Insights on social and political discord, risk management and governance, scenario and stress test analysis, and investment and strategic markets
Amid continued socio-political discordance, there is increasing need for climate and sustainability risk management, controls, and governance, inclusive of quantitative analysis.
Explore here insights on Climate and Sustainability from the KPMG report Ten key regulatory challenges of 2023.
Despite socio-political pushes, U.S. regulators will move forward in 2023 with climate-related enhanced supervision and increasingly codified requirements and guidance. Supervision frameworks are unlikely to be harmonized internationally (though will directionally align), forcing companies to set sustainability and climate priorities based on evolving opportunities and risks. Frameworks will include:
Divergence Between State and Federal Rules: Differing/discordant state climate-related regulations may further complicate the management of climate and sustainability programs; examples include California’s law to phase-out sales of new gasoline-powered vehicles, and Texas’ law prohibiting state agencies, local governments, and state public pension funds from contracting with or investing in firms that divest from fossil fuel energy companies.
The SEC and the prudential regulators will continue to examine the risk management and governance practices of companies to help ensure the companies are appropriately sizing, mitigating, and escalating climate and sustainability risks.
As these requirements and guidance are finalized and issued, areas of increased scrutiny will include:
Alignment of climate-related claims and marketing statements, such as emissions reduction targets or “net-zero” goals, with the company’s climate strategy and activities as well as consistency between financial and nonfinancial disclosures/reporting.
Regulators state that climate scenario analysis is a tool to assess climate-related financial risk and the resilience of a firm under different hypothetical climate scenarios. They further state climate scenario analysis is distinct and separate from bank stress tests.
As regulators look to utilize scenario analysis, and encourage their supervised institutions to do the same, they will specifically look at:
The legislative and regulatory focus on climate risks and impacts has created new avenues to investments, products and services, and strategic markets – this includes green and sustainable bonds and securitizations, tax credits, equity products, offsets (e.g., renewable energy credits or “RECs”), grants, and CRA-qualified lending/investments/services.
Financial service companies will continue to look at sustainability opportunities for their businesses and their clients, and to build suites of services to capitalize on these regulatory and legislative changes, including:
"From a compliance perspective, ESG considerations are rapidly evolving. To address this, and to the extent possible, we are integrating ESG into our existing compliance program and processes. This gives us the flexibility we need to meet our clients’ goals while maintaining the long-standing integrity of our platform."
Global Chief Compliance Officer at BlackRock
☑ Ensure consistency across mandatory vs voluntary reporting and disclosures
☑ Integrate climate risks into governance and risk management frameworks
☑ Develop initial assumptions and models for climate risk scenario analysis
☑ Factor potentially disproportionate impacts into decision-making
Ten Key Regulatory Challenges of 2023
Read our report for client perspectives, regulatory recaps, and actionable steps to help mitigate risk.Download PDF