Following the adoption of the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development, governments are making strides to transition to low-carbon and more circular economies on a global scale. Institutions should take a strategic, forward-looking and comprehensive approach to considering climate-related and environmental risks known as ESG Risk.
On the European front, the European Green Deal sets out the objective of making Europe the first climate-neutral continent by 2050. The financial sector is expected to play a key role in this respect, as enshrined in the Commission action plan on financing sustainable growth.
Climate-related and environmental risks are commonly understood to comprise two main risk drivers:
• physical risk (drought& bushfires, health, reefs, forests &tourism, cyclones & floods, coastal inundation & erosion)
• transition risk (carbon price, energy, policy®ulation, innovation and prices, legal action).
Physical and transition risk drivers impact economic activities, which in turn impact the financial system. This impact can occur directly, through for example lower corporate profitability or the devaluation of assets, or indirectly, through macro-financial changes.
How Deloitte can help?
Our extensive experience can help you to implement ECB Guide in many ways, including:
• Governance - update risk frameworks and policies for relevant risk types and integration of climate risk within Risk Appetite and management reporting metrics
• Risk management - establish a uniform risk taxonomy and risk categories and support in creating tools to identify and assess physical and transition risks
• Data and tools - scenario analysis, ESG scoring, risk and control assessments
• Risk assessment - calibrate PD and LGD considering climate risk, quantify climate-related concentration risk, potential losses due to market risk, integrate climate risk into Operational Risk Assessment Map.