ESG Reporting is Near Reality for US Financial Institutions—Are You Ready?

This article was written by Chad V. Scott, Consulting Manager.

There have been significant developments regarding Environmental, Social & Governance (ESG) Reporting recently, as the European Commission adopted the European Sustainability Reporting Standards on July 31, 2023. Consequently, ESG reporting will begin for large companies operating in Europe during 2024.

So, what does that mean for companies in the United States, and more specifically financial institutions?

ESG Reporting in the US

For companies that operate in Europe, and are subject to European reporting requirements, it may require ESG reporting beginning in 2024 or the near future.

Despite the fact that mandated ESG reporting requirements or frameworks do not yet exist in the US, there seems to be a clear desire by investors and regulatory bodies to begin implementation sooner rather than later, especially for financial institutions. This ESG related regulatory pressure will no doubt result in expanding requirements in the future.

Major ESG Updates

The timeline of ESG activities by the NYS Department of Financial Services (DFS), Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) illustrates the ramp up in activity since the pandemic. Although activity has slowed during 2023, it is due to committees being formed and working through reviewing responses from comment letters that have been submitted over the previous 12 – 18 months.

The NYS DFS Industry Update on October 20, 2020, which discussed Climate Change and Financial Risks was the first such communication in the United States by any Bank Regulatory Agency. Since that time, the national regulatory agencies, including but not limited to the OCC, FDIC, NCUA and Federal Reserve Bank have significantly increased their focus on Climate Related Financial Risks, as well as Diversity, Equity, and Inclusion (DE&I) matters. Further, the Federal Financial Institutions Examination Council (FFEIC), which issues interagency regulatory guidance, has followed suit.

Implications for Large Institutions

For the largest institutions that have more than $100 billion in total assets, regulators have been working closely with those institutions regarding reporting requirements. The regulators are working on a high-level framework regarding this initiative, which are currently in comment phases. Once these requirements are in place, regulators have indicated that requirements will flow down to the smaller institutions.

Implications for Small Community Institutions

Based on the emphasis placed on these matters by regulatory agencies post-COVID, the clock is ticking regarding educating the Board of Directors, Audit and Examining Committees, Senior Management and other key personnel that will be involved in the reporting processes for both climate related financial risks and DE&I. The regulatory bodies have previously published expectations regarding matters that Boards need to be considering and planning for today.

Additional Factors Impacting ESG

Additionally, DE&I initiatives should expect to see more regulatory activity as the environment related financial risks developments become more mature. DE&I is a clear focus of these regulatory bodies and requirements will begin to follow or be implemented in tandem with the climate related financial risk disclosures.

Another element of ESG that has seen increased regulatory scrutiny is cybersecurity and each institution’s ability to manage risks and respond to events once they occur. Cybersecurity has not only been a matter of emphasis for financial institution regulatory agencies, but also by the Securities and Exchange Commission (SEC), which will require reporting in annual reports beginning with December 31, 2023.

At this point in time, it is not a matter of if ESG reporting will become a reality for financial institutions, it’s a matter of when. We will continue to provide updates on this topic, but in the meantime, if you need further guidance or have any questions, we’re here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.