Issue 1. 2022 15 risks of climate change on assets, e.g., a portfolio of mortgages in coastal properties at risk of f looding, and the transition risks: e.g., a concentration of loans in high-emitting sectors. The financial institution’s loan portfolio should be analyzed by industry to determine whether there is a concentration of industries with high transition or physical climate-related risk. Financial institutions also should plan for how to introduce ESG and climate risk into risk management processes, such as: • Capital allocations • Loan approvals • Reserve allocations • Portfolio monitoring • Reporting Having a strong climate risk management system also can assist financial institutions in underwriting loans for projects related to climate change, such as: • Energy efficiency • Renewable energy • Carbon capture, use, and sequestration (CCUS) • Electric vehicles and charging stations Financial institutions should be prepared to discuss climaterelated issues and provide documentation of ESG and climate risk considerations with their regulators. Regulators are soliciting information from financial institutions to gain knowledge of bank and credit union efforts to measure and monitor ESG and climate risk. The primary goal of these efforts is to establish the infrastructure to help make the financial system more resilient to climate-related financial risks. RECOMMENDED BOARD CONSIDERATIONS Boards should assess stakeholder ESG expectations, which are likely to vary by financial institution based on various factors, including the expectations of the customer base. Executives and board members should build awareness of ESG best practices and consider how the organization’s strategy can be tied to ESG factors. The board should determine whether the organization has the information and expertise to assess ESG risks. Boards should then discuss with management whether ESG information is to be reported, what reporting frameworks are to be used, and why. The reliability of ESG data and the communication plan needs to be considered. Since executive sponsorship of ESG initiatives is vital to a successful ESG program, the board should discuss what accountabilities are needed to be set for ESG-related performance. The National Association of Corporate Directors has an ESG resource center, especially for board members on its website; ESG reporting questions that directors should consider include: • What ESG story do our website and our disclosures tell about the organization? ❒ Does that story resonate with existing and potential investors, employees, customers, regulators, and other stakeholders? ❒ How does the organization’s ESG messaging compare to peers, leaders in the industry, and competitors? • Is our ESG reporting satisfying the needs of investors, customers, and other stakeholders? ❒ What is management’s process for engaging and understanding the expectations of ESG stakeholders? • What are the organization’s ESG initiatives, and who are the executive sponsors for each ESG initiative? ❒ How and when do the executive sponsors receive ESG performance reports for each ESG metric? ❒ Is ESG performance integrated with financial and operational performance monitoring, so ESG performance gets C-suite attention? • What are the organization’s controls and procedures for ESG metrics and reporting? ❒ Is the internal audit function checking the fair presentation of the underlying data? ❒ Is an independent auditor providing attestation of the ESG data and disclosures? On Nov. 8, 2021, the acting head of the OCC issued the following climate questions for bank boards to ask: • What is our overall exposure to climate change? • What counterparties, sectors, or locales warrant our heightened attention and focus? • How exposed are we to a carbon tax? • How vulnerable are our data centers and other critical services to extreme weather? • What can we do to position ourselves to seize opportunities from climate change? A one-size-fits-all ESG program does not exist because every organization faces unique risks and circumstances. Visit BKD’s ESG webpage to learn about the four-phase process to develop an effective ESG program. n This article is for general information purposes only and is not considered legal advice. This information was written by qualified, experienced BKD professionals, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult your BKD advisor or legal counsel before acting on any matter covered in this update. Article reprinted with permission from BKD CPAs & Advisors, bkd.com. All rights reserved. Executives and board members should build awareness of ESG best practices and consider how the organization’s strategy can be tied to ESG factors. The board should determine whether the organization has the information and expertise to assess ESG risks.
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