American Bankers Association Critical of Environmental, Social, and Governance

The global move toward Environmental, Social, and Governance (ESG) has generally enjoyed favorable press.  However, based on a recent letter, some bankers are expressing their concern that ESG policies are overstepping boundaries when it involves lending matters.

While the “Environmental” in ESG is broadly environmental (ecology, habitat, pollution, etc…), in recent years, the focus has been more climate related.

Biden Executive Order

ESG became part of our lexicon in the early 2000s; however, in recent years and certainly, under the Biden Administration, it has exploded.  In a February 19, 2021, document by Harvard Law School (ESG and the Biden Presidency), they state, “…we expect the administration of President Joseph Biden to implement a broad range of policy changes meant to mitigate climate risk and bring the US back into the global sustainability conversation.”  Later in the same article, they state, “Biden has pledged $2 trillion to help the US meet sustainable targets and improve infrastructure to be more environmentally sound.”

Just seven days after taking the oath of office, on January 27, 2021, President Biden issued Executive Order 14008 (EO) on “Tackling the Climate Crises at Home and Abroad.”

Climate Finance Plan

In this lengthy document, the EO states the following, “The United States will also immediately begin to develop a climate finance plan, making strategic use of multilateral and bilateral channels and institutions, to assist developing countries in implementing ambitious emissions reduction measures, protecting critical ecosystems, building resilience against the impacts of climate change, and promoting the flow of capital toward climate-aligned investments and away from high-carbon investments” (emphasis added).

The EO as well as other policies of the Biden Administration make it clear that the whole of the US Government will institute changes to support the commitment to reduce anthropogenic greenhouse gases.  In some cases, these policies reach beyond the US border.

Department of Treasury Focus on Paris Agreement

Much of the focus by financial institutions has been on “decarbonization” (as promoted by the United Nations) and pushing lending activity toward green energy.

Last August, the Department of Treasury issued a statement that said in part, “Today, the U.S. Department of the Treasury issued Fossil Fuel Energy Guidance for Multilateral Development Banks (MDBs), which is key Guidance in response to President Biden’s Executive Order 14008 on Tackling the Climate Crisis At Home and Abroad announced earlier this year. In its Guidance, Treasury advocates for MDB investments prioritizing clean energy, innovation, and energy efficiency, which will help achieve a clean and sustainable future consistent with the development goals of the Paris Agreement.”

Multilateral development banks or MDBs are international institutions that provide financial assistance (e.g., loans and grants) to developing countries to promote economic and social development.  The United States is a member and significant contributor.

Further, outside of the US, banks across the globe have made similar commitments.

Net-Zero Banking

Several banks signed the United Nations Environmental Program “Net-Zero Banking Alliance.”  Members sign a commitment statement that states in part, “…transition all operational and attributable GHG emissions from our lending and investment portfolios to align with pathways to net-zero by mid-century, or sooner, including CO2 emissions reaching net-zero at the latest by 2050, consistent with a maximum temperature rise of 1.5°C above pre-industrial levels by 2100.”

Last fall, there was a bill called the Fossil Free Finance Act designed to steer financial support away from oil, gas, and coal.

In the midst of the current flurry of activity, there has been some dissent regarding the role of ESG and government “interference” in lending practices.

American Bankers Critical Letter

On June 23, 2022, the American Bankers Association sent a letter to several in Washington D.C. including the Board of Governors of the Federal Reserve, the Secretary of the Treasury, The Federal Deposit Insurance Corporation, and the United States Security and Exchange Commission.  See: The impact of Environmental, Social and Governance guidance and regulatory proposals on banking.  The letter states in part:

“The undersigned bankers associations write to reinforce our longstanding view that bank supervision, and other purportedly neutral government requirements like disclosures, must not become a means of allocating capital or implementing unrelated policy preferences.  As Environmental, Social and Governance (ESG) guidance and regulatory proposals proliferate, they are often cast as flexible, non-binding, or targeted to certain segments of the market, while allowing for long transitions.  In reality, the individual and cumulative effects of these agency actions have the potential to be acute, widespread, and anything but neutral.  There is growing concern from our member banks about the impact those efforts may have on their continued ability to provide critical financial services to the customers and the communities they currently serve.”

“Our basic principle is simple: Banks should be free to lend to, invest in, and generally do business with any entity or activity that is legal, without government interference.  Banks should also be free not to lend, invest, or otherwise engage so long as they do not violate fair lending or other anti-discrimination laws.  This free-market approach has given this nation the strongest and most resilient financial system in the world, and the increasing efforts by policymakers from all sides of the political spectrum to intervene in the intermediation of capital risks undermining that system.”

“Policymakers play an important role in addressing national and global challenges, but banks should not be used as proxies to effectuate environmental or other social policy goals” (emphasis added).

Commentary

Having worked in the environmental field for more than 40 years, I have seen a lot of changes in the ways companies “do business,” mostly in a positive way.  Additionally, being a provider of environmental assessments to clients and lenders, I have seen the way lenders evaluate environmental risks relative to their lending policies.  In my opinion, the assessments that I provide allow a lender to get a good glimpse as to whether they are dealing with a “healthy,” well-run company or not.

Although my assessment is focused on environmental, issues such as poor housekeeping, “dirty” working conditions, poor or lacking documentation, to name but a few, tell lenders a lot about a company’s ESG – even if it is not called that.  It has been my experience that it is more difficult for a poorly run company (regardless of the industry) to get financing.

Companies are already regulated with respect to environmental compliance, employee hiring and working conditions, and financial reporting.  To automatically “weed out” and preclude certain industries from potential financing and loans because they are deemed somehow “inferior” or “dirty” under an ESG policy leveraged by the government seems contrary to a free market economy.

As expressed by the American Bankers Association, lenders play a key role in financing companies in all market sectors.  They need the freedom and flexibility to make sound financial decisions based on their own internal policies.

If you need help with an environmental issue, contact me at 248-932-0228, Ext. 125.

The blog was drafted by Jeffrey Bolin, M.S.  Jeff is a partner and senior scientist at Dragun Corporation.  He is a published author, frequent speaker, and expert witness.  His expertise in environmental due diligence, PFAS, vapor intrusion, and site assessments has led to projects in the US, Canada, and overseas. See Jeff’s Bio.  

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