Capital markets regulatory focus areas for 2021

The following trends could have a significant impact on the business and operating environment for securities firms in 2021 and beyond:

• The shift to digital business models and assets
• Ensuring financial resilience
• Pandemic driving increased focus on operational controls
• Oversight of evolving talent models
• Climate risk

Our report offers several actions that capital markets firms can take right now to position themselves for the future:

• Governance: Make ESG part of the governance structure (e.g., climate risk executives, Chief Sustainability Officers (CSOs) and Board-level decision making)
• Enterprise Risk Management (ERM): Embed ESG into the risk framework intentionally, explicitly, and globally.
• Modeling, Quantification, and Stress Testing: Develop an understanding of climate science and climate risks, including their physical and transition risk, their transmission channels, and their manifestation as traditional financial and non-financial risks.
• Disclosure and Reporting: Accelerate adoption of the FSB’s Task Force on Climate-related Financial Disclosures (TCFD) principles, with the expectation that the principles will become mandatory in the short to medium term. Improve reporting processes, determining what risks should be reported or escalated to the board, and what performance benchmarks should be applied to those risks.
• Data, Technology, and Architecture: Understand that focusing on data challenges is an important part of enabling the internal transformation required to support the above activities, and to establishing a consistent and harmonized approach to measurement, stress testing, and other supervisory expectations – helping a firm respond efficiently to the challenges ahead.

Financial regulators understand that each institution is unique and can be affected by climate risks in different ways depending on its size, complexity, and geographic footprint. There is no one-size-fits-all approach for individual firms to address the inherent complexity and challenges that climate change poses. Still, there is increasing alignment globally on expectations, even as countries move at different speeds to incorporate climate risks into risk and governance frameworks. The pace of this global alignment is expected to be accelerated with new US leadership.