Financial institutions and companies are facing mounting pressures from environmental organizations (activists, NGOs, etc.) to be more accountable for their actions. Besides, we have been witnessing the development of a new wave of European regulations (CRR2/CRR3, Green Taxonomy, SFDR, MIFID II, ESG, etc.) aimed at transforming economic activities toward a greener and a more sustainable economy, and to enhance the resilience of the financial sector against ESG risks in accordance with the European Commission’s Action Plan.
Therefore, the European Banking Authority (henceforth, EBA) stresses the necessity to enhance the incorporation of ESG risks into credit institutions’ and investment firms’ business strategies and processes. In this regard, the adjustment of the business strategy of those institutions to incorporate ESG risks as drivers of financial risks can be considered a progressive risk management tool to mitigate the potential impact of ESG risks (EBA, report 2021).
Consequently, credit institutions and investment firms are compelled to address ESG risks in an all-inclusive manner when incorporating them into their risk business strategies and building them into their 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.
Being unprepared for such fast-moving ESG-related regulatory pressures, institutions as well as clients are feeling the burden of adapting to the mounting ESG-related regulatory inflation. Thus, they face significant challenges to fully embed ESG factors into their management systems and business strategies. Difficulties in collecting necessary information and data related to ESG risks, definition of comprehensible methodological approaches, and relevantly appropriate skills to perform the dedicated duties, are some of the numerous hurdles that institutions need to overcome.
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