Consulting with sense

A holistic approach

Sustainability-driven economy is a major change all over the world. Defending business as usual or being selective towards sustainability goals is not comprehensive enough given the magnitude and complexity of the impacts. Companies need to embrace a holistic approach to transform their business model, become purpose-driven, measure their environmental and social performance and prevent green washing.

A long-term planning can only be realized with the appropriate risk management framework. Fundamental changes are required in the areas of risk controlling, stress testing and knowledge building in sustainable finance.

RISK CONTROL

Essential for banks to handle ESG risks is building risk management capacities. First, technical resources for the analysis of the business portfolio and customer profiles regarding sustainability should be allocated. Corresponding governance management structures should be set up. These activities can be carried out based on a preliminary study and a feasibility study for implementation. An adoption and translation of the EU taxonomy should enable banks to develop their own rating and classification procedures in order to evaluate the existing business and to steer new business. The ESG risks can be integrated uniformly in the 3-LoD model. In this way their amount can still be measured in the lending or investment process. With the development of appropriate risk management methods, new sustainable financial products can also be created. The whole should of course be integrated into the business and risk strategy, risk appetite and governance. Creation of internal guidelines and process adjustments are another important instrument for the transformation of banks. The availability of sufficient data and adequate technical systems should also support this process.

STRESS TESTING

By using scenario analysis and stress testing banks can gain better understanding of their own stability against ESG risks and develop risk-reducing measures. A great challenge is the adjustment towards long-term perspective that requires specific assumptions and data, which currently cannot be validated through historical observations. In this case banks should primarily rely on scenarios developed by the supervisory authorities and apply them according to their business model and internal methods. Regulatory stress tests carried out by the ECB and EBA will at the same time provide better insights into the simulation of climate risks and the regulatory expectations thereof.

EDUCATION

Knowledge and competence in sustainability-related matters are essential for every credit institution. In order to be able to offer customers informational advantage and risk transfer, better understanding of the connection between financial losses and ESG risks is needed at all levels of the organisation. Tailor-made and focused training programs influence the risk culture in the whole organisation and can help leverage client relationships in the transformation. After assessing the knowledge requirements, targeted learning content can be created and provided in the form of interactive management training, specialized workshops, simulations and handbook materials. Furthermore, standardized online training courses can be designed and integrated into the internal Learning Management Systems (LMS).

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