bills have been introduced in statute legislatures this year addressing ESG considerations.
No Federal Regulations for Credit Unions…Yet
While on a federal level, credit unions do not yet have any reporting requirements to hold our feet to the fire on ESG, we are not exempt from the discussion. Some states such as California and New York are asking credit unions for information on certain ESG issues. In 2021, NCUA released its 2022-2026 draft strategic plan and asked credit unions to consider adjustments to their fields of membership as well as the types of loan products their offer if they serve a large farming community.
According to the NCUA, “changing weather patterns will disproportionately affect farming communities. Over time, climate change will likely affect the value of collateral, including homes and vehicles. To remain resilient credit unions may need to consider adjustments to their fields of membership as well as the types of loan products they offer. Efforts to combat climate change will likely give rise to new regulations, potentially increasing costs for credit unions as they adapt and respond.”
After receiving feedback from credit unions and leagues, the agency updated its language, clarifying that it does not intend to micromanage credit union lending decisions for climate-related financial risk and that nothing in the strategic plan should be construed as discouraging activities related to agriculture or fossil fuels.
Recent Report Reveals Importance of CU ESG Focus
A recent report released by Ceres and the Filene Research Institute reveals that thousands of U.S. credit unions have significant unaddressed risk arising from the climate crisis.
The report, The Changing Climate for Credit Unions, found that more than 60% of all credit unions—and at least $1.2 trillion in credit union assets—are at physical risk from climate change.
According to Ceres and Filene: “They face growing risks from extreme weather events including fires, floods, hurricanes, and increased transition risk, such as changes in regulation, technology, as well as legal and reputational risks.”
Steven M. Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at Ceres, said that underserved communities are particularly vulnerable to the rapidly changing climate.
“There are challenges and opportunities facing the credit union industry, both now and in the future,” he said. “We hope that every credit union staff member, manager, director, and regulator will use this report and the recommendations we have outlined as a guide to inform their approach to addressing climate risk and protecting the financial savings of their members.”
The report also warns that a credit union’s assets would be less diversified due to a geographically constrained field of membership.
“There is a wide range of perspectives among credit unions about how best to prepare for climate change, and climate change may not currently be at the top of the pile of strategic concerns at most credit unions,” said Taylor Nelms, senior director of research at Filene Research Institute. “This report shows that it should be, because climate change poses great risks to credit union balance sheets and offers great opportunities for credit unions to differentiate, grow, and meet emerging consumer demands.
Stick to the Strategic Plan…and The Golden Rule
At the end of the day, financial institutions should be able to determine who they do and do not do business with based on their own business plans and strategies without the government creating a new protected class of business. The values to which credit unions ascribe align naturally with ESG principles. Doing the right thing has always been our guiding light.
We as credit union people should strike a balance: hold space for intentional, socially responsible business practices while uplifting our communities by providing financial well-being for all. As the ESG tennis match continues, I will call upon some wisdom that was instilled in me early in life: Do unto others as you would have others do unto you. Apply this to ESG, and I think we have a pretty good plan.