The political arguments about environmental, social and governance (ESG) investment are likely to continue on for a long time to come, but these shouldn’t stop firms focusing on climate risk.
It’s only January and already I’m tired of listening to politicians, industry executives and regulators debating the status of ESG. I feel like we’ve been trapped in a constantly repeating argument on the topic for the last 18 months and we’re staring at the prospect of the same for at least the next 12. For instance, last week’s World Economic Forum in Davos was peppered with discussions about sustainability and arguments about why it is in conflict with fiduciary duty. However, the irony of executives private-jetting to the event at a ski resort where little to no snow was present to argue about sustainability was worthy of inclusion in Alanis Morrisette song.
Even those that agree that ESG needs to be properly regulated can’t get on the same page as each other. This week, we’ve seen a UK-based sustainable association crowing about why the UK’s version of the Sustainable Disclosure Requirements (SDR – not to be confused with the Settlement Discipline Regime, finreg fans) are better than the EU’s version. Instead of collaboration, we’re seeing the usual competitive forces appear among national and regional regulators to throw global frameworks off course.
We’re never all going to agree on all of the aspects of E, S and G but we do need some level of cooperation among major market regulators to ensure some degree of global cohesion. One of the most important areas of focus should be on consistently measuring and reporting climate risk.
If you’re wondering why climate risk is so important to the industry, just think about this. Last year, countries in the Northern Hemisphere experienced one of the hottest summers on record. In some parts of the UK, the roads literally melted. But, most importantly from a capital markets perspective, the exceedingly hot weather caused some data centres to go offline. Cooling units couldn’t cope with the temperatures and circuits fried.
Remember when floods took out the bottom floors of firms in New York’s financial district including the DTCC? Floods are now a common occurrence across the globe and with rising sea levels, that isn’t going to get any easier to manage in the future. Likewise with hurricanes, typhoons, even storms that could disrupt your business and are increasing in strength and frequency every year.
As we progress toward a more cloud hosted future, the industry dependence on data centres and infrastructure based all over the world will increase. Not everything will be entirely under the control of your own teams and therefore as a firm and as part of your risk mitigation strategy, you need to factor climate risk into the picture. You need to look within your own walls and outside to your partners, especially those that support your mission-critical functions.
Operational resilience isn’t just about cybersecurity and reducing operational risk through automation, it’s also making sure you plan for natural disasters. Even if you think ESG is a flawed investment strategy, you can’t argue with the need to factor some of these risks into your operations. Longer term, you might even want to factor them into your investments, but I’ll leave for another day.