Smart About Risk  

Climate change risk, green finance and ESG risks

The risk of climate change and the related concepts of green finance and environmental, social and governance (ESG) risks are some of the current frequently discussed topics that have the potential to significantly impact banks' operations, including the setting of their strategy. In particular, the consideration and management of ESG aspects is demanded by a section of public opinion as well as by the gradually establishing regulatory system. Among other things, it constitutes one of the EBA's priorities for the coming year. 
In addition to banks, these issues are also (or rather primarily) reflected in the activities of companies. Companies can expect, for example, changes in demand that will also affect their product mix, or impacts on production methods, supply chains, sales, logistics, marketing, PR or reputation.

All companies (financial and non-financial), ARM can help for example with:

  • ESG strategy development (including the formulation of practical steps):
    • definition of objectives, related indicators and timelines,
    • integrating ESG into the corporate strategy, with a translation into:
      • product and service portfolio,
      • individual company activities (operations, production, logistics),
      • supply chains,
    • setting roles and responsibilities,
    • comparison with a specific company, industry or standards (benchmarking),
  • gap analysis to ensure compliance with international standards or EU regulations and expectations,
  • improving the quality of ESG data:
    • design/assessment of methodology for data collection, processing and evaluation,
    • definition and setting of data quality controls,
    • design/evaluation of the functional specification of IT systems for data collection, use and archiving,
    • workshops on data collection and processing,
  • ESG risk management methodology:
    • ESG risk catalogue (definition of risks, assessment of their materiality),
    • ESG risk indicators (definition, calculation, limits and EWS),
    • design and calculation of stress scenarios / sensitivity analyses,
    • consideration of ESG risks in business continuity plans,
    • structure and content of internal reports,
  • setting up external reporting
  • green financing
  • obtaining an ESG rating.

To banking institutions, ARM also offers:

  • ESG risk consideration in ICAAP and risk appetite,
  • mapping of activities (or products and clients) according to the EU Taxonomy,
  • the impact of ESG risks on:
    • credit risk (e.g. in terms of PD change, LGD change, pricing),
    • market risk,
    • operational risk,
    • liquidity risk,
  • valuation of ESG financial instruments.