The new push for mandatory ESG regulations for banks and financial institutions

Regulatory changes that affect how ESG is reported

In March 2022, the US Securities and Exchange Commission announced proposed rule changes to improve and standardize climate-related disclosures for investors. These rules “will require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material effect on their business, results of operations or financial condition, and certain climate-related accounting statistics in a note to their audited accounts.”

This will include requirements to report on greenhouse gas (GHG) emissions – mainly scope 1 and 2, and scope 3 if the company’s GHG emission targets include scope 3 emissions.

The European Union (EU) recently released a set of European sustainability standards for up to 49,000 large companies located in the member states. These are proposed regulations currently under consultation with a first draft expected to be delivered by November 2022 and implementation by 2025. What is interesting about these standards is that they include dual materiality. Companies will have to disclose not only sustainability impact to the company itself, but also externally about how the company affects society and the environment.

Perhaps most impactful is the fact that in April 2022 the UK became the first G20 country to implement mandatory reporting rules for large businesses. According to the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD), the new rules will directly affect the UK’s 1,300 largest companies by turnover, insurance companies and banks, as well as private companies with more than £500 million in turnover and 500 employees. According to the TCFD, “financial markets need clear, comprehensive, high-quality information about the impacts of climate change,” and these rules are intended to “provide decision-making, forward-looking information about how an organization addresses climate-related risks and opportunities.”

What positive steps can banks and financial institutions take?

So, can these types of regulations have an impact? According to an article from the Economics Observatory, yes they can. A study published in July 2021 found that “based on relevant evidence from all the fields of accounting, finance, management and economics … mandatory CSR reporting can have significant capital market benefits in addition to changing a company’s social and environmental impact. But this will not without risk and is conditional on well-designed reporting rules being in place.” These new government regulations are an attempt to ensure that these “well-designed” rules are established to have a significant impact.

In anticipation of this regulation, what can a financial organization do today? One of the first steps that can be taken is within the data center. The high-performance computing applications that banks and other financial institutions are beginning to use—high-frequency trading, risk modeling, fraud detection, and so on—are transforming data center design. The processing requirements of these applications mean that traditional air cooling technologies are no longer sufficient. Liquid cooling, on the other hand, is able to remove almost 100% of the heat generated by the electronic components of a server, while reducing energy use by up to 40% and water consumption by 90%. Recent benchmark tests found that this can translate to 30% total energy savings in the data center.

As stated by KPMG, “robust disclosures of climate-related financial information are important as they help support investor decisions in capital allocation and allow businesses to anticipate new challenges and to change their business model and strategy”. The good news is that there are also technologies and solutions available today to help businesses begin this transition immediately.

About the author: Jason Matteson is an IT equipment cooling specialist and data center solutions engineer. He is currently Director of Product Strategy at Iceotope Cooling Technologies based in Sheffield, UK. Jason holds 72 US patents, has authored or co-authored several IP publications, and has presented on industrial power and cooling trends at various technical symposia and conferences.