Spotlight Series: Bank Regulations and Disclosures, Part 4: Forecast on ESG Regs and Compliance


In our fourth and final of this Naehas Spotlight Series on Bank Regulations and Disclosures, I’ll once again be sharing valuable and learned wisdom from another Brent, this one Brent Bahnub, CEO and Founder of Apogee Process Improvements. In a recent deep dive discussion on all things disclosures, which you can watch here, Brent graciously offered answers and actionable insights to specific questions so many in the financial services industry are asking. This time: forecasting on ESG regulations and compliance.

Before becoming the CEO and Founder at Apogee, Brent was the Managing Director and Control Officer Executive at JP Morgan Chase. He has held positions at First Niagara, National City Bank, and has written a book, Activity-Based Management for Financial Institutions. He has co-authored four patents, and holds an MBA from Columbia Business School. That’s quite a solid record of accomplishment. His background underscores why I was pleased to sit down with him for a deep dive discussion on doing disclosures well, and why.

Q: On the issue of ESG, what do you see as the future of regulators and disclosures? How are they going to keep up with the latest fintech products, and also the latest movements such as environmental issues? What do you see as the forecast?

Brent’s timely, topical insights are important as more financial firms tune into all of the important components behind Corporate Social Responsibility (CSR) and evolving Environmental, Social and Governance (ESG) guidelines.

His input follows:

The laws and the rules and the regs generally follow the advancements on products and channels and the overall financial environment. I can say that in the next couple of years, we are certainly going to see more ESG-related disclosures and fines, as those go hand in hand.

Environmental, Social and Governance disclosures is what we are seeing as this next wave of disclosures. The Apogee team has identified key areas of focus.

  • Pollution
  • Waste
  • Resource depletion
  • Carbon footprints
  • Deforestation
  • Climate change
  • Diversity, Equity & Inclusion
  • Employee Relations
  • Working conditions
    (including child labor and slavery)
  • Local under-served communities
  • Health and safety
  • Executive compensation
  • Donations and political lobbying
  • Corruption and bribery
  • Board diversity and structure
  • Tax strategy

business process 3The SEC is wrapping up their first draft of this and will put it out for commentary period in the coming months. While we do not yet know when they plan to implement them, these are the kinds of things that are taking a front seat right now. There will certainly be more. When you look to other areas of impact, it will be critical to think about customer pain points. Rohit Chapra, the current head of the CFPB, and his staff are cracking down on debt collection practices. While we have the Fair Debt Collection Practices Act (FDCPA), issues like this will be enhanced over the years. This is what I am seeing. There will be more protections and more protections that banks need to be communicated.

We earlier spoke of the 2008 crisis and the regulations that came for consumer protections after that. Now, even saying the mortgage servicer number and the ID are both now required. These are little things and big things that banks may not have thought of as protection before, but that is now how our legal system and our regulatory system works.

Expect more regulation, not less, I can guarantee that.

The work of the Securities and Exchange Commission (SEC) to which Brent made reference to was clarified in a statement issued on May 25, 2022, “SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices.”

Planning and preparation for regulatory disclosures is a critical cog in the compliance wheel.

Here, then, highlights from the SEC on their proposed plans to enhance disclosures. This is key for financial services companies looking to both offer insight to the agency, and to better understand what’s involved.

From the SEC:

“The proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors. The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said SEC Chair Gary Gensler. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

Finally, to complement the proposed ESG disclosures in fund prospectuses, annual reports, and adviser brochures, the proposal would require certain ESG reporting on Forms N-CEN and ADV Part 1A, which are forms on which funds and advisers, respectively, report census-type data that inform the Commission’s regulatory, enforcement, examination, disclosure review, and policymaking roles.

The proposing release will be published in the Federal Register. The comment period will remain open for 60 days after publication in the Federal Register.

business process 2With great thanks to Brent Bahnub and his team at Apogee Process Improvements, I’m hopeful that this “Spotlight Series on Bank Regulations and Disclosures” – a multi-media offering with videos and blogs – has helped in 4 key ways:

  1. Identify the common mistakes banks make with disclosures
  2. Appreciate the benefits a bank gains from improving its disclosure program
  3. Expand awareness of technology which is driving better, automated, disclosures
  4. Understand and prepare for stronger ESG disclosures ahead

As we work together to support the goals of financial services institutions of all types and sizes, my team and I stand at the ready to deliver technology innovations in a way that eases the burdens on banks who can gain ground by doing disclosures better.