Exploring the Next Frontier in Banking: Sustainability Regulation

How times change! Ten years ago, when someone asked me, "so where does government fit into all this stakeholder management work on corporate responsibility UBS does?" I was hard pressed to give much of an answer. My main concern at that time was with non-governmental organizations, some of which had just discovered that, when it came to environmental and social matters, banks would also make for a relevant addressee of their concerns. Governments' concern at the time was undoubtedly with banks, but definitely not regarding environmental and social matters; 2007 was the year the financial crisis came to the fore.

And today? I am equally hard pressed to condense the topic of governments, regulators and sustainability in finance. That's because I've personally become fascinated by the evolution of this topic in recent years (which is probably the historian in me looking back at how it all came about). But in the main, it's because of the topic's growing (business) implications.

When governmental and regulatory bodies act upon societal matters they do so with companies across all industries in mind. A good example are sustainability-related disclosure requirements. Whether it's the EU Directive on Disclosure of Non-Financial and Diversity Information by Large Companies and Groups (and, more specifically, its ongoing transposition into national law by EU member states) or the somewhat more localized UK Modern Slavery Act. To give another example, the conflict minerals disclosure provisions in the US Dodd-Frank Act and those passed by the EU parliament.

This broad applicability is also true of the work of the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TFCD), initiated by Mark Carney, Governor of the Bank of England, in 2015, and headed by Michael Bloomberg, former mayor of New York. This example does not as yet concern regulation, but the broader realm of standards and guidelines, that address sustainability issues. The UN Guiding Principles on Business & Human Rights launched in 2011 performs a similar role, which does not make either of these less relevant!

The FSB's TFCD encourages organizations to evaluate and disclose climate-related risks and opportunities most relevant to their operations in their financial statements and reporting processes. And with that we move into classic financial sector "territory". Put simply, it's about how these risks and opportunities, once properly disclosed, will impact investors' decisions. In other words, it's about the financial materiality of climate change! Given evolving notions of fiduciary duty, once materiality is established then this has very direct implications for how financial services providers interact with clients and investors. This is how sustainability integrates itself into the mainstream.

So, what do I conclude from all of this? First, the scope and diversity of topics in this area is growing and confusing. Second, most in the financial community are not even aware what is evolving here – and what kind of (new) challenges and opportunities this presents. Third, to better understand these developments requires joint cross-financial sector discussions. And therefore, fourth, UBS is actively partnering with a number of peers and the sustainability consultancy ECOFACT on what we call the Policy Outlook network. On 6 June we ran a full-day conference in London ("Exploring the Next Frontier in Banking and Insurance: Responding to Sustainability Regulation") which looked precisely at all of the above and more: key emerging sustainability-related standards and regulations addressing the financial sector; their main implications for financial firms and the challenges in responding to these developments; practical experience from institutions who have already acted on these developments. Lots to report on in the future. So watch this space for more!