Environmental, Social, and Governance (ESG) factors refer to key elements commonly used in assessing the sustainability and societal impact of an organization. Attention to ESG should not be used as window dressing or for crafting anecdotal stories devised to make a company appear environmentally and socially responsible. For credit unions, it goes well beyond stories. It truly encompasses a credit union’s mission of service to members, employees, the community, and other key stakeholders.
U.S. federal and state regulations currently do not require ESG reporting for credit unions or for public companies. For credit unions, certain states like California and New York, however, are increasingly paying attention to ESG factors, especially related to sustainability. Although not required, ESG reporting by companies is receiving increasing attention for financial institutions, whether public, private, or member owned.
An organization’s purpose describes the reason it is in business, and its values describe how it does business. For credit unions, sustainability, ethics, human capital development, and diversity to name just a few ESG values, are a way of life. Credit unions, as purpose and value- driven entities, are perfectly situated to integrate ESG factors into overall strategy and risk oversight to drive value creation. Credit union boards and senior management are well positioned to lead the way.
Even in the absence of required regulatory reporting, many ESG matters are surely already part of your business considerations. Environmental issues can involve reducing the credit union’s carbon footprint, and adopting policies in lending, investing, and education that support sustainability within the communities where your credit union operates. Smart managers are always focused on human capital development and employee practices, including health and safety, a real concern in times of Covid. Stakeholder and community issues are additionally important social aspects of ESG. Governance includes board diversity, business ethics, executive pay and transparency.
Management and the board together strive to integrate relevant ESG issues into the credit union’s overall planning. Moreover, many if not most ESG issues are integral to enterprise risk management discussions. Boards discern how strategy is shaped and risks are weighed as a fundamental fiduciary responsibility. The strategy, which involves important ESG components, is regularly reviewed by the board and its committees and embedded into the credit union’s operations. Many ESG issues are taken into account as important areas of measurement in senior management and board dashboards. Even though ESG issues are currently not part of the regulatory reporting regime, the trends are moving in that direction. By observing and measuring relevant ESG issues now, leadership not only gets the benefit of the strategic considerations associated with ESG, but they are also effectively preparing for a future where more accountability around these issues is most certainly to be expected.