16. ESG risk

Question 1

Why banks have to approach ESG risk?

Answer 1

For banking system is related to risk mng. This will help to better profile the risks and as companies are social actors, this will imporbe banking activities. Aso, as banks are system actors, if they are more sustainable, the system will be more sustainable.

Question 2

Explain double materiality in ESG risks:

Answer 2

• Financial materiality: Carbon tax, for ex
• Enviromental materiality: a large CO2 emitter might later be subject to a financial material impact caused by climate change.

Question 3

In ESG risk, how can you classify physical risk?

Answer 3

• Acute: specific weather-related
  event
• Chronic: changes in climate and
  weather that are distributed over

Question 4

In ESG risk, explain Transition risk

Answer 4

Risk that comes from a transition in:
1) Policy: new carbon tax, for ex.
2) Legal: Possible ligitation for not taking ESG meassurements, for ex
3) Tech: Some tech might be obsolet
4) Market: Customers prefer eco-friendly products
5) Reputational.

Question 4

In ESG risks, What is NEt Zero?

Answer 4

Net zero: the most used approach is “carbon offsets” (Remove emission from the
atmosphere, netting their owns, by financing forestry conservation, renewable energies,
community projects and waste-to-energy projects).

Investors now re thinking that efforts should be made to
decarbonize rather than netting

Question 5

Name Risk Mng practices for ESG risks:

Answer 5

1) Risk appetite (how much risk is the company willing to take), risk policies and risk limits
2) Data and methodology
3) Risk measurement, monitoring
and mitigation
4) Tests of resilience to ESG
risks

Question 6

ESG risk mng for financial institutions?

Answer 6

+ Establish policies to avoid counterparties that harm environmental or social objectives (change credit conditions for borrowers)
+ Incorporate ESG perspective so they can asses counterparties and embed ESG in relevant processes