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Markets have had some rough sledding over the past few weeks. Though things seem to be holding and there are actors in the space working to steady things out, we are not out of the woods yet. And if you’re affected by this, this is stress-inducing. You have my empathy. It is not like we all haven’t had challenges and change over the past few years.
But I want to make sure that we don’t draw the wrong lessons from this – specifically that ESG is somehow to blame. In short, it wasn’t that ESG induced risk in the banking sector, but rather that a lack of good governance and smart regulation did, starting with Silicon Valley Bank (or SVB). In essence, more ESG would have been better. We would all have less stress and more money if principles of ESG were more fully implemented.
But we should recognize that SVB didn’t just trip. SVB was pushed. And it was it was pushed by the people that ESG is designed to protect us from.
I’ll explain.
First, a quick recap on how SVB got tripped up. The stress in the market is associated with banking instability, specifically from banks like Silicon Valley Bank and First Republic Bank that had poorly managed their exposure to financial risk. They did this by allowing their liabilities associated with deposits outgrow their accessible assets should there be a significant period of withdrawals. After a few institutions in Silicon Valley – such as Peter Thiel’s Founders Fund – encouraged their relationships to rapidly withdraw their deposits from SVB and to move it to very large, corporate banks such as JPMorgan Chase. This caused a bank run which toppled SVB, Signature Bank, and is threatening First Republic. The reason that cash was moved to JPMorgan is because it had a strong balance sheet and appears to be immune to being overwhelmed.
Political critics will talk about the social activities and the investments in climate that caused SVB to topple, but a quick analysis shows that those were some of the strongest assets on SVB’s books. The problem with SVB and others wasn’t their investment in the E & S of ESG, but their lack of focus on good governance. They forgot about the G. For example, SVB had been without a Chief Risk Officer for 8 months. Relatedly, they had allowed themselves to become especially exposed to startup cash withdrawals associated with rising interest rates, which made them very fragile. And it was made possible because SVB had advocated for banks of their size to be exempt from capital requirements of the Dodd-Frank Act.
Poor governance led SVB to increased risk. Investors concerned with ESG would do well to remember that third letter’s importance.
But we should also look at the broader issue – while SVB was in a precarious position of its own making, instead of being helped, it was pushed. It was pushed by some of the people that decry ESG as a measure of risk management. It was pushed by the people that rolled back capital requirements of the Dodd-Frank Act. And it was pushed by people who had their relationships move capital to the biggest banks in our system for stability – those still covered by Dodd-Frank. It was pushed by people who value short-term profits over long-term investments. No wonder they’re pushing against ESG.
There are some really smart companies doing work in ESG. On the banking side, I think of Aclymate’s customer Amerant Bank. I think of the smart work being done in ESG investing by ImpactFolio and Change Finance, two other customers of Aclymate.
And there is one thing I know they would agree with me on – moving money to the large banks like JPMorgan Chase that are required to maintain reserves by regulation ignores the ESG risk that they have, too. JPMorgan Chase and other large banks have very public ESG statements, but they’re also incredibly exposed on the other side of the balance sheet, with over $4 Trillion in loans to fossil fuel interests since 2015. Loans that are typically collateralized by using the value of proven fossil fuel reserves. This is a significant risk when those assets decrease in value in a decarbonizing world. Not to mention that your deposits in such institutions enable these financial risks and climate damage.
So, we should recognize that ESG-guided decisions that prioritize long-term financial outcomes are the best way to build a company, small or large. We should support smart regulations that prevent systemic shocks. And we should continue to recognize that every decision matters from a climate and a broader ESG perspective. And the sooner you align your business to our climate future, the sooner you’ll improve your odds of attaining wealth and minimizing stress.
