Floods, droughts, food shortages and mass migration are just some of the consequences of climate change. The floods in the UK and the forest fires and hurricanes in the US provided a preview of the effects climate change could have on our planet. But financial services firms must start to think about how these physical threats will affect their ability to do business in the future. This article, the third in this series on environmental risk, looks at what the banks need to consider regarding their physical soundness and environmental policies.

Flooding and resulting power failure is perhaps the most immediate threat to financial services firms, particularly those in London. The recent threat of a tidal surge up the Thames and fears that the Thames Barrier could be overwhelmed, coupled with the extensive flooding in Gloucestershire and Yorkshire last year, have brought the importance of business continuity management into sharp relief for banks.

"We are certainly seeing a change, from people just talking about green issues to putting in place practical mitigation strategies," says Keith Tilley, UK managing director and executive senior vice president for Europe at SunGard Availability Services. "Firms are ensuring there are safeguards in place against events that previously rarely happened, such as the extreme flooding seen last summer in Gloucestershire. Traditionally we only had interest in flood defence from the areas of London in the Thames flood plain, but now flooding is something that firms across the country are taking into consideration when conducting their business impact analysis. More firms are asking us about the location of our facilities, which is something that did not happen before."

Banks are reviewing and building datacentres away from London to ensure business continuity. Parm Sangha, business development manager at Cisco Systems says: "The drivers behind this are threefold. From an operational risk point of view, the density of secondary datacentres located in one part of the city was increasing, so the whole risk profile in light of certain risk events, for example terrorism and floods, had to be reviewed. The second risk converging on banks was the supply of energy, as they were all on the same grid. The third event directly affecting the banks' bottom line was the rising cost of energy to service their datacentres. Now banks are having to revise their risk controls for business continuity by building third datacentres to ensure that they are outside of the city, away from other banks' centres, with secure energy supply and protection from high-severity risk events."

In addition, an integrated approach between the design of risk controls and the challenges faced by banks on the business side provides an opportunity to gain competitive advantage from having to build third datacentres, by upgrading their systems with more energy-efficient deployment configurations.

"The implementation of the Markets in Financial Instruments Directive (Mifid) and the increase in algorithmic trading means that banks will be sending out 10 times as many orders for every trade. Now is the time to construct not only the smart supply of energy to your datacentre, but to start using virtualisation in your storage and processing to ensure you get optimum use and lower latency," says Sangha.

Tilley agrees. "Aside from ensuring the continuation of their business in the event of a natural disaster, firms are also looking to business continuity planning to help them reduce their carbon footprint through virtualisation. That involves taking all their IT requirements and squeezing them down to reduce the amount of hardware they need. This helps to reduce their overall carbon footprint by cutting down on the amount of power used and, most importantly, helps firms to cut costs."

Virtualisation is certainly a buzz word in the business continuity world as it can help banks become more efficient and store data digitally rather than in a format that has to be transferred physically.

"The ultimate aim of virtualisation is to look at the IT estate of a company and run analysis to determine how it can help to cut down on servers, streamline data storage to reduce costs and enable more efficient recovery. A helpful by-product of that is that their carbon footprint is reduced," says SunGard's Tilley. "Financial services firms are very much at the forefront of this drive to be green and they are also driving much of the virtualisation technological advances to reduce inefficiencies and their carbon footprint."

Citi is close to completing a sustainable datacentre in Frankfurt. The Frankfurt datacentre, which among other green design features has a grass-planted roof, is expected to save about 11,700 tonnes of CO2 per year, which according to ClimateCare would otherwise cost £103,000 to offset.

At the launch of the project in August 2007, Citi claimed the datacentre would save up to 25 per cent of electrical energy consumption compared to conventional datacentres. However, more recently John Killey, head of realty services for Citi, speaking at the Finexpo Green City event in London in April 2008, admitted the power requirements of its IT equipment are continuing to rise by 12.5 per cent per year. Killey attributed the rising energy consumption of the group's IT equipment to the efficiency of the computer systems in each facility, rather than the design of the facility.

Buildings and IT systems are a big consumer of energy and are a major contributor to banks' carbon footprints – electricity consumption made up 69 per cent of HSBC's carbon footprint in 2006. Rising energy prices are also driving up costs for banks. According to research by Cisco Systems, one bank saw its energy bills rise to £8 million per year purely due to price increases. So banks have a financial incentive to reduce energy consumption as well as a green one. Installing an intelligent energy metering system could help to optimise their energy consumption.

"High energy prices are set to continue and this is really bringing the issue to the fore," says Neil Harris, green IT manager at Cisco Systems. "One of the main problems is that there is no link between a chief information officer's (CIO's) responsibility for energy consumption and the actual energy budget within an organisation. If we could get IT to take accountability for the cost of energy it consumes, we would see a lot more action in this area."

He adds: "If the CEO has made a public announcement about going green, the CIO should be creating a green IT strategy that corresponds to the business' sustainability goals, ensures IT expenditure meets today's and tomorrow's eco-standards, and that IT is constantly examining and tuning itself to ensure investments and strategies are conscious of the energy they consume. In the future it will become the norm to have an energy budget, or carbon budget, for each project."

Adoption of eco-friendly computing is fast emerging as a priority for technology decision makers. A new report by independent market analyst Datamonitor, Trends to watch: green IT, predicts a surge in CIO interest and vendor initiatives in green IT, fuelled by tighter regulatory measures and advances in technology. In an independent survey conducted by Datamonitor, more than 75 per cent of respondent firms considered eco-friendly computing an important element in their IT strategy, while a further 15 per cent rated it as their top IT priority.

Going carbon neutral

Several leading banks are working hard to reduce their physical carbon emissions. Green leaders such as Standard Chartered, Citi and HSBC are investing in energy-efficiency systems, including low-energy lighting, recycling, more energy-efficient heat management systems and buying green energy, as well as being involved in international projects to raise awareness of climate change.

"Many banks are keen to advertise their policies on climate change, though it is not always clear exactly what they are doing," says Matthew Elkington, vice president at Marsh Risk Consulting in London. "As in most sectors, financial services firms have been promoting their green credentials over the past few years, particularly commercial banks, but the more cynical industry observers increasingly question how seriously they regard climate change or if it is just being exploited as a PR exercise or so-called 'greenwash'."

Recent research carried out by internet network provider Cisco Systems looked at the top 60 companies in Europe to assess the action behind the green headlines. “We were seeing at lot of green-focused headlines from big organisations so we wanted to look at what tactics and strategies they are employing to make this happen and enable us to think about how we could get involved," says Harris. " We measured firms' executive commitment through to how they publicise their results, to what tactics and technologies they are employing internally to make it happen. Our main conclusion was that, although there is an incredible desire at board and management level, the tough realities of doing this only start to be realised six to 12 months down the line.

"It really is not easy. A growing organisation has to be as agile as possible in today's globalised world, and it is really tough to implement green projects that in many cases aspire to carbon neutrality – and we have seen, in one or two cases, firms taking the easy route. That can be as simple as outsourcing large chunks of their carbon profile. However, the sophistication of many non-government organisations, industry commentators and emerging policies will not let that go unnoticed."

Reducing their carbon footprint and becoming carbon neutral has been a major issue for the leading banks, with most of the top-tier banks professing to have achieved carbon neutrality. In 2005, HSBC became the first major bank to become carbon neutral, with many more following suit in the past few years. But the lack of any accepted methodology or reporting standards for green policies such as reducing carbon neutrality makes it difficult to assess how green firms really are and how they compare with their peers.

"The question in the back of my mind is how firms are measuring their carbon footprints," says Elkington. "Are they just talking about their offices and the energy they use or do they consider their indirect contributions to global emissions arising from their operational and investment activities such as lending to and financing power stations and other heavy-emitting sectors? There are so many differences between how various companies measure their green behaviour that without defined and commonly accepted guidelines and standards it is impossible to compare apples to apples."

At an operational level, actions by banks to help achieve carbon neutrality have included amending company policies such as introducing a climate change or energy policy to ensure "green" energy is purchased; improving infrastructure by investing in more energy-efficient plants and equipment; and instigating programmes to change employee behaviour regarding energy consumption such as " switch it off" campaigns.

Cutting down on business travel is an immediate way a firm can cut its carbon footprint, and costs, but in banking face-to-face meetings are usually expected and are well bedded into the corporate culture. That said, the more forward-looking banks, such as HSBC, are attempting to cut back on travel by installing state-of-the-art videoconferencing. Cisco's TelePresence advanced videoconferencing delivers real-time, face-to-face interaction between people using advanced visual, audio and collaboration technologies. These technologies transmit life-size, high-definition images and spatial discrete audio, which allows the participants to discern facial expressions for discussion and negotiation across the virtual table.

There are many ways in which to prepare for the impact of climate change, most of which also result in dramatic cost savings, be it through reduced energy consumption or ensuring the continuation of business. Having an environmental strategy makes sound financial sense from more than just a market and credit risk perspective – ensuring the effects of climate change are included in areas such as business continuity and disaster recovery plans, outsourcing contracts and reputational risk under Pillar II also demonstrates to regulators, as well as investors and the public under Pillar III disclosure requirements, that the firm has a robust and wide-ranging operational risk framework.

The threat of climate change will not go away – indeed, global regulation is gathering momentum – so it is vital that businesses address issues such as energy consumption. The most successful in the new world era will be those who start to prepare now.

Victoria Pennington is deputy editor of OpRisk & Compliance, the monthly magazine that covers regulatory initiatives and features on implementing operational risk and compliance frameworks within financial services firms.

A version of this article first appeared at OpRisk & Compliance