Banks and ESG

Abstract

Money can be more than just a simple unit of account or medium of exchange. How people, corporations, and governments choose to spend their money can also be an implicit statement of their values. Responding to emerging societal consensus on issues from climate change to gun control, banks have begun to incorporate environment, social, and governance (ESG) considerations into their businesses, including their provision of deposit accounts, credit, and other services. In response, states have passed a raft of anti-ESG laws attempting to discipline banks that they determine rely on ESG considerations and are therefore hostile to certain industries or certain political viewpoints. Federal agencies and legislators have joined the effort, using their legislative and regulatory powers to influence whether and how banks employ ESG considerations. According to ESG opponents, banks and banking agencies have become too politicized, and are operating outside of their legal mandates and areas of expertise.

This paper responds to the growing controversy surrounding the proper role of ESG-related issues as part of the business of banking. In doing so, it challenges the prevailing anti-ESG narrative in two ways. First, it argues that federal banking agencies incorporating ESG-type considerations into regulation and supervision is legally sound and serves legitimate policy objectives. Regulators have ample authority, under longstanding banking law provisions, to address emerging climate-related, antidiscrimination, safety and soundness, and legal compliance risks. Second, this paper argues that two recent Supreme Court decisions call into question whether anti-ESG efforts are legally permissible. Specifically, under the Supreme Court's opinion in National Rifle Association v. Vullo, it is likely that anti-ESG laws and regulations impermissibly infringe upon banks' rights to free expression. Separately, the Court's recent decision in Cantero v. Bank of America suggests that state anti-ESG laws are preempted by the National Bank Act. These conclusions ultimately invert the narrative that ESG opponents are protecting the victims of a partisan-political project, and instead suggest that state and federal efforts opposing ESG subvert the societal consensus surrounding ESG issues. This paper then offers a path out of the current political and legal minefield by proposing a more sustainable path for reconciling banking and ESG issues that are rife with controversy, complexity, and unintended consequences.

Keywords: banking; financial institutions; environmental, social & governance; ESG; climate change; climate finance; first amendment law; commercial speech; federal preemption, banking; financial institutions; environmental, social & governance; ESG; climate change; climate finance; first amendment law; commercial speech; federal preemption