The Office of the Comptroller of the Currency (OCC) is considering a rule (i.e., Fair Access to Bank Services, Capital, and Credit), which would ensure that banks provide equal access to financial services, without discrimination. Such clarification is sorely needed.
It should go without saying, that banks should not discriminate against potential creditworthy clients who are operating in legal industries. Yet, thanks in part to the growth in Environmental, Social, and Governance (ESG) investing and management guidelines, there is a growing tendency for this discrimination to occur.
As applied to investors, ESG screens out companies based on a wide variety of pre-specified criteria. Some ESG funds restrict their investments to companies that meet specific environmental or social criteria, such as cleantech companies. Other ESG funds are, for all intents and purposes, broad-based funds that simply reject targeted investments. As applied to businesses, ESG criteria impose operational guidelines that compliant companies are supposed to follow. For some ESG proponents, the criteria include paying a sufficient minimum wage, for others, it includes minimizing a company’s greenhouse gas emissions.
By following these criteria, companies and investors are supposed to be able to “do well while doing good”. Whether applied to investors or companies, ESG raises troubling issues.
One, which is relevant to the proposed OCC rule, is that the arguments supporting ESG suffer from a fundamental incongruity. Proponents, who are often from outside of the organization, pressure companies and investors to implement ESG strategies. These same advocates also claim that ESG programs and investing will enhance profits. These two claims are contradictory.
In all other parts of the business, businesses and investors do not need outside entities to force them to engage in actions that will enhance profits. This is the responsibility of the business’ leadership, who will be replaced should they fail to maintain sufficient profitability.
It logically follows that profit-maximizing firms and investors will implement ESG programs and strategies when they enhance profits. No additional advocacy or pressure is required. This means that ESG advocacy is only necessary for programs and strategies that do not enhance profits.
With respect to the OCC’s proposed rule, banks are being pressured by ESG activists to forgo serving politically disfavored industries such as energy companies, gun manufacturers, or private prisons. However, if these industries are unprofitable, no pressure to discriminate against them is required.
For instance, banks did not discriminate against video stores as their lending to this industry dried up. Evaluating the business fundamentals clearly demonstrated that the business model was no longer relevant. The same logic applies to these disfavored industries. If their business model was unsound, as many activists claim, then no pressure to discriminate against them would be required – banks would naturally shift their loan portfolios toward other more profitable industries.
The pressure to discriminate against these industries is only required because these industries are economically viable. Therefore, the issue is no longer whether these industries are financially sound, the issue is the political desires of the ESG activists targeting these industries.
Caving-in to these political pressures will create large economic costs.
First, when the pressure from ESG activists directs banks to discriminate against profitable industries, these institutions are making lending decisions based on political correctness rather than economic fundamentals. When lending decisions are predicated on political considerations rather than financial soundness, failures typically follow. The $2.6 billion taxpayers lost when the government directed investment capital to 19 politically favored, but failed, green energy companies, exemplify the risks.
The same risks to the broader U.S. economy will arise if policies do not actively block a similar politicization of banks’ lending decisions. In short, allowing the political trends of the day to discriminate against profitable industries will ultimately harm our future growth and prosperity.
It is important to note that not allowing the political fashions of the day to deny credit to entire industries does not mean that banks should not consider political or legal risks when making individual loan decisions. These considerations can be pertinent. However, such considerations should be evaluated through a typical unbiased loan approval process, not through blanket discrimination against a legal industry.
Second, using political justifications to deny viable companies banking services imposes financial and economic harms directly on these industries. If widely blackballed by the banking industry, then their operations will be negatively impacted causing job and income losses far beyond the disfavored industries.
Third, ESG activists are circumventing the political process when they use banks to punish disfavored industries. The purpose of the legislative process is to allow the representatives of the people to make important policy decisions. Typically, activists are pushing banks to discriminate against disfavored industries because there are important policy questions that must be decided.
How these questions are addressed will meaningfully impact important social policies such as the appropriate response to global climate change, whether additional Second Amendment restrictions should be imposed, or whether state and local governments should have the option to use private prisons.
Deciding these issues through the state legislatures and Congress creates an open process where all pertinent issues can be considered. Not only is it inappropriate for individuals to use the banking system to bypass the appropriate legislative process, doing so obstructs our ability to sustainably resolve important policy questions.
A fundamental value of our federal banking regulations should be ensuring access to financial services without discrimination. The proposed rule advances this goal by ensuring that bank lending decisions are based on economic fundamentals rather than political considerations. As a result, the rule will help the banking sector perform its vital role in providing essential credit services that foster an economic environment conducive to growth and prosperity.