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Sustainable Finance Live sneak peek: ESG risks - how can we build in sustainability?

Sustainable Finance Live sneak peek: ESG risks - how can we build in sustainability?

Finextra spoke to Adam Webb, COO, Risk at ICBC Standard Bank, ahead of Sustainable Finance Live about his experience in risk management and mitigating climate risk.

Webb will be taking part in a panel on 'How can sustainability be built into regulation and risk?' at Finextra’s fifth Sustainable Live conference taking place on the 29th November 2022. We captured some of this thoughts on this topic ahead of the event.

How do ESG considerations impact your day-to-day role?

We are still developing our framework and approach to ESG, and with a business that has a focus towards emerging markets and commodities, there needs to be pragmatism in this regard. However, ESG considerations are becoming more embedded within regular activities and processes. For me personally, I am leading the response to PRA requirements around climate change but also using this as an opportunity to expand the focus to sustainability more broadly where appropriate.

What impact have newer regulations like SFDR, TCFD, CSRD had?

For some of these it is too early to state what impact they are having on businesses, markets, or whether they are successful in eliminating greenwashing, which for some is the stated intention. TCFD has seen a marked uprise in take up over the last couple of years, though a lot of this is down to regulators including the PRA, ECB, MAS etc making it mandatory to report in line with. There are issues here though with standardisation, and the wide ranging availability of sustainable disclosure frameworks that firms can follow. And whilst its mandatory in some jurisdictions, in others I.e. the US, it remains voluntary. Hopefully the work that the ISSB is doing will change this and a standardised format will follow which will make cross comparison across firms and sectors more meaningful.

What role does technology play in sustainability regulation?

One thing is certain that sustainability regulation is only going to grow and become more onerous over time, even if standardisation is achieved. Therefore technology solutions, that can guide firms towards managing differing levels of regulation across multiple jurisdictions, will certainly have a key role to play. This is probably most acute when it comes to scenario analysis and completing disclosures, and especially for smaller firms that do not have the level of resources dedicated to sustainability. A real challenge here though is the breadth of platforms that are offering technology solutions and their coverage of companies or markets that are for instance, unlisted or in jurisdictions where sustainability regulation is limited or non-existent.

What role does the lack of enough data have on current ESG risk profiles?

This is a significant roadblock currently, and has been a key concern that has come out of the thematic reviews that the PRA has undertaken when assessing firms progress on this subject. There is little historic data that can be called upon when it comes to transition risk, and whilst there will be historic data on market movements following acute physical risks such as hurricanes, the data on chronic risks is more scarce. Similarly obtaining counterparty level data, especially on emissions, can be challenging for those outside of large listed firms in Western markets. Therefore, a level of proxying and assumptions need to be applied which is far from perfect but really is the only option currently. No doubt this will improve over time but it will be many years before the majority of firms portfolios are publishing the necessary data and banks are not relying on third parties to supply this.

How can sustainability be built into regulation and risk?

Some regulators are taking positive steps with regards to this but they are not in lockstep globally, nor is the focus generally on sustainability as a broad topic. That being said a start has been made by a number of key regulators, which has at least forced firms to consider sustainability and how it may impact their business and clients. When it comes to risk management the ideal approach in my opinion is to view sustainability as an overlay to the existing risk management framework.

Sustainability risks, whether they being environmental, social or governance factors, act as risk drivers that create economic transmission channels and manifest as impacts on the principles risk types such as credit, market and operational risk. For instance new social policies around supply chain management could result in increasing costs to comply or legal expenses which could impact profitability therefore weakening a firms credit profile. Sustainability can be viewed as either a cross-cutting risk, that impacts the principle risks, or a standalone risk type, though it really depends on the individual firm and their business model as to which is the most appropriate.

To hear from more experts, register here for Finextra’s fifth Sustainable Finance Live conference and hackathon to take place on 29th November.

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