Pub. 11 2021-2022 Issue 5

Clean environment

ESG Initiatives in Banking: How They Impact Consumer Loyalty

Environmental, Social, and Governance (ESG) factors are playing an increasing role in decision-making at banks.

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 has been studying the drivers of consumer 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 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 banks must generate significant boosts in their ESG ratings to benefit.

Several banks have taken steps to establish such credentials. Those efforts include establishing an ESG business unit and creating a post to oversee environmentally and socially responsible investments. Another large bank offers a commercial deposit product that lets clients direct cash reserves to finance socially and environmentally sustainable projects.

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 U.S. trend.

ESG activities aren’t confined to the largest national banks. A community bank in Northern California formed an internal climate change committee to assess climate risk in its portfolio.

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. It appears that U.S. banking customers have already largely self-selected; in other words, those who prioritize social impact have affiliated with smaller or more niche banks. Perhaps surprisingly, the attitudes of neobank customers do not reveal social impact as a strong motivator.

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

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 forming an ESG policy. Nonetheless, a complete understanding of the overall landscape is always a good input for strategy formulation.

Paul Davis is Director of Market Intelligence at SRM (Strategic Resource Management). He has more than 20 years of experience following financial institutions. Before joining SRM, he was the editor of community banking and M&A at American Banker, supervising the publication’s coverage of banks with up to $20 billion of assets.