SRM Blog - The Bottom Line

Why ESG Should Be a Key Part of Your Strategic Plan

Written by Jehan Sherjan | Feb 15, 2022 4:30:00 PM

Environmental, Social, and Governance (ESG) factors play an increasing role in bank and credit union decision-making. Climate considerations, whether the result of government mandates, shareholder activism, or environmental shifts, have altered risk assessment models. Additionally, the prospect of regulators adding ESG metrics to examination criteria is gathering steam.


ESG's most immediate impact on the banking industry's bottom line, however, may come via the court of public opinion.  

SRM is studying the drivers of customer loyalty as part of a research initiative we began in 2012. Our recent report, based on data collected in July 2021, offers clues on the extent to which bank and credit union fortunes hinge on customer perceptions in areas including ESG.

Walking the Climate Talk

SRM's research reveals subtle nuances between why consumers choose a given bank or credit union and why they elect to stay with their financial institution. Quality service continues to rank at the top of both lists. However, an institution's reputation plays an essential role in the initial selection. Our study further indicates that "commitment to climate change" is one of the largest influencers of consumer loyalty – although most FIs must generate significant boosts in their ESG ratings to realize these gains.

Several banks have taken notable steps to establish such credentials. M&T Bank in Buffalo, NY, established an ESG business unit comprised of its corporate responsibility and sustainability functions. At the same time, US Bancorp in Minneapolis created an ESG post to oversee environmentally and socially responsible investments. Before agreeing to sell to US Bancorp, MUFG Union Bank launched a commercial deposit product enabling clients to direct their cash reserves to finance socially and environmentally sustainable projects.

Interestingly, two US-based players – Citibank and JPMorgan Chase – ranked among the top five in a recent poll of "Standout Global ESG/Sustainable Finance Providers," and Bank of America made the top 10. While their efforts may focus largely on commercial and investment banking activities, it shows that multi-national institutions recognize the value of brand positioning and may be ahead of the curve on what seems to be an inevitable US trend.

ESG activities aren't confined to the largest national banks. Sacramento's River City Bank formed an internal climate change committee to assess climate risk in the $3.6 billion-asset bank's portfolio. Another example is Ascend Federal Credit Union, which backs Root Nashville, a nonprofit that plants thousands of trees around the city.

Social Impact Segmentation

To date, SRM's research indicates that a financial institution's commitment to social impact, including climate change, resonates most strongly in the brand perception of smaller banks and credit unions. It appears that US banking customers have already largely self-selected; in other words, those who prioritize social impact have affiliated with smaller FIs. Perhaps surprisingly, the attitudes of neobank customers do not reveal social impact as a strong motivator.

If ESG factors gain ground in US consumers' decision-making and large institutions continue to burnish their credentials in this area, it's easy to envision accounts shifting away from smaller FIs that overlook similar initiatives. Since ESG particularly resonates with the 25-34 cohort, the long-term growth implications could be significant.

The Bottom Line

The variables that drive consumers' banking relationships are continuously evolving and are increasingly influenced by experiences outside the financial sector. SRM's customer loyalty report offers valuable insights to inform financial institutions' strategic decisions.

Naturally, there are many factors beyond account retention to consider when formulating an ESG policy. Nonetheless, a complete understanding of the overall landscape is always a good input for strategy formulation. SRM can assist you as you look to incorporate ESG elements into your broader strategic plan.