A few things I’ve been reading recently - from the FT’s Swamp Notes on the absence of nuance in political debate to Rebecca Solnit on the history of activism - have indirectly highlighted some of the potential limitations of official bodies, including regulators. Briefly, their arguments expose the flaws in our natural tendency to approach problems in a relatively binary way, looking to simplify wherever possible and focusing on a strategy of full frontal assault. When the problem is complex, like climate change, we potentially miss large swathes of both the problem and its solutions.
These thoughts came to mind last week, following the IPCC’s latest report on climate change, and in particular when digesting my colleague Sandy Trust’s concise distillation of the PRA’s consultation on supervisory expectations (see link). The FCA too has just waded into this territory with its own discussion paper.
Part of the climate change story, of course, is that took a long time to reach the official agenda, and was propelled there by many forces far beyond the reach of regulation. Even if we look back only as far as the early 1960s, it’s evident that this narrative is a long and winding one. Given this history and climate change's immense complexity, it’s worth regulators, and firms, looking for some new approaches in addition to those currently on the table.
In other contexts I’ve several times been told that banks look for a return on investment over no longer the three years. And, given the remorseless routine of quarterly results announcements and the prioritisation of shareholder value, even this might be optimistic. Regulators likewise tend to operate on, at best, a three year cycle. However, even against the stark warnings of the IPCC report, climate change is a much longer term game.
It follows from this that an effective regulatory strategy for climate change should be similarly long term. And that it should also be sufficiently flexible to recognise that the future of climate change progress, like its past, will not be wholly dependent on actions taken by governments and large firms, important though they are. If so, this will challenge many operating models, including those of regulators.
Regulation has also tended to tackle the problems right in front of it. Aspirations to be forward looking and to focus on root causes over symptoms have often proved frustratingly elusive in practice but an effective regulatory approach to climate change will demand both these qualities.
The PRA and FCA papers are an important initiative, but I suspect climate change will also require the development of new and creative tools. Some may be unusually long term, establishing a predictable framework for firms to plan towards; others could be more immediate and dynamic, to remain in step with change on the ground. Both would challenge existing regulatory practice.
The consultation follows last week’s report from the International Panel on Climate Change on the challenges and opportunities associated with achieving the Paris goals on limiting global temperatures to 1.5°C. The report highlighted the significant role of investment and lending decisions in funding the transition to a low carbon economy.