In recent years, environmental, social, and governance (ESG) initiatives have been adopted in response to stakeholder interests in environmental sustainability, social issues, and corporate governance. The Center for Audit Quality (CAQ) noted that approximately 95% of public companies disclosed ESG in some form in 2020.
However, debates continue about ESG significance and impact. A 2024 survey of institutional investors, not specifically related to financial services, was conducted by the MSCI Sustainability Institute and Stanford University’s Graduate School of Business. Roughly 78% of respondents indicated that they believe incorporating ESG into investment decisions can reduce risk, 61% believe it can lessen volatility, and 80% believe it impacts financial performance. A deeper dive into responses identifies the respondents’ perceived priorities:
- Environmental. Climate change issues and how a company addresses them were the top medium- to long-term concern, with 78% of investors factoring it into their investment decisions.
- Social. Leadership and workforce diversity were the lowest on the list of priorities.
- Governance. Traditional shareholder value was the No. 1 short-term governance priority. The top five concerns respondents cited: board structure (72%), ownership structure (72%), board diversity (65%), quality of financial reporting (57%), and board chair independence (50%).
ESG Initiative Oversight: Where Should a Board Focus?
The board plays a critical role in overseeing ESG. Key areas of responsibility include:
- Board Governance Structure: Defining this structure is critical to ensure ESG is integrated into the overall corporate strategy.
- Board Agendas: With increased interest from investors, customers, and other stakeholders, ESG will likely need to be a standing board agenda item.
- Stakeholder Engagement: Understanding stakeholders’ views on ESG issues and how best to incorporate them into the institution’s ESG strategy is important for effective governance.
How Can a Board Improve a Bank’s Incorporation of ESG Initiatives?
The board’s role in ESG oversight involves a strategic approach to governance, risk management, and stakeholder communication. Thoughtful consideration of the answers to these questions will guide the board in the creation of a structure to increase transparency, accountability, and ethical practices, and ensure ESG matters are incorporated into the institution’s core strategy and operations:
- How do your ESG strategies realistically compare to your peer group?
- How will you meet environmental “net zero” impact promises?
- Do current products need to be revamped to accommodate an ESG perspective?
- Do ESG concerns and initiatives consider your bank’s processes, functional decisions, systems, and controls for current and in-development products and services?
- Are plans in place to anticipate potential ESG regulatory and compliance requirements?
- Is your bank measuring, reporting, and disclosing non-financial and risk-related ESG information? If not, what’s the plan?
Rehmann can help your financial institution and its board members navigate the changing ESG environment by assessing and benchmarking your bank’s internal ESG policies, procedures, and governance. We can also assist with data collection and reporting to help your team identify opportunities to enhance its overall ESG strategy. Contact your Rehmann advisor or reach out to Kristy Clark, a principal specializing in risk advisory at Rehmann: [email protected] or 248.952.5000.
