New ESG Reporting Requirements for Banks Continues to Gain Momentum

On June 23, 2021, the House Financial Services Committee advanced a bill, the Greater Supervision In Banking (H.R. 3948), requiring the largest US banks to submit annual reports to the Federal Reserve. The reports must include details on 17 business areas, such as those relating to environmental, social, and governance (ESG) activities. These include the company’s size and complexity; the diversity of their directors; their involvement in projects that contribute to or mitigate disproportionate environmental harm to communities of color or Indigenous peoples, or other forms of environmental racism; and their actions taken in relation to climate risk and contribution to climate change.

ESG initiatives across the financial services industry are gaining momentum, including those relating to climate risk. These follow on the heels of recent executive orders from the White House bringing new requirements for federal agencies and requests for information from the US Securities and Exchange Commission (SEC) that are likely to bring new disclosure and monitoring requirements. The question is: Should the financial services industry assume that this is just the beginning?

These new reporting requirements   were enacted with the goal of advancing greater supervision of US “global systemically important bank holding companies.” This supervision, specifically around climate risk, has been a key talking point of the Biden administration as concern grows regarding the US economy’s vulnerability to climate risk, a concern voiced by many—including Treasury Secretary Janet Yellen. However, despite climate risk being a key issue for this administration and the House Financial Services Committee, it’s not immune to disapproval. This recent regulation drew opposition from Republican committee members, with several fearing that these new reporting requirements are taking too heavy a hand against the country’s biggest banks while offering little in the form of substantive new information for investors and the American public. The debate across party lines is likely to continue and could impact the specific terms of new requirements rolled out by the SEC  as well as other federal agencies making changes to their departments in order to better manage the risks presented by climate change and to meet the recent requirements outlined in President Biden’s executive order.

As impacted banks prepare to accommodate these new reporting requirements, they will likely be able to use information distributed through their standard SEC filings and other reports and publications when compiling the annual reports. Banks will need to include the reports as part of their systemic risk scores, also known as global systemically important banks (G-SIBs).   Therefore, they should be aware that any observed risks noted in the reports could impact their capital requirements, among other factors related to G-SIBs. The reports will be made available to the public on the Federal Reserve Board’s website.

Given the amount of activity coming out of the Biden administration—and other branches of government—this is likely just the beginning, and there will be more reporting requirements to come. Accordingly, large US financial institutions should begin reviewing the climate data they are collecting and sharing. They should also review the climate risks they are managing and begin assessing how prepared they are for the more significant reporting and disclosure requirements that are likely just around the corner.