ESG Risk Appetite

Definition

ESG Risk Appetite is an organizations Risk Appetite in relation to managing its ESG Risks. This is an emerging term (as with most aspects of ESG Risk Management).

Scope

ESG risk appetite must clearly define and addresse all material ESG risks an organization is exposed to. Risk appetite should specify the type and extent of the ESG risks institutions are willing to assume in their portfolio composition in relation to all relevant business lines, geographies - including jurisdictions and more granular geographical areas, economic sectors, activities and products, including as regards the portfolio’s concentration and diversification objectives.

Requirements

The risk appetite should be implemented with the support of appropriate ESG-related key risk indicators (KRIs), including potential limits, thresholds or exclusions. These KRIs should anchor ESG considerations in relation to products or financial instruments issued, originated or held by the institution, client segments, type of collateral and risk mitigation instruments. Institutions should use backward-looking and forward-looking indicators tailored to their business model and complexity.

Institutions should ensure that the risk appetite and associated KRIs are appropriately cascaded down within the institution, including all relevant group entities and business lines and units bearing risk, and are subject to monitoring and escalation processes.

Dimensions

• Countries or regions of operation and their prevailing ESG Factors and risks.
• Business models / business lines and their intrinsic ESG footprint

Issues and Challenges

• Reputation Risk