utah.bank 14 Public and regulatory expectations regarding climate change and other environmental, social, and governance (ESG) issues are rapidly changing. The largest banks have made climate commitments, pledging hundreds of billions of dollars to sustainable finance. While the larger financial institutions have adopted ESG reporting and practices, this is expected to apply to community financial institutions in the coming years, as regulation trickles down to smaller institutions. Due to the speed of change of these expectations, executives and boards in community financial institutions can no longer take a “wait and see” approach and should invest in learning and applying ESG factors in their institution. ESG & CLIMATE CHANGE ARE REGULATORY HOTBUTTON ISSUES The importance of climate risk and other ESG factors was a common topic for regulators during 2021. In October 2021, the Financial Stability Oversight Council released its Report on Climate-Related Financial Risk, which identified climate change as an emerging and increasing threat to U.S. financial stability. The report includes recommendations for more regulatory action to address this threat. The Securities and Exchange Commission (SEC) has been busy in the past year working on proposed mandatory climate disclosure rules for public companies, which it plans to issue in early 2022. It is unclear whether the climate disclosure rules will require disclosure of Scope 3 emissions, including emissions from certain financed projects. In an Oct. 7, 2021, speech, the Federal Reserve discussed the development of climate scenario models to assess the effects of climate-related risks on financial institutions and the financial system, with differentiation by region and economic sector. On Dec. 16, 2021, the Office of the Comptroller of the Currency (OCC) issued for comment its draft Principles for ClimateRelated Financial Risk Management for Large Banks. Large banks are OCC-regulated institutions with more than $100 billion in total consolidated assets, including national banks, federal savings associations, and federal branches or agencies of foreign banking organizations. The draft climate principles provide a framework with six key aspects for climate-related financial risk management, including: • Governance • Policies, procedures, and limits • Strategic planning • Risk management • Data, risk measurement, and reporting • Scenario analysis These are the latest examples of increased regulation expected in the coming years to meet the Biden administration’s goals of reducing net greenhouse gas emissions by at least 50% below 2005 levels by 2030 and a net-zero economy by 2050. WHAT FINANCIAL INSTITUTIONS SHOULD DO TO PREPARE FOR REGULATORY SCRUTINY ESG factors should be seen within the context of strategy and core operations, as ESG factors are enterprise-level considerations. Strategic plans and business models should be evaluated to identify potential threats related to climate risk and other ESG factors. Climate risks include the direct physical WHY FINANCIAL INSTITUTIONS SHOULD EMBRACE ESG By Steve Wilkerson and Dirk Cockrum, BKD CPAs & Advisors
RkJQdWJsaXNoZXIy MTU2MTQwNg==