ESG risks: a new source of risks for the banking sector

Abstract

The financial sector has been mandated to support political decisions promoting sustainable development. For the banking sector, ESG (environmental, social and governance) risks constitute a new source of risks which should be identified, evaluated, monitored and managed. Given the novel nature of these risks, this is a challenging task and the purpose of the paper is to clarify concepts, increase awareness and facilitate the assimilation of the regulation into the decision-making process. The first part analyses the ESG themes and the transmission channels towards the traditional banking risks. The second part focuses on the initiatives that may facilitate the ESG framework to be introduced into the financial sector. The third part focuses on how banks can incorporate ESG themes into decision-making. The ambitious policy agenda in relation to sustainability requires a shifting mindset in the financial sector in order to finance the transformation towards sustainability.