Industry insights on integrating climate, environmental and social risks


Industry insights from the banking sector on climate, environmental and social risks

The opportunities and challenges around integrating ESG risks into risk management and business processes

ESG risks are materially impacting banks and play a crucial and ever-growing role in banks’ risk management strategy. Integrating these ESG risks into the entire organization can be challenging. This article shares some key considerations, based on our ESG experience with banks.

Awareness and urgency

Now, more than ever, climate change is at the top of the global agenda. There is a growing awareness that climate-related risks will materially impact financial institutions. More broadly, financial institutions are also clearly exposed – both financially and reputationally – to other environmental risks, including the risks of biodiversity loss and water scarcity, as well as to social risks, such as those relating to human rights and workplace safety. The banking industry has become aware, from both a stakeholder and regulatory perspective, of the urgent need to better understand the implications of climate, environmental, and social (ESG) risks and to take action to address them.

The ECB’s guide on climate-related and environmental risks (ECB, 2020) outlines 13 expectations for banks integrating these risks into their activities. The deadline for ECB-supervised banks to submit a self-assessment report and roadmap for meeting these expectations was May 15th 2021, while banks under DNB supervision had until June 15th to do so. The report to DNB also had to include considerations of social risks.

The Dutch and European banking sectors are seeking to improve their understanding of environmental and climate-related risks and consider how to best integrate the implications into their business processes. However, this requires organizational change and multiple challenges first need to be overcome.

Key areas for consideration

The keynote speech given on June 16th 2021 by Frank Elderson, a member of the ECB Executive Board, at the ECB-EBRD joint conference on ‘Emerging climate-related risk supervision and implications for financial institutions’ highlighted the need for banks to take action to meet the ECB’s expectations. Although the ECB recognizes that banks have made progress, it stresses that banks are “still a long way off meeting the supervisory expectations we have laid out for them.”

In recent months, Deloitte supported several banks across Europe in drafting their roadmaps for integrating climate-related and environmental risks. From this experience and our market insights, we have identified several areas for banks to consider when integrating these risks.

Strategic direction
Implementing a consistent strategy and aligning your ESG risk management activities with your business environment, overall purpose, goals, KRIs and KPIs are essential. However, combining the typically shorter-term banking horizon with the longer-term horizon for climate impact can be challenging. By taking a structured approach and preparing a detailed plan, you can reach short-term goals and progress in your long-term strategy.

Impact versus risk
Combining initiatives relating to the positive impact that a financial institution aims to make on the planet and society and the impact that the planet and society have on the institution can be challenging. These inside-out and outside-in effects often get confused or are considered separately from each other, while they may in fact be interconnected or share common grounds. Institutions therefore need to have a better understanding of their overall sustainability landscape and to speak a common language.

Ownership and accountability
ESG risks span organizational departments and existing risk categories. The challenge is to define ownership and accountability for these risks and to understand how they are linked to other risk types. Clearly understanding the definition, scope and interconnectedness of ESG risks in the risk taxonomy is a good starting point. Next you need to make sure your ESG risks are properly embedded in all three lines of defense: business, risk management and control, and internal and external audit. The ESG risk governance should align with the overall organizational risk appetite.

Data challenges
The data required for accurate risk identification and measurement (including data on greenhouse gas emissions) is often not readily available or of insufficient quality. We recommend you to consider a mix of quantitative and qualitative data from verified and reliable external sources. Adopting a transparent approach to data collection and use is crucial, given the uncertainties associated with external ESG-related information at counterparty level (AFM, 2020). Over time, you will develop a learning curve and be able to overcome these challenges.

Methodologies and stress testing
ESG risk management is a forward-looking exercise with a long-term horizon. This makes using conventional risk management methodologies to quantify ESG-related information challenging. Using a mix of hybrid qualitative and quantitative approaches – such as heatmaps, or sectoral or geographic concentration analysis – can help you to identify risks and to better understand their materiality. Econometric models can then be useful for quantifying the risks in your most material portfolios.

Understanding the meaning and interconnectedness of social and environmental risks
Investors, financial institutions, and businesses have tended to overlook social risks (i.e., risks relating to the rights, well-being, and interests of people and communities). Moreover, they don’t always understand that the environmental component of the ESG framework is much broader than CO2 emissions and also includes other interconnected and reinforcing factors such as how climate change impacts biodiversity loss, and vice versa. Therefore, it is essential to not only understand the full spectrum of risks, but to also recognize their interrelations.

Fast-forward through sharing

From advising our clients, we learned that there is no “one size fits all” approach for identifying the actions needed to meet the ECB’s expectations and for implementing these actions. Instead, the methodologies evolving from good practices need to be tailored to your institution’s specific context. We firmly believe that the best way for us all to fast-forward is by sharing insights and knowledge.

Although challenges remain, it is vital to take action now. The risks are real and we’re already seeing the effects of climate change and other environmental issues. Regulators and other stakeholders are demanding urgent action. Defining a clear and consistent ESG risk strategy, including mitigating measures, improves resilience and, when managed well, positively contributes to a more sustainable world. Be clear on your ambitions, mobilize your employees, and be transparent on your progress.

Please feel free to reach out if you would like to share insights or learn more about our work in this field.


ECB (2020). Guide on Climate-Related and Environmental Risks. Supervisory Expectations Relating to Risk Management and Disclosure. European Central Bank, November 2020.

AFM (2020). Call for a European Regulation for providers of ESG Data Ratings and Related Services. Position Paper, December 2020.

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