ESG in the banking industry

ESG in the banking industry

Nebraska banks play a key role in the state’s strong economic success by providing credit and other financial services to individuals, businesses and communities. Banks carefully manage risk and the needs of the customers and communities they serve when making lending decisions. Unfortunately, special interest groups have proposed using the heavy hand of government to dictate how banks serve these interests. Banks are faced with pressure from both sides of the political aisle regarding environmental, social and governance (ESG) issues.

ESG refers to a set of criteria some businesses and individuals use to evaluate a company or organization’s impact on the environment, its treatment of its people and its corporate governance practices. As private businesses in other parts of the country have moved to adopt ESG policies, there has been a corresponding attempt by lawmakers to restrict these efforts. One type of proposal would force banks to provide access to credit and narrowly restrict bank management and decision-making. These proposals are referred to as “forced access” legislation. Other proposals would blacklist banks for purportedly including ESG considerations in their strategies and prevent public entities from doing business with them.

Nebraska banks should be free to lend to or not lend to any entity, provided they do not violate statutory, regulatory, fair lending or other anti-discrimination laws. Nebraska banks, for example, have different areas of industry expertise. Forced access proposals could hinder my bank’s ability to make informed lending decisions. Consider a scenario involving a small rural bank in south-central Nebraska like mine which may lack the expertise to lend to a high-tech start-up. Forced access legislation threatens to limit the bank’s discretion in declining such opportunities, potentially narrowing the pool of funds available for local investments.

For decades, banks have used the five Cs of credit — capacity, capital, collateral, conditions and character, to evaluate the risk in potential lending decisions. Forced access legislation would fundamentally change the way banks are allowed to weigh risk and would prohibit them from considering the character and experiences of potential customers in making a credit decision. Ignoring key components of the risk assessment framework introduces unnecessary risk into the financial system.

Other states are already experiencing the unintended, yet foreseeable, consequences of using the government to intervene in private markets. In Oklahoma, for example, the “Energy Discrimination Elimination Act of 2022” aimed to combat perceived discrimination against fossil fuel companies, but instead cost the state’s taxpayers millions of dollars. For instance, just one week after the law went into effect, the City of Stillwater was forced to significantly reduce the scope of an infrastructure project after the State Treasurer blacklisted the project’s lender.[1]  Ironically, the blacklisted bank is the largest lender to the oil and gas industry in the world.

A nearly identical law enacted in Texas forced many banks out of the state’s bond market. The resulting decrease in competition increased borrowing costs for public entities. According to a University of Pennsylvania Wharton School of Business study, the law cost taxpayers $504 million the first year it was in effect and is expected to cost an additional $416 million per year.[2]

The unintended consequences and costs to taxpayers and business in implementing these misdirected, anti-free market policies are clear. When policymakers use banks to impose unrelated policy goals, communities and taxpayers end up losing. Nebraska banks provide the foundation of that economy and provide invaluable services to their customers every day. Intervention by the state and federal government is simply not needed in the Cornhusker State.



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