ESG Risks
Contents
Definition
ESG Risks are the risks of any negative financial impact on an institution stemming from the current or prospective impacts of ESG Factors on its counterparties or invested assets. The term is used in the context of Sustainable Finance.
Impact
Climate change, environmental degradation, social issues and other environmental, social and governance (ESG) factors are posing considerable challenges for the economy. The impact of acute and chronic physical events, the needed transition to a low carbon, resource efficient and sustainable economy as well as other ESG challenges are causing and will continue to cause profound economic transformations that impact the financial sector.
Classification
Environmental risks, including climate-related, are expected inter alia to become even more prominent going forward through transition and physical risk drivers. This may affect all traditional categories of financial risks to which institutions are exposed. In addition, social factors - such as human rights, health or working conditions - and governance factors - such as executive leadership or bribery and corruption – may also drive financial impacts on the institutions’ counterparties or invested assets and represent sources of financial risk that institutions should assess and manage.
Usage
In the context of formal ESG Risk Management, ESG Risks is the collection of risk types recognized with the articulation of ESG Criteria. ESG risks can vary by country or region, business line, economic sectors, client (market) characteristics, and other possible factors.
The ESG Classification is used extensively in the European Sustainability Reporting Standards.
ESG Risk Taxonomy
Issues and Challenges
- Lack of Uniform definition of ESG Risks
- Lack of Appropriate quantitative and qualitative criteria for the assessment of the impact of ESG Risks
