Silicon Valley Bank (SVB) was renowned for its broader ESG (environmental, social, and governance) commitments, yet ESG concerns, or more specifically those around governance, played a role in its demise.
Despite lessons from 2008, the lack of oversight and risk management in recruitment and money management contributed to the bank’s eventual collapse. SVB is now being bought by First Citizens, who are taking on the bank’s assets and loans.
Weak corporate governance plagued SVB
Despite its ample ESG investing, SVB neglected its own ESG efforts. For nearly eight months of 2022, the bank did not have a chief risk officer (CRO), demonstrating the lax attitude towards risk management that permeated the company. This also suggests that the CRO role was not functional and was merely implemented to tick a box. Surprisingly, appointing a new CRO was not a priority for the bank, despite the overall industry facing a growing range of challenges that indicated the need for extra mitigation measures, such as sharply rising interest rates and high levels of inflation.
It is widely accepted that SVB failed due to a liquidity mismatch and the ensuing bank run. SVB had previously received citations from the Federal Reserve, in which the Fed expressed their doubt about whether SVB could handle a high volume of withdrawals. Sufficient action was not taken by the bank’s leadership on the recommendations that were given, resulting in the crisis that we see today. The rating agency Moody’s echoed this sentiment, saying that SVB’s profile “reflects high risk in its financial strategy and risk management”. The Justice Department and the SEC have initiated investigations into SVB, as reported by the Associated Press, and are looking into the conduct of senior bank executives.
ESG investments are being unfairly attacked for the bank’s failure
Blaming a general focus on ESG investing for the collapse of SVB is misplaced and opportunist from ESG detractors. The bank collapse exacerbated an already fiery culture war in US politics, which has already seen the state of Florida pass a bill that would remove ESG considerations in pension funds. There is evidence to suggest that investing in companies with high ESG ratings is good for financial returns, but there is also evidence for the reverse.
Ronny Jackson, a Republican congressman tweeted that “the woke agenda coming from SVB is in a large part to blame for their failure.”
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However, true adherence to ESG principles would include good governance, which would have meant ensuring that there were effective risk management levers in place, something SVB was not doing. Without the need for an annual Dodd-Frank stress test, there was less accountability, and the chance of the present issues being seen decreased.
So, in opposition to what Congressman Jackson may believe, more ‘wokeness’ could have gone a long way to saving the bank. SVB was rated highly for its ESG investments. The bank announced a $5 billion program to support its clients’ sustainability businesses and an $11.2 billion community benefits plan. The bank took plaudits for being successful in the ‘E’ and ‘S’ areas of ESG, which regularly take the headlines when it comes to corporate strategy.
Inadequate risk management
However, this helped to shroud the true ESG credentials of the bank—it severely lacked good governance. Despite this, it is the bank’s ESG investments that are being unfairly attacked. Analysis so far seems to suggest that these investments did not play a part in the collapse.
SVB suffered from poor governance and inadequate risk management, which opened it up to a bank run. ESG detractors are unfairly blaming the bank’s collapse on its ESG investing positions, despite 56% of their holdings being US treasury bonds. This argument is merely being used for political point scoring.