This is the second of a four-part article series

In the second part of this four-part article series, we delve into two more areas: increasing climate vulnerabilities and the rise in regulatory scrutiny, expected to remain at the forefront of priorities for corporate finance and treasury executives in 2024.  

We trust that finance and treasury professionals can derive value from this article, enabling them to prepare effectively and proactively address the likely challenges associated with escalating climate shocks and regulatory scrutiny.

1. Climate vulnerabilities

Among the array of risks that corporate treasurers had to encounter in 2023, geopolitical, cybersecurity, market, credit and liquidity stood out as the foremost concerns. However, one of the biggest challenges facing corporations and their treasury teams next year will be the impact of climate change-induced natural disasters.

According to The Economist Intelligence Unit’s (EIU) white paper Risk outlook 2024, “Climate change models point to increased frequency of extreme weather events. So far these have been sporadic and in different parts of the world, but they could start to happen in a more synchronised manner. Severe droughts and heatwaves have already weighed on crop yields, and the return of El Niño could exacerbate weather events and lead to record-high global temperatures in 2024.”

El Niño as outlined by the World Meteorological Organization (WMO), is marked by warmer global temperatures that heighten the likelihood of severe weather and climate events. These may include heatwaves, drought, wildfires, heavy rain and floods across various regions.

The EIU white paper reckons that such climate and weather disruptions, in conjunction with geopolitical factors such as the breakdown of a grain export deal between Russia and Ukraine, may intensify operational strain on industries reliant on commodities, such as agriculture, mining and manufacturing.

In the final weeks of 2023, which is officially the warmest year in recorded history, the Intergovernmental Panel on Climate Change (IPCC), “The international body responsible for limiting global warming and its disastrous effects called on countries to transition away from the chief cause of climate change – fossil fuels – for the first time”, as was reported in a recent article published in NPR.

While the agreement to move away from fossil fuels (coal, oil and gas) was approved a week ago (December 13) at the United Nations Climate Change Conference (known as COP28) in Dubai, “With the overarching aim to keep the global temperature limit of 1.5°C within reach”, according to a statement issued on December 13 by the UN Framework Convention on Climate Change, it seems unlikely that businesses, investors, consumers and governments worldwide will promptly unite to limit global warming (global temperature rise) to 1.5 degrees Celsius (2.7 degrees Fahrenheit) above pre-industrialisation levels.

“The science on climate change is clear. To limit the worst effects of planetary warming – runaway sea level rise, mass extinction of plants and animals, and damaging and deadly wildfires, hurricanes, droughts, heatwaves and floods – the world needs to reduce its emissions of climate-warming fossil fuels rapidly and steeply”, warns NPR’s article (December 13).

Not all of the nearly 200 countries present at COP28 were happy with the deal on fossil fuels, There are deep divisions over the issue. This makes it harder to imagine that countries around the world will come together quickly to limit global heating to the crucial 1.5°C threshold.

Given the expected rise in climate hazards in 2024 and their potential impact on corporate balance sheets, it becomes imperative for treasury professionals to engage in discussions about climate risks and to approach climate vulnerabilities with the utmost seriousness. In this context, harnessing climate risk intelligence and the integration of climate-related shocks into existing risk management systems will play a pivotal role in mitigating climate change risks and advancing progress in this area.

2. Rise in regulatory scrutiny (AI, data, privacy, competition, and FBAR)

Regulatory activity is on the rise in the US, the European Union (EU), and elsewhere, particularly in response to advancements in artificial intelligence (AI), data access, privacy and competition.

Boards and regulators exert the greatest influence for driving corporate compliance. Additionally, investors/shareholders, employees, customers, and the overall public sentiment are exerting increasing pressure on companies, seeking accountability in relation to their strategies, operations, and compliance initiatives.

Furthermore, over the past few years, the United States government has significantly heightened its enforcement initiatives regarding the reporting of Foreign Bank and Financial Accounts (FBAR), with the primary responsibility for such filing lying with corporate treasury and tax departments.                                                                                                                                     

EU’s AI Act, is the world’s first comprehensive AI legislation to regulate the development and use of AI. The AI Act was “Originally designed to mitigate the dangers from specific AI functions based on their level of risk, from low to unacceptable. But lawmakers pushed to expand it to foundation models, the advanced systems that underpin general purpose AI services like ChatGPT and Google’s Bard chatbot”, the Associated Press (AP) News reported recently.

“Other EU regulations, such as those on data (the Data Act and Data Governance Act), privacy (the General Data Protection Regulation) and competition (the Digital Markets Act—DMA), will also have an impact on the evolution of the AI market. The DMA, with the Digital Services Act (DSA), will become fully enforceable in 2024, giving regulators a greater say in the internet market, especially for the largest companies, which will be under greater scrutiny”, stated the EIU’s white paper Industry outlook 2024.

Taking its first strides in AI regulation, on October 30, the US President signed an executive order (EO) focusing on the safe, secure, and trustworthy development and use of AI. According to an article published in Vox Media on October 31, the order broadly summarized, “Directs various federal agencies and departments that oversee everything from housing to health to national security to create standards and regulations for the use or oversight of AI.”

The EO comprises multiple provisions that present corporations with both risks and opportunities. This underscores the need for corporate compliance and treasury teams to maintain a close vigil on the development and implementation of AI technologies. It is equally vital for them to adapt their strategies to conform to the changing landscape of AI standards and regulations, while giving priority to security and privacy within their organizations to minimise risk exposure and safeguard brand reputation.

Moreover, the elevated regulatory scrutiny surrounding emerging technologies, privacy and data protection has placed another layer of pressure on corporate compliance and compliance technology budgets. This necessitates budgetary increases in cybersecurity/data privacy, data analytics, process automation and AI. It will also involve prioritising investments in risk assessments, monitoring and testing, third-party risk management, and governance practices to uphold critical operations and embrace a data-centric approach to compliance.

In conclusion, this article emphasises the increasing importance for corporate treasury teams to allocate additional time and resources in 2024 towards addressing key vulnerabilities posed by climate change and mitigating potential compliance risks that can adversely impact a corporation’s capital, earnings and reputation.

Doing so will ensure that treasury leaders take effective action to turn climate risk and corporate compliance into a competitive advantage. In this regard, the content available on CTMfile will help you stay abreast of developments and assist you in honing your expertise. We invite you to continue reading CTMfile and staying connected with the OpenTreasury Podcast through the entirety of 2024.

To read the first part of this article series, click here: 

To read the third part of this article series, click here:

To read the fourth part of this article series, click here: