Sustainable Finance Risk Management

Sustainable Finance Risk Management

ESG (environmental, social and governance) measures have a far-reaching significance for a sustainable orientation of the business model of credit institutions. The concept of the EU Commission envisages that changes in the business models of banks will help to redirect capital flows towards financing sustainable activities on an unprecedented scale. The ESG transformation would have an impact on all organizational areas of banks, such as

  • Strategy processes
  • Design of product and customer portfolios (sustainable assets/refinancing, "green bonds" etc.),
  • Pricing and risk management (including equity capital backing),
  • Distribution of financial products
  • Reporting of own ESG risks and their impact on monitoring bodies and stakeholders.

The ECB (“Guide on climate-related and environmental risk”, May 2020) and Bafin (Federal Financial Supervisory Authority (“Guidance Notice on Dealing with Sustainability Risks”, January 2020) recently published their expectations and recommendations (“Good practice procedures”) for including ESG factors in the risk management of credit institutions. These also implement the recommendations of the Network for Greening the Financial System (NGFS).

Credit institutions are called upon to review their risk management systems and models and, if necessary, develop them further and increase their transparency by improving the disclosure of information on climate and environmental issues. This is in line with the EU Commission’s “European Green Deal” which is based among other things on the Paris Climate Agreement of 2015 as well as on an Action plan of the EBA, according to which the inclusion of climate-related supervision and the review of the capital backing requirements of credit institutions are to be pursued with high priority. The ECB envisages that European bank supervisors should be in an ongoing active dialogue with banks on the level of integration of ESG risks (in the SREP - Supervisory Review and Evaluation Process - or in the supervisory process, e.g. the Bafin). This creates new challenges for banks, the nature and extent of which depend on the specific, company-tailored business model.

In the concrete treatment of ESG risks, credit institutions should gain transparency about the extent to which the established processes for managing and measuring borrower default, market price, liquidity and operational risks are influenced by "physical" or "transitory" sustainability risks. The business/risk strategy, governance, risk management (risk identification, management, controlling, and reporting processes), and stress testing rules- including scenario analyses - must be adapted individually as required. In the same way, processes in the lending business (e.g. credit assessment or customer risk classification) or in trading or treasury, etc., for example, should also be focused on.

It is to be expected that in future, the ESG requirements of the supervisory authority will be binding and that the supervisory review obligations pursuant to § 29 KWG will be extended in Germany. To ensure that necessary processes and systems can be revised or newly established within an appropriate period of time, Bafin recommends an early start of strategy and alignment projects.

BDO has a globally interconnected, multidisciplinary team of experts that combines ESG competence with expertise in auditing and consulting on risk management systems of banks. We support you in

  • the analysis of ESG risks,
  • the creation of strategic positioning aids
  • the execution of GAP analyses on the implementation status in your company,
  • the development and implementation of individual modules (e.g. lending process, treasury and liquidity management, compliance, internal audit, reporting and external reporting, etc.) or even
  • in the area of change management (e.g. in the form of training).

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Dr. Gebhard Zemke

Dr. Gebhard Zemke

German Public Auditor, Certified Tax Advisor, Partner, Financial Services Banking
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