Introduction
As the impact of climate change on the economy and financial system increases, along with changing demographics and social norms, and an increasing demand for transparency and accountability, the ECB acknowledges the need for strong risk management practices.
These practices are necessary to address not only climate-related and environmental risks but also the broader spectrum of Environmental, Social, and Governance (ESG) risks. Consequently, the ECB calls for more action in this regard.
The latest publications on supervisory priorities as well as Supervisory Review and Evaluation Process (SREP) results are supporting the ECB's commitment to address these risks and ensure integration into risk management and governance frameworks of the banks.
Challenges
- Complexity of ESG Risks
- Data Availability and Quality
- Client Engagement and Due Diligence
- Scenario Analysis and Stress Testing
Complexity of ESG Risks
ESG risks are multifaceted and interconnected. Therefore, it is challenging to identify, assess, and manage these risks comprehensively. The world around us evolves rapidly and makes ESG risk a fast moving and dynamic topic, requiring continuous monitoring.
Data Availability and Quality
Limited availability and consistency of ESG data make it challenging for banks to assess and quantify ESG risks accurately. Lack of standardized reporting frameworks and metrics hinder comparability and benchmarking across different companies and industries.
Client Engagement and Due Diligence
Engaging with clients and counterparties to address ESG risks and opportunities requires enhanced due diligence processes, transparency, and disclosure. This requires significant investment of time and resources.
Scenario Analysis and Stress Testing
Conducting scenario analysis and stress testing to assess the impact of ESG risks on bank portfolios requires robust data, modelling capabilities and scenario design. Anticipating long-term systemic risks, such as climate change impacts or social unrest, presents challenges in terms of scenario design and quantification.
How we can help
PwC has supported numerous banks in various ESG Risk related projects.
As a leading consulting firm, we can work closely with your organisation to deliver high-quality outcomes across all aspects of ESG Risk. We can also advise on value-adding initiatives, identify areas requiring enhancements, and support clients on ensuring compliance with regulatory requirements.
We can assist you with the following topics:
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