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U.S. social unrest presents opportunities for firms to enhance ESG credentials, bolster ties with other stakeholders

NEW YORK(Thomson Reuters Regulatory Intelligence) - *To read more by the Thomson Reuters Regulatory Intelligence team click here: bit.ly/TR-RegIntel

A woman attends a banned demonstration planned in memory of Adama Traore, a 24-year-old black Frenchman who died in a 2016 police operation which some have linked to the death of George Floyd in the United States, in front of courthouse in Paris, France June 2, 2020.

The racial justice protests unleashed by the killing of George Floyd last month have offered U.S. companies an opportunity to take a stand – and some have been unflinching in their response. This is in contrast to the U.S. social unrest of 1968 when corporate America essentially watched from the sidelines.

As the social dimension of corporate environmental, social and governance (ESG) policies has grown in importance, due both to this year’s COVID-19 pandemic and, now, a social upheaval highlighting deep racial divisions, how U.S. companies react may become a critical factor in how they are perceived by not only investors but also a broader coalition of stakeholders who have become increasingly important.

“The question being asked is to what degree can we quantify and therefore measure and allow companies to compete over their contributions to inclusion and equal treatment,” said Ross Levine, professor at the Haas School of Business, University of California, Berkeley.

“There is really quite a bit of evidence that corporations that invest in non-shareholder stakeholders can obtain long run benefits,” he added.

With respect to the mass protests unfolding across U.S. cities this week, those non-shareholder stakeholders include residents of lower-income, predominately black communities, where the economic gap with the rest of society has only widened because of the pandemic’s unequal death toll and its financial fallout.

This has prompted some corporations to stake a stand, in public statements, financial actions and internal policies that do not tolerate racism.

BANK OF AMERICA REACTS QUICKLY TO SOCIAL UNREST

On Tuesday, Bank of America, one of the largest U.S. lenders, took a lead in responding to the social unrest, announcing a $1 billion, four-year commitment to help communities “address economic and racial inequality accelerated by a global pandemic.”

The bank said the funding would focus not only on health issues related to the pandemic, such as virus testing, telemedicine, flu vaccination clinics, and other health services, but also on support to minority-owned small businesses and further “recruitment and retention of teammates in low-to-moderate-income and disadvantaged communities to build on work the company has already done to serve clients locally.”

“Underlying economic and social disparities that exist have accelerated and intensified during the global pandemic,” said CEO Brian Moynihan. “The events of the past week have created a sense of true urgency that has arisen across our nation, particularly in view of the racial injustices we have seen in the communities where we work and live. We all need to do more.”

The focus on recruiting individuals who may better understand the needs and issues of such communities is a way in which banks and other financial-service providers can make a meaningful difference, said some experts.

“I think it could be effective for banks to look internally and ask who are the decision-makers? Are they people of color and do you understand the community the way that an entrepreneur does?” said Melissa Murray, professor at NYU School of Law.

Other financial firms also weighed in. The heads of U.S. banking majors JPMorgan Chase and Wells Fargo issued statements denouncing racism and discrimination, while CEOs of Canada’s Toronto-Dominion Bank and Canadian Imperial Bank of Commerce called for action to tackle racism.

Meanwhile, SoftBank Group announced a $100 million U.S.-focused fund to invest in “companies led by founders and entrepreneurs of color.” Described as SoftBank’s bid to improve diversity, “we have to put money behind it, set plans, and hold ourselves accountable,” SoftBank’s chief operating officer Marcelo Claure, who will head the fund, wrote in a letter to employees on Wednesday.

Also making headlines, and demonstrating zero tolerance for racist behavior, was a decision by Franklin Templeton to fire a white employee after a viral video showed her calling police to say she felt threatened by an African-American bird-watcher who asked politely that she leash her dog in an area of New York’s Central Park that required it.

The 1968 violence that killed dozens and gutted major cities in protests against the assassination of civil-rights leader Martin Luther King Jr. came amid other turmoil, over the Vietnam war and the assassination of presidential candidate Robert F. Kennedy. It spurred public condemnation of the protesters and support for tough police “law and order” crackdowns. But Wall Street, buoyed by a strong economy, was unfazed. At the time, the U.S. non-white population was smaller as a share of whole, and the labor force and corporate leadership were less diverse.

CORPORATIONS CAN HAVE INFLUENCE ON DIVISIVE ISSUES

While most U.S. companies have tended to steer clear from contentious social issues, experts say evidence suggests the private sector can sometimes play an influential role in helping shape future government policy.

Murray of NYU Law pointed to past efforts by large companies such as Coca-Cola, Mattel, Nike and Google to provide LGBTQ employees with some of the benefits of marriage, even as same-sex relationships were ineligible for state marital recognition.

“A really interesting example in the runup to marriage equality legislation is when a lot of state and local governments were not recognizing same sex-marriages, but businesses did ... and a lot of this occurred in quite red states,” said Murray. “As the states began to pivot about same-sex unions they actually drew on those industry examples.”

A similar case can be made for the role of corporations in advancing paid family leave policies in recent years. Beginning in 2015 and 2016, a slate of influential businesses, including American Express, Ikea, Amazon, Twitter, and Netflix, announced expanded paid family leave plans for their employees, offering, in many cases, several months of paid leave to new parents. The United States is the only developed country in the world that does not provide paid maternity leave at the federal level, and only a handful of states have laws requiring paid family leave.

“In stark contrast, all twenty of the biggest companies in the United States currently offer paid maternity leave policies,” said Murray in a recent study. “As with the decision to offer benefits to same-sex couples, corporate leave policies were not animated solely by a desire to influence public policy; indeed, many companies viewed the family leave policies as an effective tool for recruiting and retaining talent.”

FEDERAL AGENCIES SEEM DIVIDED AS WELL

One of the most important U.S. financial regulations regarding poorer communities is the Community Reinvestment Act (CRA), a 1977 regulation that combats redlining, or racial bias in lending, and requires banks to meet the needs of local communities, particularly for low- and moderate-income borrowers.

In December, the Office of the Comptroller of the Currency joined the Federal Deposit Insurance Corporation in unveiling a modernized version of the CRA, which according to Joseph Otting, then head of the OCC, aimed to promote more CRA-qualifying lending, investment, and services in the communities banks serve.

Last month, at a Senate banking committee hearing, several senators voiced strong opposition to the proposed CRA overhaul, particularly given the economic crisis from COVID-19 and the disproportionate harm inflicted on lower-income workers and those infected with the coronavirus.

Senator Brian Schatz, a Democrat from Hawaii told Otting and FDIC head Jelena McWilliams: “This is the wrong idea at the wrong time ... No one I’ve talked to thinks this is a good idea. I do urge you to postpone this rulemaking.”

“If we are looking at CRA reform we have to do that in concert with affected communities,” said Mark Warner, Democrat from Virginia, adding that it was noteworthy that the Federal Reserve had not signed on to the joint proposal from the OCC and FDIC.

Since then, Otting went ahead with a final version of the revamped CRA[go-ri.tr.com/Z8fK3Z] before stepping down the next day as OCC head. The FDIC did not join the OCC in finalizing the rule, saying that smaller banks were already facing a "Herculean effort" in helping businesses weather a global pandemic.

The resulting picture is one of division among the top U.S. banking regulators over a rule that affects millions of low-income black and minority consumers.

PEER PRESSURE COULD BE A POWERFUL FACTOR

Industry peer pressure could play a role in advancing private sector company policies on inclusion, diversity and more active engagement with minority communities.

With Bank of America having set a prominent bar for other banks to follow, how they respond to the crisis engulfing these communities could have a lasting effect on important stakeholders as well as investors, a growing number of whom are putting such considerations high on their investment criteria.

“The issue here is are there leaders who can take hold of this and drive it towards positive outcomes,” said Levine of Haas Berkeley. “Identifying firms that behave appropriately and highlighting them as examples and pointing out firms that don’t can be a powerful force.”

(Henry Engler, Regulatory Intelligence)

This article was produced by Thomson Reuters Regulatory Intelligence - bit.ly/TR-RegIntel - and initially posted on June 5. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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