4. Engage in open regulatory dialogue
We see a “co-creative” process at play as new methodologies are needed to understand the extent of climate and other sustainability risks. Financial institutions and regulators together are defining an evolving field of finance. Industry practice and science-based innovation, to an extent, are informing supervisory expectations and ultimately regulatory requirements. We also see an unrelenting regulatory pace, particularly in the European Union (EU), with a suite of new regulations causing implementation challenges and confusion.
5. Monitor developments in jurisdictions that are “early movers.”
The UK and French climate “stress tests,” for example, will be informative on many levels; and the EU’s suite of new requirements and regulatory developments must be monitored carefully from a compliance and foresight perspective. Global firms, in particular, need to ensure that they have processes in place to adequately keep abreast and assess the implications of new developments, which may impact now or in the near future. The political or public policy barometer is worth following, as this may well be a leading indicator of when and how quickly a country may seek to accelerate or pivot the climate-related regulatory agenda.
6. Consider broader sustainability factors beyond climate risk
COVID-19 has bought greater attention to the other aspects of environmental, social and governance (ESG). We are seeing greater focus on these aspects in new or planned regulatory requirements, such as in new disclosures in the EU; or envisaged as part of the EU’s renewed sustainable finance strategy; as well as in recent amendments by the Securities and Exchange Commission of its business disclosure rules to enhance the focus on human capital disclosure. If climate change-related risk is anything to judge by, regulators will continue to look to and, in many ways, take the lead from the industry while developing sustainability-related requirements.
Various global initiatives are underway to foster transparency and comparability by driving frameworks, standards and metrics for sustainability and long-term value creation. It is worth staying close to such developments, as they are likely to inform regulatory thinking, at least in some jurisdictions, if not globally.