ESG Risk Factors for North American Banks: Review of 2022

DBRS Morningstar has released a commentary discussing how ratings or rating trends of publicly rated North American financial institutions have been affected by Environmental, Social, and Governance (ESG) factors in 2022.

Key highlights include the following:

• The number of banks identified as incurring ESG issues that were material to the ratings has marginally improved in 2022 compared with 2021. The only assessed significant factors to the ratings were Governance factors.

• Going into 2023, ongoing monitoring of regulatory environment/changes, particularly AML issues, remains high on the regulators’ agenda.

• In terms of Social factors, we expect cybersecurity to remain an important risk factor, as such attacks could have material financial and reputational impacts.

• We expect to see more transparency on climate-related risks in 2023, and how these risks are being managed and incorporated into banks' business, strategy, and risk management processes. Furthermore, we expect to see more uniform reporting requirements for the banks.

“No common systemic ESG factor negatively affecting North American bank credit profiles in 2022,” said Maria-Gabriella Khoury, Senior Vice President, Global Financial Institutions at DBRS Morningstar. “We will continue to monitor closely climate-related concerns and how North American banks will consequently adjust their risk management practices as regulators catch up with industry best practices that are already in place in Europe.”