Bankers Are Navigating a Brave New World with Mergers and ESG

Embedding ESG into a merger playbook is a strategic move worthy of banks’ consideration.

Bankers typically aren’t the segment of society that gets a lot of sympathy. First responders, military personnel, and even TikTok influencers can pull at the heartstrings, but bankers? Nah!

However, pull out a Kleenex because one must admit that bankers are surrounded on all fronts right now from a strategic standpoint.

Banker in the Middle

On one front, bankers face Fed-induced low rates that are crushing margins. Cornerstone Advisors estimates $145 billion of pre-tax revenue has disappeared for bankers via margin compression in only the past two years.

On another front, you have digital disruption and fintech innovation, forcing bankers to step up their investments in transformation and more aggressively attack their existing business models.

On the third front, you have a new administration seeking to “rein in” bank mergers just as banks seek greater scale to compete in tech and combat compressed revenue.

Finally, the fourth front brings new environmental, social, and governance (ESG) mandates coming from literally everywhere. Whatever the good intentions of these new mandates, any new compliance orders require resources, change management, and an understanding of the unintended risks that could arise. ESG has overnight become another huge outcome for bank executives to drive.  

The Social Responsibility Challenge

It’s almost impossible to speak about ESG and not be anxious. No one wants anything to be misinterpreted as a lack of sincerity. From Cornerstone’s viewpoint, we can share good news. We see bank leadership earnestly working through the spirit of ESG in dozens and dozens of boardrooms across the country, and we are bullish that corporate and workplace leadership will be a catalyst for positive change.

At same time, the pace of new mandates and expectations is increasing so rapidly that responding and complying with this new world is proving to be a thorny challenge for every executive. Bankers see ESG coming in bigger ways soon from the Office of the Comptroller of the Currency, the Federal Reserve, the Securities and Exchange Commission, institutional investors, and the stock exchanges. Sorting through this will take a focused effort from midsize FIs, and one hopes that smaller institutions will get some degree of relief as it all rolls out.

And that brings us to the topic of mergers. The banking industry is on pace to have a bang-out year of merger volume ($54 billion in deal value year-to-date). Yet, bankers must be fully aware that mergers will be viewed not just from a book value accretion lens, but more piercingly through an ESG and social policy lens. This scrutiny among all stakeholders will be higher than at any time in the industry’s history. From all sides, stakeholders will jump in on any deal announcement with the question, “Is this bank a socially responsible corporate citizen and do we want to give them license to do this?”

After 30 years of ongoing consolidation, banks have built machine-like merger and acquisition (M&A)  deal-making and integration capabilities, but they would be unwise to think of ESG as just another diligence, approval, and operational “box” to check. This focus can never be viewed as PR or window-dressing. It must be what pours out from the culture, the leadership, the brand, and the operations of a modern banking institution.

Earning the Trust of the Stakeholders

Love it, like it or hate it—the reality is that banks with an authentic and impactful execution of their ESG strategy will have better luck on the merger front with more support from stakeholders that can throw a wrench in things at any time.

As bankers active in M&A continue their ESG journeys, the Cornerstone team would offer the following strategic advice.

• Ensure the entire organization views this as a growth and learning opportunity. Initially some of this may feel like work or a new compliance burden, but if that attitude permeates throughout the institution, its cultural efforts won’t be successful. This is one of those opportunities where banks can take a “requirement” and turn it into a positive strategy that not only addresses the institutional and compliance side, but also the strategic growth side of the business.
• Get the story straight. Banks need to do the work to treat ESG impact statements seriously and better communicate their social responsibility outcomes as part of the heart and soul of the organization’s brand and culture. Banks are often active in worthwhile community and socially responsible initiatives, but these efforts are too fragmented and poorly communicated both outside and inside the organization. Better integration and communication help build stakeholder support and momentum in inspiring team members and partners to do more.
• Make ESG a major due diligence and integration work stream. Bankers risk underplaying the efforts that should go into ESG during the merger process including data analysis, brand and culture integration, lending products, market strategies, and staff training. Having an executive in charge of ESG integration and a combined strategy for mergers will be a small move with big impact.
• Leverage that fact that new generations of customers and employees want to see this. When it comes to testing and learning and tapping new leaders, executives have the chance to tap into new leadership mojo from younger generations’ diverse team members across the organization. Letting these types of leaders play “out front” during merger processes can add the right energy and buy-in to ESG among those applying scrutiny to a deal.
• Engage in creative ways to achieve outcomes versus blindly following dictums. In any new wave of institutional expectations and compliance, there’s bound to be some senseless regs and requirements. Some of these may seem more like socially responsible “theater” than creating a positive impact. At these times, leadership should avoid the eyerolls and instead engage in an effort to influence the evolution of the regs and the institutional dictums to better move toward the desired outcomes.

After the continuous rinse and repeat of “book multiples,” “capital dilution payback,” and “seamless operational integration,” embedding ESG into a mature merger playbook will feel new and uncomfortable to many bank executives. However, no matter what one’s political leanings, this new landscape will influence the value ultimately created (or not) through industry consolidation.

Banks are embattled between margin compression and technology disruption. Instead of ESG feeling like another weight on their shoulders, bankers would be better served to actively learn and shape how striving for additional non-financial outcomes best fits into the financial services industry.