New Basel Requirements - Integrating ESG in Bank’s Risk Management (USA)

• Focus on the financial materiality that sustainability risks have on credit 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 have a thorough understanding of how credit risk is affected by climate-change driven physical, transition and liability risks
• To apply materiality assessment at loan portfolio level
• To have an overview of how to integrate sustainability risks, particularly those stemming from climate change, within bank-level risk frameworks
• To comply with current regulatory requirements and/or recommendations
• Assess and utilize key sustainability data sources

Introduction to climate change and financial risk

• Climate change 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
• The regulatory landscape for credit risk and financing
  • EU regulation
    • ECB and EBA’s climate and credit guidelines
    • CSRD reporting on credit risks
  • UK’s PRA climate and credit risk work

Managing climate driven risks in the credit origination process

• Judgemental credit evaluation: integrating climate in the 5 C’s of credit origination:
  • 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:
    • PCAF
    • PACTA
• Statistical credit evaluation:
  • Integrating climate factors
  • Shadow PDs
  • Inclusion of climate variables in credit risk models

Regulatory integration of climate driven credit risks

• Climate integration for Pillar 2 of Basel II’s internal capital adequacy assessment processes
  • Credit risk
  • Concentration risk
  • Residual risk
  • Legal and Compliance risk
  • Economic and Regulatory environment
• Forward capital planning and climate
  • Business risks
  • Strategy
  • Stress tests
  • Governance
  • Culture
• Climate risk disclosure requirements
  • The EU’s CSRD
  • UK’s Climate-related Financial Disclosure Regulations 2022
• Navigating data limitations

The trainer is a former banker specialized in sustainable finance and with experience ranging from client coverage, credit risk management, financial restructuring and product innovation. Across the Americas and EMEA, he has worked with banks, asset managers, pension funds, DFIs, social enterprises, financial regulators, fintechs 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 he worked with senior and middle management to integrate ESG across the various risk frameworks and product development strategies. The trainer 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 credit risk management. However, with the increase in impacts and importance of sustainability, and particularly climate change, the relative weight of these factors is growing. From one of many minor factors that is to be taken into account, climate has grown in importance in credit management over the course of the last seven years.

This growth of incorporation of ESG in credit risk dates back to 2016 with the support of 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 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 risk, ESG considerations are gaining prominence across banks and risk management professionals, but also regualtors such as the European Banking Authority (EBA) and the European Central Bank (ECB).

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