The Securities and Exchange Commission wants to require public companies, including stock banks, to disclose climate-related risks to their businesses. But the impacts could be felt more broadly in the financial industry.
As the federal government moves closer to requiring publicly traded companies, including stock banks, to disclose information related to climate change, other banks and even credit unions could feel the effects.
The Securities and Exchange Commission has proposed a rule that would require public companies to take a standardized approach to disclosing climate-related risks to their businesses and other related information, a move the SEC said would give investors more consistent, comparable and reliable information. The agency has also said its Examinations Division will focus considerable efforts this year on analyzing public companies’ broader claims to investors who weigh firms on the basis of environmental, social and governance factors.
Since credit unions and most Connecticut-based banks are not publicly traded, the proposed rules would not apply. But as investors and consumers become accustomed to climate disclosures, other organizations could face pressure to start sharing information about their environmental, social and governance initiatives, including those involving climate change.
For some financial institutions, operating in Connecticut – the first state to pass legislation creating a green bank more than a decade ago – has provided opportunities to launch or augment environmental initiatives.
“We got an increased awareness about green lending and managing our carbon footprint in the area once we got connected with the [Connecticut] Green Bank,” said Jeffrey Tracey, vice president of lending at Shelton-based Mutual Security Credit Union.
Some Lending to Be Scrutinized
A consumer survey by Virginia-based research firm Rockbridge found that 68 percent of respondents said they like to do business with companies that are environmentally responsible. But consumers do not want companies to just say they are environmentally responsible. The study found that 72 percent of survey respondents wanted companies to be sincere in their message.
The SEC proposal would give investors, ratings agencies and institutional investors information that they could use to better understand and make decisions about companies, including through enhanced or new valuation models, said Maura Hodge, the ESG audit leader with KPMG IMPACT in Boston.
“Even though many companies are starting to report more, the level and the quality of that information is generally not high,” she said. “These proposals … are going to force companies to up their game and really increase and enhance the way that they think about and talk about climate-related risks and opportunities.”
The SEC’s nearly 500-page proposal was released on March 21, and the agency is accepting public comments until June 17 before finalizing the rules. The rules would apply to public companies and those going through an initial public offering, though some businesses, including smaller ones, would not be subject to all requirements.
Under the proposal, firms would typically have to provide specific metrics and disclosures on financial statements, including the impact of climate-related risks. They would also have to report – and have an auditor confirm – the company’s direct greenhouse gas emissions, known as “scope 1 emissions,” as well as “scope 2 emissions,” which involve sources for the company’s power supply. Some companies would also report on “scope 3 emissions,” which cover supply chains and, in the case of banks, could include investment and lending relationships.
Other disclosures are similar to guidelines released five years ago by the global Task Force on Climate-Related Financial Disclosures, created by the Financial Stability Board, that help companies assess their exposure to climate risks and provide this information to investors. And companies that have already taken steps to mitigate these, such as scenario analyses or establishing plans to transition away from carbon-emitting power sources, would have to disclose this information.
“The absence of that disclosure indicates or implies that you as an organization haven’t done it, and maybe you aren’t necessarily taking climate risks as seriously as others,” Hodge said.
Of the four publicly traded banks based in Connecticut, Webster Bank, Patriot Bank and Salisbury Bank mentioned climate change at least once in their SEC Form 10-K, the annual report released earlier this year. Only New Canaan-based Bankwell did not reference climate change.
The SEC climate proposal could expand Form 10-K by 20 pages, Hodge said. Because Bankwell, Patriot Bank and Salisbury Bank qualify as smaller reporting companies, according to their annual reports, they will likely experience less of an impact.
Banks Grapple with Multiple Angles
Boston-based Berkshire Bank, which has branches in Central and Eastern Connecticut, began formalizing an ESG program in 2018 in response to questions from stakeholders – customers, communities, shareholders and investors – who wanted to know more about what ESG would mean for Berkshire and its role in the communities it served, said Gary Levante, the bank’s vice president and corporate social responsibility officer.
Under CEO Nitin Mhatre and his predecessor Richard Marotta, the bank has since worked to make corporate social responsibility a core part of its brand. And Berkshire Hills Bancorp, the bank’s parent company, added a two-page “Corporate Responsibility Update” to its latest annual report, and included a section on climate change.
As it reviews the SEC proposal, Levante said Berkshire is taking a multi-layered approach, considering what the proposed rules would mean for the bank as a business, for its investors and for communities.
Berkshire views the SEC proposal as a welcome opportunity to provide a clear framework for climate reporting, Levante said. But he added that the proposal will come with implications for banks, including costs to compete for and hire skilled staffing to manage the reporting; operational changes to build climate-related programs and strategies to address the effects on business; and costs to calculate all three levels of greenhouse gas emissions.
Beyond the SEC requirements, Levante said, banks might also need to consider other regulations, including the Community Reinvestment Act if a low- and moderate-income community overlaps with an area at risk from climate change.
Even before the SEC released its proposal, some large and regional banks have collaborated on exploring the risks banks face from climate change, including through consortiums launched by the Risk Management Association. Stamford-based Webster Bank is a founding member of the RMA Regional Bank Climate Risk Consortium.
While developing ESG programs will be a focus for publicly traded banks preparing to comply with climate disclosure rules, other institutions could eventually see their operations affected as well.
“I do think that even private companies will have some or much of [the proposed rules] to comply with as well, if nothing else, the greenhouse gas emissions reporting and potentially the financial information,” KPMG IMPACT’s Hodge said.
Customer Interest on the Rise
Until the SEC proposal – and perhaps other climate rules bank regulators might introduce – has been implemented, though, its effects on other types of banks will not be felt right away, said Chris Roughton, a manager in the business technology advisory practice at Baker Newman Noyes, who works with small and midsized enterprises.
But community financial institutions have started to ask about the potential impacts of climate reporting, he said.
Community financial institutions have also seen interest in how they manage ESG and climate change from depositors, borrowers, community organizations and municipalities, Roughton said. nternally, he added, employees and boards are also looking to understand what banks are doing about climate change.
Assessing the priorities for the bank and all stakeholders – including communities and shareholders – was a key starting point as Berkshire went through the process of developing an ESG program.
“That process really helped Berkshire build our program from the ground up in a very intentional way,” Levante said. “We were focused on areas of concern in our community where we knew we could have the most material impact, so having that very thoughtful strategy is ultimately what is helping drive forward our program.”
Bank leaders also found value in building its ESG strategy into the bank’s everyday business, he said, instead of centralizing it in one department.
Roughton said he has heard some skepticism from mission-driven companies about ESG and climate disclosures because they are already engaged in the community and perhaps even reporting on their initiatives.
“Where this ESG movement is going toward really is about comparability and usefulness for customers, for investors as they look at: Where am I putting my money?” he said.
Existing Regulations Can Help
Community financial institutions might find that some of these standards are similar to what they are already doing, Roughton said, noting that these institutions should take credit for the efforts already taken while trying to understand where more work is needed.
Jeffrey Tracey, the vice president of lending with Mutual Security Credit Union, said the credit union’s aggressive approach to adopting digital lending processes had benefits from an environmental perspective in reducing paper. The DocuSign platform even provides data on printed pages eliminated, Tracey said.
Participating in the Connecticut Green Bank’s lending program for energy efficient home improvements helped build the credit union’s interest in climate-related initiatives, Tracey said, adding that MSCU offers educational seminars for homeowners and contractors about financing energy efficient projects.
The credit union has also developed its own products for projects that might not meet the Green Bank’s requirements but would still contribute to energy efficiency, Tracey said, and MSCU has added solar panels to a branch it owns.
Part of the credit union’s mission around climate change also involves ensuring that Western Connecticut’s diverse population has equitable access to energy efficient improvements, Tracey said.
“A huge focus for us is how we can provide sustainable energy that’s affordable to all communities,” Tracey said. “That’s what’s really meaningful to us as a credit union – it’s really about that community impact and really helping elevate the standard of living.”
