New Basel, EBA and PRA requirements - Integrating ESG in bank’s risk management

• Deep understanding of the requirements by financial regulators in the UK and Europe around integrating ESG and climate in bank’s risk frameworks
• Focus on the financial materiality that sustainability risks have on risk exposures
• Insight into practical aspects of designing and adapting risk frameworks to climate driven credit risks
• A thorough review of related academic research and its implications
• Perspective based on international experience in ESG
• Practical insights on sustainability risk regulations and the implications for implementation by banks

• To provide an overview of the emerging regulatory landscape around the integration of climate prudential regulation
• To have a thorough understanding of how Basel II related credit risk management is affected by climate-change driven physical, transition and liability risks
• To apply materiality assessment at a loan portfolio level
• To have an overview of how to integrate sustainability risks, particularly those stemming from climate change, within bank-level risk frameworks and climate-related risk disclosure
• To comply with current regulatory requirements and/or recommendations
• Assess and utilize key sustainability data sources

Introduction to prudential regulation on the intersect of climate change and bank’s risk exposure

• The regulatory landscape for credit risk and financing
  • EU regulation
    • ECB and EBA’s governance guidelines for climate related financial risk disclosures
    • Corporate Sustainability Reporting Directive (CSRD) on credit risks
  • UK’s Prudential Regulation Authority (PRA) climate and credit risk work
• Climate change risk to business and financing:
  • Climate change basics
  • Main actors
  • Disambiguation
• Transmission of climate change risks to other financial risks
  • Physical risks to credit risk
  • Transition risks to credit risk
  • Physical and transition risks to other prudential risks, to credit risk g. “ESG credit risk”

Managing climate driven risks in the credit origination process

• Judgemental credit evaluation: integrating climate in the 5 C’s of credit origination process:
  • Character
  • Capacity
  • Capital
  • Collateral
  • Conditions
• Credit portfolio management:
  • Moving from sustainability policies to risk appetite statements
  • Key Risk Indicators
  • Use of heat maps and climate risk scorecards
  • Portfolio management tools:
    • Partnership for Carbon Accounting Financials (PCAF)
    • Paris Agreement Capital Transition Assessment (PACTA)
  • Statistical credit evaluation:
    • Integrating climate factors
    • Shadow Probability of Default (PDs)
    • Inclusion of climate variables in ESG credit risk models.

Regulatory integration of climate driven credit risks

• Climate integration for Pillar 2 of Basel II’s internal capital adequacy assessment processes
  • ESG and Credit risk
  • Concentration risk in banking
  • Residual risk in banking
  • Legal and Compliance Risk
  • Economic instruments for environmental regulation
• Forward capital planning and climate
  • Business risks
  • Strategy
  • Stress tests
  • Governance and risk management practices in banks
  • Culture
• Climate risk disclosure requirements
  • The European Union EU’s CSRD
  • UK’s Climate-related Financial Disclosure Regulations 2022
• Navigating data limitations

The trainer is a former banker specialising in sustainable finance and with experience ranging from ESG, client coverage, ESG credit risk management, financial restructuring and product innovation. Across the Americas and Europe, Middle East, Africa (EMEA), Thomas has worked with banks, asset managers, pension funds, DFIs, social enterprises, financial regulators, fintech and universities. His drive comes from a desire to help grow businesses and institutions that successfully combine commerciality and sustainability at scale. Having previously led the banking group at the University of Cambridge Institute for Sustainability Leadership (CISL) where we worked with senior and middle management to integrate ESG across the various risk frameworks and product development strategies. He now holds a Senior Associateship at CISL with a special focus on fintech for sustainability and is a visiting lecturer at various universities.

Arguably sustainability factors have always been part of sound risk management. However, with the increase in impacts and importance of sustainability, and particularly climate change, financial regulators are now stepping in to recommend or require that banks identify, manage and mitigate related risk exposures.

This growth of incorporation of ESG in credit risk dates back to 2016 with the support of the United Nations Environment Programme Finance Initiative (UNEP-FI), as it launched initiatives to enhance the transparent and systematic integration of ESG factors in these assessments. Since then, it’s been recognized that poor management of Environmental, Social and Governance (ESG) factors can lead to financial, reputational and regulatory risks that may result in negative financial consequences for companies and a bank’s loan book. As evidence consolidates around the fact that ESG factors can affect financial performance and credit concentration risk in banks, ESG considerations are gaining prominence across banks and risk management professionals, but also regulators such as the European Banking Authority (EBA) and the European Central Bank (ECB).

The course helps participants understand the overlap between ESG, particularly climate change, financial disclosure, and credit risk. It clarifies how ESG can be integrated into bank’s traditional risk frameworks. It goes in-depth on how ESG factors can drive credit risk, and how leading banks are adapting to better identify, monitor and mitigate these.