Sustainable finance risk management within the financial services sector

Because of its special role in the economy, the financial sector has become increasingly central to measures to implement and achieve the climate targets set out in the Paris Agreement and the 17 UN Sustainable Development Goals (SDGs). Alongside climate change, social inequalities and responsible corporate governance are further exemplary and immediate fields of action in the central focus of public attention. Numerous regulatory initiatives have been launched worldwide through the Paris Climate Agreement. In the EU, these include the action plan for financing sustainable growth, which has initiated a variety of legislative measures.

Key central banks and financial regulators around the world are also developing concepts for the financial sector in the newly founded Network of Central Banks and Supervisors for Greening the Financial System (NGFS). We observe that their impulses are increasingly being taken up by national regulators for national development and implementation, such as recently by BaFin in Germany.

The willingness to provide funding for climate-related investments is directly linked to a corresponding further development of risk management by investors and financial intermediaries such as banks. Some regulators have also expressed more specific expectations regarding the management of environmental, social and governance (ESG) risks at banks, such as the European Banking Authority (EBA). In principle, banks are expected to start implementing measures to adapt their risk systems in a timely manner, as Andrea Enria, Head of European Central Bank (ECB) Banking Supervision, emphasised once again in June 2020, i.e. in the middle of the ongoing corona pandemic.

At the same time, the foundations for the development of appropriate systems have yet to be laid. Their development is being worked on intensively at many levels and there is still a long way to go. These include, for example, the development of practical sustainability criteria in the form of taxonomies (see TEG) or best-practice methods for ESG risk management or standard processes in the implementation of scenario analyses for sustainable finance. Banks face difficult challenges in this situation.

Apparently, only those institutions that decide early on to implement ESG criteria in their organisations with the corresponding mapping in risk management will be sustainable and can grow in the future. Only in this way will they continue to be perceived as credible market participants. On the other hand, the objectives for best-practice in green risk management will still change significantly and this is associated with considerable implementation risks.

What are you looking for?

BDO has a multidisciplinary team of experts on Sustainable Finance Risk Management that is dedicated to supporting you. Our team members are experts in sustainability advisory, risk management and change management. We can support you with, for example:

• gaining an understanding of the ESG risk situation
• developing a framework for sustainability risk management
• implementing individual modules of sustainability risk management (for e.g.: the corporate credit process, green bond framework, scenario analysis, etc.)
• ESG change management including training on sustainability risk management or understanding the UN sustainability goals