Navigating ESG Risks: A Holistic Approach for Financial Institutions

Understanding and addressing ESG risks has become integral to modern risk management. The Institute of Sustainable Finance’s recent research explores the intersection of ESG factors with traditional banking risk types—credit, market, operational, and liquidity risks.

Key Highlights:
1️⃣ Identifying and classifying sustainable assets to drive impactful financing.
2️⃣ Innovating product and client portfolios to reflect ESG considerations.
3️⃣ Aligning sustainability with corporate governance and strategy.
4️⃣ Embedding ESG risks into valuation, risk management, and capital requirements.
5️⃣ Managing ESG data effectively to meet stakeholder and regulatory expectations.

Insights from the Table:
➡️ Credit and operational risks show the highest overlap with ESG factors, highlighting the need for robust integration.
➡️ Liquidity risk, while less directly affected, requires nuanced strategies like sustainable refinancing instruments.
➡️ Comprehensive ESG reporting and adherence to MiFID II in the EU are pivotal for transparency and stakeholder trust.

📊 As financial institutions face increasing regulatory demands and market scrutiny, it’s critical to embed ESG criteria into every layer of decision-making.

A special thanks to co-authors Martin Hajný and Petr Teplý for their invaluable contributions to this research.