(ACBJ) - Right now, the program is limited to just those six banks, but regional and community bankers say they’re eyeing what happens next – with some readying their data to respond to similar questions down the line. What hits Big Banks often comes for them next, they say.
And while some institutions have the coffers to hire consultants, others might be forced to opt out entirely – potentially limiting lending in areas vulnerable to climate change, including the North Carolina coast.
Banks try to be proactive
At Tennessee-based Pinnacle Financial Partners (Nasdaq: PNFP), which runs its Raleigh operation from its Glenwood Avenue offices, Joe Bass co-leads the climate and sustainability committee, which is watching these regulators' proposals. Already, representatives from Pinnacle have had conversations with regulatory agencies and experts. “Mostly what we’re doing is learning and waiting … the goal here is to be in position to respond when [regulators] do ask,” he said.
The bank’s committee meets regularly and is trying to be proactive – working to measure the bank’s own carbon footprint “while we look at what the overall risk is to our credit portfolio.”
“That’s the tricky part,” he Bass. “We’ll probably need help in figuring out what the overall risk is; what we need to be measuring.”
That’s where consultants are likely to come in – though Pinnacle has yet to hire a firm to assist it in this area.
Pinnacle, which has grown through acquisitions – including that of Bank of North Carolina in 2017 – has been preparing for this move for some time, but it could still be costly. Bass said his firm has the advantage of scale and infrastructure – but is still “in learning mode.”
At TowneBank (Nasdaq: TOWN), Triangle market President Brian Reid also says these types of requests will eventually work their way down to banks like his. TowneBank is “always keeping an eye on things that the Fed is directing,” he said.
But not every bank has the dollars to address the questions that could be coming, and that’s created worry among some of North Carolina’s banking players.
Could climate change stifle some lending?
Chris Marinac, director of research at Janney Montgomery Scott, said smaller banks may just opt out rather than incur the cost of answering some of the questions handed down by regulators.
“It may actually be that if there are loans that create a lot of excess regulation, the banks won’t do them,” he said. “You may find that there’s certain loans that banks turn away, turn down.”
That could be particularly impactful in climate vulnerable areas such as the North Carolina coastline.
A recent NASA report predicts sea levels along U.S. coastlines will rise by as much as 12 inches by 2050, with the Southeast among the regions expected to see the most change. By 2100, the report says, $1 trillion worth of property could be inundated.
Banks unwilling to hedge the risk – and the regulatory burden of analyzing that risk – may cut off vulnerable regions from future lending.
While Marinac doesn’t think the issue should top the immediate priority list for most banks (the exception being those lending on the coast), “I do think it’s on the list of to-dos for these companies.”
Alex Lassiter, CEO of sustainability software developer GreenPlaces, however, says it could be a more immediate challenge than many in the industry think.
His company, which efforts to help firms gain real-time visibility into their carbon footprints, is already hearing from community and regional banks who are concerned about regulation that could be coming.
“What I’m hearing is not, ‘if this will be a requirement,’ but ‘when will it be a requirement,’” Lassiter said. “And I believe it will be sooner than most regional banks are preparing for.”
Banks have questions
He said banks of all sizes already have risk management policies and procedures in place, including those that examine potential impact of extreme weather events. Gwaltney said it might be more beneficial for regulators “to evaluate the effectiveness of existing risk supervision practices before considering implementing new regulatory burdens on the industry”
“We also believe the regulatory agencies should use empirical data to determine the extent to which climate-related risks effect the safety and soundness of individual banks and the financial system as a whole,” Gwaltney said, pointing to a 2021 study put out by the Federal Reserve Bank of New York that found environmental disasters over the past 25 years had insignificant effects on banks, which already tend to avoid mortgage lending in flood-prone areas. That data suggests “local knowledge may also mitigate disaster impacts.” Gwaltney said his personal experience as CEO of the Louisiana Bankers Association when Hurricane Katrina flooded New Orleans back in 2005 backs up that study.
“As devastated as the homes, businesses and infrastructure of the city were, not a single bank failed,” Gwaltney said. “In fact, the banks that were headquartered or had branches in New Orleans came out of the event more profitable and stronger than before the storm.”
However, Lassiter said that the successful players may be the ones who get ahead of the regulations and start the process of collecting carbon accounting data.
“If they can get a handle on the data, preparing for disclosure and eventual sustainability auditing will be much less painful,” he said.
By Lauren Ohnesorge
