Advocacy for ESG — environmental, social and governance — issues is no longer novel in banking. Many banks and credit unions have introduced diversity initiatives, for example, under the ‘S’ part of the acronym.
Tackling the ‘E’ in ESG, however, isn’t as straightforward.
Environmental advocacy has become increasingly controversial and confrontational, bristling with political, legal and reputational pitfalls for financial institutions. To compare ESG navigation to getting stuck between a rock and a hard place is an understatement.
On one hand, a bank’s success is contingent on satisfying shareholders, many of whom demand sustainable business practices in banking. Bank regulators, too, are hinting at implementing climate policies, although no rules or recommendations have yet been formalized.
On the other hand, banks exist to make loans and support communities, and failing to do so under the banner of climate change can lead down a difficult road. As the industry has already witnessed, states including West Virginia and Texas have instituted bans on doing business with lenders who pull out of fossil fuel financing in those states.
Keep An Eye On The Trends:
Some big banks — including Wells Fargo and JPMorgan Chase — were put on West Virginia's 'Restricted Financial Institution List' for no longer lending to coal, oil and natural gas companies.
There is an ever-increasing torrent of information bankers need to know about, not only relating to ESG and climate stress tests, but divestments, customer sustainability concerns and more. It can be overwhelming, and questions will inevitably come up:
- Are there sustainability projects we should be worried about?
- Do we have to conduct stress tests?
- Do we need to measure our ESG scores?
- What is an ESG score? (Hint: there are numerous types)
- Are we supposed to know our carbon footprint? And do we need to be evaluating both our internal, operational carbon footprint or does our loan portfolio have one too?
For years, these questions weren’t a concern, let alone a burning topic to address. Over time, however, they have risen to the surface and banks in the industry — Wells Fargo, Deutsche Bank, Fifth Third Bank, BMO, Amalgamated Bank, Morgan Stanley and Standard Chartered, along with Mastercard, just to name a few — created a Chief Sustainability Officer position in response.
But, what exactly is a Chief Sustainability Officer? And at what point should regional and community banks and credit unions consider hiring one or creating the position?
Is a Chief Sustainability Officer Really Necessary?
The argument that banks and credit unions need a CSO — or even have a role to play in climate change and its trajectory — is still a new one. Deloitte argues in its “Future of the Chief Sustainability Officer” report that it came about most prominently with the onset of Covid-19. (The report was produced in partnership with the Institute of International Finance.)
“The CSO is emerging as the organization’s ‘sense-maker in chief’,” the report reads. “Understanding and predicting changes in the external sustainability environment has become essential to the role.
There is some doubt a CSO will be a prerequisite to a bank’s success forever. The Deloitte report identified CSOs who acknowledge their responsibilities could one day be relegated back to other departments.
“When that happens, they think the role will be subsumed within business as usual or migrated to the CEO,” the report reads. “For the time being, though, these are still minority views.” Even on a five-year view, 70% of respondents think the CSO’s role will continue to be distinct, “making a unique contribution to the sustainability challenges we all face,” Deloitte states. (Quotes from anonymous CSOs throughout this article, such as the one below, are sourced from the Deloitte report.)
“There will always be a role for a centralized point-person to orchestrate sustainability.”
— anonymous CSO
It can be unclear when a financial institution (especially smaller banks) should designate a spot in the C-suite for a CSO. Experts at Deloitte say there are at least one of three ‘tipping points’ a bank or credit union will reach when they realize they need one:
- External change exceeds internal change.
- Stakeholder expectations run ahead of management’s expectations.
- The institution recognizes ESG risks as strategic.
The ‘outside influences’ and ‘external changes’ come from a few places. Maybe a bank has already made promises around sustainability — i.e. signing on to be a part of the Net Zero Banking Alliance — that its executive teams need to follow through on.
But, there are also pending regulations that could quickly become challenging if financial institutions aren’t ready for them. For example, the Federal Reserve’s plans to include environmental factors in upcoming stress tests of large institutions. Likewise, the OCC is creating principles for U.S. banks to manage climate-related financial risks.
What Does A Banking Chief Sustainability Officer Do?
As KPMG research points out, “few roles have changed so dramatically, so quickly, as that of the Chief Sustainability Officer.”
In 2001, chemical company DuPont hired Linda Fisher as its inaugural Chief Sustainability Officer — the first publicly-traded U.S. company ever to do so. The trend didn’t catch on right away, and certainly not in banking. Research conducted by The Financial Brand indicates one of the first banks to institute a similar role was when SunTrust Bank (now Truist) named Tori Kaplan as its Chief ESG and CSR (Corporate Social Responsibility) Officer in 2018.
The backgrounds of many financial CSOs vary, and their day-to-day responsibilities can be wildly different.
While the name and description of the job can change from institution to institution, Deloitte found there are three consistent expectations of a CSO across the board:
- Make sense of the external environment and bring insight back into the firm,
- Help the bank or credit union reconfigure its strategy,
- Provide thought leadership and help align teams by engaging, educating and connecting.
“My mandate right now is to engage the whole of our workforce and get them thinking about strategic direction.”
— anonymous CSO
How Does the CSO Fit Into The Executive Team?
Sometimes a bank may have sustainability goals already in place, and the CSO will help execute them. Other times, a CSO is brought on to help develop a sustainability plan.
Likewise, a CSO may not be directly responsible for executing ESG strategies within the company as much as overseeing the issues as they play out, Gartner points out. This makes the CSO position “lean by design.”
“In the U.S., for instance, chief sustainability officers on average have six direct reports, and roughly six other staffers are tasked with the issue in other departments,” Gartner’s Senior Principal of Research Laura Cohn writes. “These functions include environment, health and safety; supply chain; communications; and corporate social responsibility.”
Not every CSO comes equipped with time in banking or even hails from a sustainability background. In fact, about 85% of people in ESG positions don’t have any prior experience with ESG, according to a Capital Monitor analysis of 1,500 ESG jobs at the world’s largest banks.
“I meet lots of other CSOs — none of us have the same job.”
— anonymous CSO
Similarly, Deloitte’s report found the experience of the CSOs surveyed “spanned nearly two dozen occupations, from biology to branding to law.”
These kinds of statistics can prompt accusations of “greenwashing” — when a company makes sweeping promises about sustainability without follow-up action. As a result, more financial institutions are onboarding talent with experience in the field, nabbing climate scientists and ESG experts to fuel sustainability plans, Insider Intelligence reports.
A Deeper Dive Inside How Bank CSOs Operate
Wells Fargo is becoming a leader in environmental goals. It’s a different position for the bank, which for years was slammed by analysts and environmental activists over its support of fossil fuel and carbon-emitting industries.
Capital Monitor wrote that Wells Fargo has one of the highest proportions of ESG staff with previous experience in that role, at roughly 25%.
“Embedding sustainability skills across the entire organization is one of my medium-term targets. “
— anonymous CSO
The megabank hired its first CSO Robyn Luhning in April 2022. She has a background of corporate social responsibility (CSR) roles, and holds a graduate degree from Yale in industrial environmental management.
Wells Fargo tasked Luhning with:
- Leading progress against the company’s enterprise climate initiatives,
- Overseeing the Wells Fargo Institute for Sustainable Finance,
- Supervising the bank’s ESG transparency and disclosure initiatives.
Other megabanks have established ESG programs with the goal of achieving net-zero carbon emissions or investing in local sustainability enterprises.
In its research, Deloitte found there are ten technical skills a financial leader ought to look for in a new CSO (listed in order of priority).
- Risk analysis and management
- Products and market
- Disclosure and reporting
- Climate science
- Regulatory skills
- Data and quantification
- Circular economy
Just about every professional in Deloitte’s survey expects the CSO position will only continue to grow in both numbers and necessity. The responsibilities once delegated to different departments will need a cohesive point of contact.
As one CSO puts it: “Although the role of the CSO may have evolved from the corporate social responsibility officer, it is now as far away from that role as it is from the chief technology officer. It will continue to change in the future, ensuring a discrete role for the CSO for the foreseeable future.”