ESG risks are on the rise for companies across the board – physical risks, litigation risks, and transition risks all weigh heavily on company leadership. This rolls down to the banks that finance them as a company facing adverse ESG impacts is believed more likely to default on its loan obligations. The European Banking Authority (EBA) is working on guidance to help banks manage their ESG risks. Recently, the EBA published a consultation on draft Guidelines requiring financial institutions to identify, measure, manage, and monitor ESG risks. The EBA’s press release states:
“To ensure the safety and soundness of institutions in the short, medium and long term, the Guidelines set requirements for the internal processes and ESG risks management arrangements that institutions should have in place. As part of it, these Guidelines set out principles for the development and content of institutions’ plans in accordance with the Capital Requirement Directive (CRD6), with a view to monitoring and adequately addressing the financial risks stemming from ESG factors, including those arising from the adjustment process towards the objective of achieving climate neutrality in the EU by 2050.”
The consultation period runs until April 18, 2024. While the guidelines only cover financial firms in the EU, ESG risk assessment is a good idea for companies in all sectors globally. No one wants to be caught flat-footed on a risk that could have been mitigated if it had been addressed earlier. Unfortunately, the broad nature of ESG makes risk management feel like an overwhelming task. ESG risks are also highly dynamic in a way that traditional risks may not be. An ESG risk can arise seemingly out of nowhere and have major impacts on businesses. This may lead some to reconsider how often risk assessments should be carried out so that shorter time horizons can be accounted for.
PracticalESG.com members have access to a number of Guidebooks and Checklists to help identify and manage a wide range of ESG risks. If you aren’t a member, sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
If you aren’t already subscribed to our complimentary ESG blog, sign up here: https://practicalesg.com/subscribe/ for daily updates delivered right to you.
