The ESG effect

Environmental, social, and governance (ESG) is more than a buzzword. ESG has gained increasing traction globally as a way to gauge an organization’s profitability, environmental sustainability, and social impact.

Major institutional investors now expect companies to commit to ESG criteria, and regulators are putting rules in place to hold publicly traded companies accountable for the effect their activities have on the climate. At the same time, policymakers in more states are trying to discourage companies from using ESG metrics.

While its origins are in sustainable investing, ESG is becoming increasingly important in financial services because:

• Regulators and policymakers are paying attention to it.
• Consumers, especially young adults, and employees increasingly demand more equitable, ethical, and sustainable organizations.
• The discipline represents a set of risks and opportunities that are becoming more salient for financial institutions.

Credit unions can use ESG as a competitive differentiator and as a means to deepen Financial Well-being for All™ and advance the communities we serve.

From a macro perspective, ESG represents an approach toward a more holistic and balanced approach where businesses strive to be ethical, socially and environmentally responsible, and able to serve communities beyond their shareholders and management teams.

It is also a more holistic approach that recognizes the connections between good governance, environmental sustainability, and social responsibility.

ESG factors were previously considered outside the purview of traditional corporate responsibilities. But a transformation has occurred over the past couple of decades. Outside of government mandates, many companies have begun to work with stakeholders to address issues of mutual concern.

The pandemic, social unrest, and environmental and climate-related events have added to the pace of change. According to Korn Ferry, 86% of employees and consumers want to see a more equitable and sustainable world post-pandemic, and 43% of employees are reconsidering their current jobs because their employers aren’t doing enough to address social justice issues.

Mounting evidence suggests a high commitment to ESG is correlated with stronger financial performance by attracting top talent and customers and reducing costs (e.g., lower energy consumption) and regulatory and legal burdens, McKinsey & Co. reports.

In this context, it’s not surprising that ESG and sustainability considerations are increasingly incorporated into organizations’ strategies, risk calculations, performance metrics, and public reporting. According to KPMG, 90% of North American companies report on their sustainability efforts.

ESG risks and opportunities

An ESG approach means credit unions explicitly consider both environmental risk mitigation and ways to maximize environment/climate-related opportunities in their strategies, planning, and metrics.

Credit unions know the environmental and climate risks well. When natural disasters and weather events hit, they are often among the first responders for their members, staff, and communities.

Credit unions have been taking these issues into account since our formation as we continue to make loans to farmers and ranchers, as well as small businesses, across the nation.

Nevertheless, we can do more by, for example, proactively managing these risks and doing more to take advantage of opportunities to expand our portfolio of green lending products.

The benefit of proactively managing these and other climate-related risks is that these losses and the impact on credit union balance sheets are mitigated and stress and injury to employees, members, and the community is reduced.

Environmental events can result in economic disruption, infrastructure damage, loss of assets, and health impacts for members, which affect how they engage with their financial institution. Often the impact hits the most vulnerable populations hardest.

This means credit unions must be prepared for delayed payments, loan defaults, and the need to provide emergency financing to rebuild homes or provide access to shelter and other basic requirements.

In addition to addressing environmental risks, credit unions can support affordable and sustainable green and clean solutions to environmental and climate challenges. 

This includes working with industry leaders to help reduce their carbon emissions, providing financing for less carbon-intensive energy sources for homes and businesses, and connecting individuals who desire socially responsible investment opportunities to green projects located in low-income areas.

Other opportunities include financing projects that support access to affordable housing, clean water, and affordable and healthy food.

NEXT: A fundamental consideration

A fundamental consideration

While environmental factors often get the most attention, ESG is also about concern for people and communities. Diversity, equity, and inclusion (DEI) is a fundamental ESG consideration and part of the metrics used to measure an organization’s social score.

DEI considerations include workforce diversity; fair and equitable treatment of all employees in terms of pay, professional development, and career advancement; and an inclusive workplace culture that seeks diverse perspectives so employees feel they belong and can fully contribute to the organization’s mission.

Also vital are connections to the community through partnerships and support for diverse suppliers.

Research points to significant benefits of a diverse, equitable, and inclusive workplace boosting its competitive advantage. These include attracting and retaining top talent, improved financial performance, better customer orientation, increased employee engagement, fewer sick days, and more innovative and collaborative teams.

Sound governance is fundamental to a credit union’s ability to fulfill its mission of serving its member-owners. Sound governance is also vital to our growth and continued relevance in the marketplace.

Governance is embedded in our cooperative principle No. 2, member democratic control.

This includes meeting relevant standards of transparency, compliance, and accountability, and considering the broad set of stakeholders’ interests.

This may mean considering the composition of the board and executives: Are they a diverse and inclusive group that reflects the credit union’s membership?

If not, the credit union risks not having the needed perspectives and insights to operate in a way that ensures long-term relevance and sustainability.

A competitive differentiator

Since their inception, cooperatives have represented an alternative to the traditional corporate approach that focuses exclusively on serving shareholder interests. As cooperatives, credit unions are guided by eight cooperative principles which codify our sense of accountability and responsibility to a broad set of stakeholders—members, community, society, underserved and historically marginalized groups—and prioritizing people over profit and communities’ sustainable development.

There is a clear opportunity for individual credit unions to use ESG as a competitive differentiator and a means to advance financial well-being for all. 

At the same time, there is a window of opportunity to get in front of policymakers and regulators to avoid regulations that limit credit union self-determination and to respond to growing consumer and employee demand.

If we seize on this moment, it will yield positive impacts on credit unions’ bottom line, as well as for members, employees, and communities.

Some credit unions are already prioritizing ESG. Last summer, the Pacific Northwest experienced an unusually hot summer where temperatures hit dangerous levels. The heatwave killed 200 people in Oregon and Washington.

Access to quick and affordable credit took on a life-and-death urgency for these areas. Low-income and historically marginalized groups were among the most vulnerable, unable to afford air conditioning or heat relief of any kind.

Verity Credit Union in Seattle, which has a robust DEI and green-lending program, recognized this gap. The $733 million asset credit union responded by working with partners to ensure it offered products that served the most vulnerable consumers, not just high-net-worth individuals.

Verity’s experience bears out what an abundance of research shows: namely that women, Black, Indigenous, Latino, low-income, and other vulnerable groups disproportionately suffer the consequences of environmental hazards and climate change.

This demonstrates the power of ESG, which calls on institutions to use a holistic lens that considers environmental, social, and governance considerations.

The good news is that credit unions don’t have to pivot to integrate ESG into their approach. It is baked into our cooperative principles and is a natural fit.

Increasingly, we see credit unions explicitly committed to environmental sustainability, and connecting the dots between E, S, and G. We can no longer afford to see financial services as disconnected from the health and well-being of our members and communities.

Continuing to be our members’ best financial partner means making those connections and serving the needs of everyone in our communities.

SAMIRA SALEM is vice president of diversity, equity, and inclusion for Credit Union National Association.

This article appeared in the Summer 2022 issue of Credit Union Magazine. Subscribe here.