FHLB Dallas Bankcast
FHLB Dallas Bankcast
A Conversation with Deloitte on Establishing an ESG (Environmental, Social and Governance) Strategy
Establishing an ESG (Environmental, Social and Governance) Strategy - A Conversation with Deloitte
The views expressed by our podcast, guests are their own and do not necessarily reflect the views of the federal home loan bank of Dallas.
Speaker 2:Welcome to bank has the federal home loan bank of Dallas Todd chats. Today we're talking about ESG. ESG is the latest buzz acronym. It stands for environmental, social, and governance, but what exactly is it? And how does it impact financial institutions? Particularly our members, banks, credit unions and insurance companies, companies of all sizes are increasingly under the microscope from regulators, shareholders, and others to run their businesses. According to an ESG approach, we'll hear today from two experts in ESG about how it impacts the financial services industry what's important and how to begin incorporating ESG into your daily operations in your future business strategies are Jared Wieland and Rushma Shaw from Deloitte. Mr. Whelan, a CPA is an ESG banking sector leader. His sustainability experience includes working with clients in the financial services industries on their sustainability assessments, benchmarking to peers, evaluating processes and implementation of reporting to meet ESG objectives. Ms. Shaw also a CPA is an engagement senior manager with a background in auditing financial services companies. Her sustainability experience includes working with clients on their data processes and controls, which has enabled clients to make data driven decisions, to improve operational efficiency, reduce costs and invest performance across a range of ESG metrics. Welcome Jared, and Rushma
Speaker 3:Thanks to me.
Speaker 2:So I guess we're going to dive right in. Let's start with the why, why should financial institutions such as our community bank, small regional banks, insurance companies, and credit unions consider implementing an ESG strategy?
Speaker 3:Sure. I'll take the first question. Uh, ESG strategies that our institution adopts can be in response to several factors, such as standards or regulations, stakeholder pressure, and the ESG risks affecting the organization. So let's look at each one of these from an overarching perspective. It's very important to understand that ESG risks are simply business risks and stakeholders are demanding visibility, accountability, and transparency. Currently there is limited, mandatory ESG regulation to manage these stakeholder demands. The ESG standard setters such as the sustainability accounting standards board or Saxby and task force on climate-related financial disclosures or TCFD are voluntary frameworks for ESG reporting. Having said that the sec does intend to leverage these frameworks and creating their own regulations. The sec has indicated that they will, that they do intend to make certain ESG climate disclosures mandatory. And that's that there will be industry specific considerations. Speaking of regulators and industry, the New York state department of financial services, or DFS is one of the first regulators to formally express a view on ESG. The DFS expects regulated entities to incorporate ESG risks into their enterprise risk management framework to increase visibility and accountability.
Speaker 2:Thanks, Jared. So this matter when it comes to ESG to small banks, insurance companies and credit unions need an ESG plan in short, if you're not publicly traded, why should you care about ESG?
Speaker 4:That's a really great question. Jamie. Remember when Jared said ESG risks or business risk? Well by extension ESG risks, don't only affect public companies. It affects every part of our economy, including small banks, insurance companies, and even credit unions. Even more importantly, these smaller organizations may have a collective reach equal to that of financial public institutions. Also the ESG issues affecting public companies also impact private companies. For example, conserving energy, using renewable energy and recycling can reduce costs and help the environment for all sizes of companies and all types of companies creating a diverse workforce or employees are valued and treated fairly can help attract top talent, improve morale and reduce turnover. Finally, the sec is in the process of drafting some ESG rules and has set the expectation that public companies accurately disclose ESG information and programs along those lines, investors and other stakeholders may naturally context that similar information from private businesses.
Speaker 2:It sounds like this is really affecting everyone.
Speaker 4:Absolutely.
Speaker 2:So given that, how does a financial institution without an ESG strategy get started?
Speaker 3:Sure. Uh, one of the first steps we see organizations undertaking is to form what's called a materiality assessment where you engage with your stakeholders inside and outside the organization to understand what their priorities are when it comes to ESG. You want to understand what they think is important that the organization pay close attention to or address by developing dedicated ESG strategies. For example, an insurer may think that procuring renewable energy is top of the agenda based solely on what's most popular in the news. However, given the nature of the industry stakeholders such as employees, customers, or even regulators might prioritize other topics such as an ESG investment policy after you prioritize what your material topics are, it's time to implement monitoring mechanisms, along with the strategies to address the previously identified material topics. What you can see, you cannot address not being able to measure the performance of your initiatives or programs can lead to the lack of progress, or may even prevent you from taking the next step, which is reporting public and private companies alike are subject to their stakeholders scrutiny. If you don't tell your story, somebody else will and disclosing your ESG performance is critical to telling your own story. Leading practices are to comply with applicable regulations, but also taking it to the next level, which is generally falling. One of the widely accepted standards of frameworks, such as the global reporting initiative GRI, or as previously mentioned the Saxby or TCFD, we're seeing an increased focus on attaining assurance over sustainability reporting either through a portion of the report, certain KPIs or the entire report.
Speaker 2:That's great information, Jaron. And sounds like there is a lot for companies to begin thinking about. You already mentioned both of you that there may be some regulations coming down the pipeline. What can you tell us about what guidance maybe in the future?
Speaker 4:Yes, there's a lot going on. The sec has indicated that it intends to propose rules on the topics of climate change, human capital management, corporate, or diversity and cybersecurity risk governance. We did expect a draft rule this month in October, 2021, but based on a recent speech by chair Gary Gensler, that rule making has been delayed. The sec has indicated that they will prioritize climate change. Companies should begin to prepare themselves for management, climate related and other disclosures. Since this regulated landscape for ESG disclosures will differ significantly from the current landscape of voluntary reporting to adapt to disclosure standardization companies will need to focus on improving data integrity and reliability by enhancing management processes and controls. At delayed. A leading practice we are seeing these days is for companies to set a minimum disclosure requirement. Regulators allow the use of existing ESG reporting standards and frameworks such as the SSP and TCFD to align their disclosures to
Speaker 2:Great information. Certainly something to be looking for too. In the next few months, we've talked a lot about the different standards, got a good introduction to ESG. It seems like the environmental portion gets the most media attention, but what's the most important of the ESG lens for a financial institution, the E the S or the G.
Speaker 3:Sure. And we've heard this question before, and it's a very good question and, and, you know, for an institution where to focus on, but you know, truly all the stools legs are important for financial institutions to address from an environmental lens, a bank and design a strategy to finance only clean energy initiatives and ensure it can commit to, to not underwriting coal-fired plants. From a social perspective, banks can work to make capital more accessible to under-banked communities. And from a governance perspective, banks can implement a set of processes and controls to help minimize ESG and business risks. This includes having the same rigor and level of internal controls around ESG, as you do around financial reporting, however, each leg can address a multitude of topics. That's why it's important to perform a materiality assessment, even within the same industry and or sector companies may prioritize ESG topics differently.
Speaker 2:So let's look at this from another perspective, if you were in an industrial climate, think Houston, the hub of oil and gas, how do you weigh meeting the E and the S with serving your customer? So for example, where, where we are located here in Texas and Louisiana hub for oil companies and cattle raising that, which produces lots of livestock emissions, it's big business. And if your customer has any industry, how do you reconcile the how and the why?
Speaker 4:That's really a great question. And we've spoken to many clients about this before every industry has a role to play within our modern society, as well as the opportunity to do right on the environmental and social funds, even for these industries, which some may perceive as not being ESG Ford companies can find value in managing their ESG risks. Some of the areas for added value or brand differentiation, such as being known in the marketplace as a leader value is also driven by innovation. And if you're finding ways that ESG can drive more efficient and valuable processes, for example, here at Deloitte, we are purchasing sustainable aviation fuel. Since this deal is less harmful to the environment, it helps us reduce our own emissions. This is an example of using an innovative approach to being more efficient, related to innovation is operational efficiency where you can use dimensions of ESG to minimize costs such as reducing energy or water waste here at delight. For example, we were one of the largest us corporate travel buyers of airline tickets a few years ago now because of our ESG goals and lessons learned from the pandemic. We have a cold cut business travel for each employee by 50% by 2030 capital access is also a consideration for some where there is a potential increased access to capital, as well as a lower cost of capital. To those who demonstrate positive ESG considerations value can also be driven by risk mitigation. For example, by integrating ESG into erm, systems you can minimize or avoid costs as well as minimize and avoid loss revenues, which ultimately leads to higher valuations. And maybe one of the most important areas in the marketplace today is talent, attraction and retention. We have talked to many organizations where this is an important growing priority. This current battle for talent is really becoming a differentiator because professionals want to work for organizations whose values align with our own. This is really an opportunity of where having a clear position on E and S and G and telling your story can help attract and retain talent,
Speaker 2:Great response to restaurant. So we've talked a lot about the positives of ESG from that you just in innovation, Jared mentioned addressing under-banked communities, talent, attraction, and retention, but what's the downside to bank. What's the, is it risk? Is it cost? What should companies be concerned about if they head down this path?
Speaker 3:The main concern should really be not addressing ESG risk, which could ultimately end up costing the organization. Inaction may lead to further scrutiny from stakeholders and quick companies in our regulatory bind investors are putting emphasis on timely and transparent disclosures that correlates with what we're seeing from capital markets participants, such as investors, lenders, credit, rankers, who are increasingly integrating ESG information into decision-making the downside to not address ESG risks is missing out on an op on the opportunities when investors are attracted to other organizations that are focusing on ESG.
Speaker 2:So as we wrap up today's podcast and you have both shared some, some great things that our members and our other listeners can be thinking about, can you share with us some of the resources that are available to our community financial institutions or other listeners as they consider whether to, and how to implement an ESG framework?
Speaker 4:Yes, absolutely. Our latest publication on ESG and financial services is called how financial services can use ESG initiatives to help build a brighter future for all. We can provide the link to this publication, so it can be attached to the podcast notes. In addition, following Jared and myself, um, on LinkedIn, where we always share the latest updates and thought where on ESG, thank you, Jamie, for the opportunity to discuss ESG with you and your team and your members and the broader community, we hope you found it helpful and definitely reach out if you have any further questions.
Speaker 2:Thanks so much to both of you rush my aunt Jared. So this concludes our edition of bank has thanks to all of you out there for listening. Rushman Gerry. Thank you again so much for sharing your expertise on this subject.