Growing attention to both environmental and social risks by U.S. financial regulators is a positive for the banking sector, says Moody’s Investors Service.
In a new report, the rating agency pointed to stepped-up efforts to address environmental, social and governance (ESG) issues. The U.S. Securities and Exchange Commission (SEC) launched an ESG enforcement task force and added ESG and climate-related risks to its compliance exam priorities for 2021, and the U.S. Federal Deposit Insurance Corp. (FDIC) has also launched new initiatives.
Those efforts are credit positive for banks as the regulatory attention will filter down to firms in the sector, the report said.
Alongside the launch of its new task force and the addition of ESG issues to its compliance work, Moody’s noted that the SEC also said it plans to “integrate climate and ESG considerations in its broader regulatory framework and examine business continuity plans as climate change-related physical risks intensify.”
Moody’s also reported that the FDIC plans to promote diversity and inclusion internally within the agency and externally, fostering financial inclusion in the banking system.
Moody’s said the FDIC’s plan is consistent with its view that “government and investor scrutiny will drive financial institutions to act on gender inclusion.”
“Many institutional investors now factor gender inclusivity in their assessment of corporate governance,” it said, adding that its own research showed that highly-rated companies tend to have a larger percentage of female board members.
While Moody’s sees the most significant social risks for banks to be data security and customer privacy, it also said that “a lack of diversity could result in human capital risks as requirements for disclosures on organizational diversity, gender pay and board composition increase.”
In terms of environmental risks, Moody’s said “the transition to a low-carbon economy increases banks’ business risk because their customers, investors and regulators expect them to meet broader carbon transition goals in their role as capital providers.”