Environmental, social, and governance (ESG) issues as well as their associated opportunities and risks are becoming more and more relevant for financial institutions. Banks must approach ESG risks in a holistic fashion when embedding them into their risk management frameworks. This process includes adjusting business and risk strategies and corresponding risk appetite statements, making sure roles and responsibilities are fully transparent throughout all three lines of defense.
While ESG risk is not a fully stand-alone risk type, it exerts influence on financial and non-financial risks present in a bank to varying degrees. Hence, risk management methods and processes must be amended, considering the complex cause-effect relationships across risk types. This involves risk measurement/assessment techniques in run-the-bank and in change-the-bank processes as well as in stress testing applications.
Besides embedding ESG into risk frameworks, banks need to consider related issues in product design, pricing and sales decisions. Also, an appropriate consideration of ESG risks in a wide range of change processes is of vital importance for fostering profitability. Several tools developed by KPMG can help banks to master those challenges.
Last but not least, regulators, rating agencies and other parties around the world are taking a keen interest in the topic, leading to increased requirements and reporting needs. This constant flow of new regulations is bringing extensive compliance challenges for banks.
The United Arab Emirates (UAE) is at the forefront in addressing ESG issues and driving sustainability under the framework of the UAE Vision 2021, in alignment with the UAE Green Agenda 2015-2030, the Dubai Plan 2021, the Paris Agreement (COP21), and the 17 UN Sustainable Development Goals (SDGs). For instance, the UAE government formed a National Committee on SDGs aiming for national implementation of the SDGs. Meanwhile, the UAE’s UN Global Compact network aims to root the ten principles of the Global Compact, as well as the SDGs, into the national context.
Key areas prone to ESG risks
|Consideration of sustainability in the business strategy and the organizational setup/governance||Consideration of ESG risk in pricing and risk management|
|Adjustment of product and customer portfolio||Consideration of ESG risks within the capital charge|
|Identification/classification of sustainable assets||Inclusion of ESG criteria in the distribution process (including MiFID)|
|Offering of sustainable financing to customers||Reporting of own ESG risks and their impact to supervising authorities and stakeholders|
|Refinancing with sustainable instruments||ESG data management|