The new push to mandatory ESG regulation

Amongst other events, the most recent UN Climate Change Conference, COP26, sparked a greater sense of urgency for both countries and companies to address the climate crisis. The reporting and regulating of Environmental, Social and Governance initiatives is one resulting area that has come under greater focus. ESG reporting has been around for a while, but has historically lacked the teeth to influence long-term change as measurement was voluntary, nonstandard and incomplete. Now the push for greater transparency is getting a boost with mandatory regulations coming into play around the world.

In March 2022, the United States Securities and Exchange Commission announced proposed rule changes to enhance and standardize climate-related disclosures for investors. These rules “would 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 impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” This would include requirements to report on Greenhouse Gas (GHG) emissions - predominantly 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 (ESRSs) for up to 49,000 large companies located within member countries. These are proposed regulations that are 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 the fact that it includes double materiality. Businesses will need to disclose not only sustainability impact to the company itself, but also outwardly of how the company impacts society and the environment.

Perhaps the most immediately impactful is the fact that, in April 2022, the UK became the first G20 country to implement mandatory reporting rules for large businesses. Following the Financial Stability Board’s (FSB) Task Force on Climate-related Financial Disclosures (TCFD), the new rules will directly affect the UK’s 1300 largest traded companies, insurers 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 on the impacts of climate change” and these rules are intended to “provide decision-useful, forward looking information about how an organization is addressing climate-related risks and opportunities.”

So, can these kinds of regulations make an impact? According to an article from the Economics Observatory, yes they can. A study released in July 2021 found that “based on relevant evidence from across the fields of accounting, finance, management and economics . . . mandatory CSR reporting could have significant capital market benefits as well as altering a business’ social and environmental impact. But this does not come without risks and is conditional on well-designed reporting rules being in place.” These new government regulations are an effort to ensure that those “well-designed” rules are established to have a material impact.

In anticipation of these regulations, what can a financial services 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, etc. - are transforming data center design. The processing requirements of these applications means that traditional air cooling technologies no longer suffice. Liquid cooling, on the other hand, is able to remove nearly 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 this can translate to a 30% total data center energy savings.

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 forecast emerging challenges and to transition their business model and strategy.” The good news is there are also technologies and solutions available today to help companies begin that transition immediately.