Environmental, social, and governance (ESG) issues as well as their associated opportunities and risks are becoming more and more relevant for financial institutions. For banks, sustainability is not just an ethical question, but will soon enough also become an economic question - generating a new type of risk: ESG risk (environmental, social and governance). Heightened demand of investors for sustainable products as well as increasing pressure from regulatory bodies highlight the need for banks to consider ESG risks in their risk management framework.
This report looks at ESG risk drivers and sustainability issues in the banking sector, highlights various options to embed them into risk management frameworks, in particular stress testing, and draws parallels to the current COVID-19 crisis. Taking a holistic approach to ESG risks within risk management can deliver clear and tangible outcomes that move financial institutions toward a more effective, efficient and sustainable CRO function.
