How will ESG regulations and policy impact US banks?

Exploring the impact of upcoming ESG regulations changes on the US banking model was the subject of BNP Paribas’ “Banking in a Changing World” webinar.


Stakeholders and policymakers both in the US and globally are taking a more active stance on accounting for environmental, social and governance (ESG)-related risks in business models, prompting banks to increase their focus on the topic. Exploring and anticipating upcoming regulatory changes and the impact they could have on the US banking model was the subject of the “Banking in a Changing World” webinar, hosted by BNP Paribas Financial Institutions Coverage Americas in late March.

US policymakers change course on climate risk

The new US administration is taking a resolutely proactive position on climate change, and this is filtering down into the various regulatory agencies, said Lauren Anderson, Senior Vice President and Associate General Counsel at the Bank Policy Institute (BPI), a nonpartisan public policy, research and advocacy group that represents the nation’s leading banks.

Anderson pointed to the Securities and Exchange Commission’s (SEC) recent informal consultation on climate change-related disclosures, as well as the Federal Reserve’s creation of both a Supervision Climate Committee (SCC) – looking at the micro-prudential aspects (individual bank regulation and supervision) of climate change – along with a Financial Stability Climate Committee (FSCC), focusing on the macro-prudential aspects, including the potential for climate-generated economic shocks.

“The Federal Reserve started its review into ESG slowly and methodically, focusing on topics such as risk management, governance and scenario analysis,” Anderson said. “In contrast, we have seen the SEC come out of the gates quickly on ESG disclosure, but the rulemaking process will also take time. In particular, it is critical that different agencies coordinate and work together so that their rules dovetail without conflicts.”

Climate change will affect US banks differently depending on their respective business models, sectoral exposures and geographic exposures, said Anderson. The Federal Reserve is aware of this challenge, which is why it is proceeding in a cautious manner, she added. Anderson also noted that the Department of Labor would likely revisit rules introduced under the previous administration, which make it a fiduciary obligation for pension fund managers to consider ESG issues solely on pecuniary factors.

The global pivot toward ESG

A number of international coalitions and organisations are also actively involved in promoting ESG standards. Organisations such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Financial Stability Board (FSB) are underlining the importance of climate risk management for banks, said Linda French, former Assistant Chief Counsel at the Investment Company Institute (ICI), an association representing regulated funds globally.

Both market participants and policymakers are increasingly implementing the reporting framework for climate-related disclosures designed by the FSB-convened Task Force on Climate Related Financial Disclosures (TCFD). However, as standards and frameworks develop around the world, the risk of differences between the US approach to ESG and that of the European Union increases.

“While the US is concentrating on climate-related business risk disclosure, the EU is also focused on how businesses are impacting society and the environment. Ideally we’ll see some level of global convergence on at least a baseline of climate risk disclosure,” said French.  One issue that could potentially impair climate risk reporting by US banks and corporates is the fear that added disclosures could increase liability, she noted, adding that concerns about litigation risk will need to be addressed.

A changing banking model

Banks are making tangible progress on ESG, with a number of US banks recently announcing commitments to reach net zero emissions, said Mark Howard, Senior Multi-Asset Specialist at BNP Paribas. Howard opined that the banks quickest to embrace ESG practices would be net beneficiaries. He added that regional banks have a compelling opportunity to promote local social issues, which would enhance their standing in their communities.

When asked if ESG is affecting enterprise valuations, Howard explained: “It always has in a sense, but with new disclosures and data capture, the world is more focused on [ESG] and it’s having a larger impact.”

An enterprise-wide approach

Anderson concluded her comments by noting that banks need to take this issue seriously and in an enterprise-wide manner, with buy-in from the top of the organisation and across individual businesses.

Hervé Duteil, Chief Sustainability Officer, BNP Paribas Americas, and moderator of the panel, closed in similar vein, pointing out that financial institutions that were among the first movers on ESG and sustainability will clearly reap the rewards over the long run.

Suggested reading
Market Trends
Sparking a clean energy revival in the US
Market Trends
Sparking a clean energy revival in the US