Internal Governance Framework, ESG principles and expectations for credit institutions
Integration of ESG principles into the internal governance model and how to adequately prepare your organization
Environmental, social or governance (ESG) risks can be defined as the risk of losses arising from any negative financial impact on the institution stemming from current or prospective impacts of environmental, social or governance (ESG) factors relating to the institution’s counterparties or invested assets1.
The adoption and proliferation of the regulatory requirements tied to ESG has had a major impact on financial institutions in the European Union. Prior to considering the specific impacts of these requirements, it is important to specify that the existing environmental, social and political contexts have led to the progressive and accelerated efforts of the European Union to develop more sustainable activities and growth.
These efforts have impacted numerous stakeholders in society, particularly institutions that have been identified as key actors in the prevention and management of ESG risks. These institutions have been obliged to become ESG specialists and play an important role in providing data on climate and other ESG-related impacts on products, transactions and other financial activities to the European Union.
“In order to ensure adequate management of ESG risks, institutions must assign responsibility as well as reorganize and adapt their internal governance and control framework (including their risk management framework) accordingly.”
The necessary reorganization stemming from the consideration of ESG risks presents significant challenges to institutions in the EU from a business model, internal governance and risk management perspective.
In our whitepaper we explore manners in which to integrate the current ESG-related requirements into internal governance frameworks throughout the overall internal governance value chain (across the management body and through the three lines of defence). ESG risks are cross functional, and thus impact numerous key internal governance dimensions. We present a model ensuring the presence of human resources within an institution possessing the required ESG knowledge, and ensuring institutions will be better adapted to respond rapidly and appropriately to upcoming ESG related risks and regulatory requirements.
1 EBA Report on management and supervision of ESG risks for credit institutions and investment firms (EBA/REP/2021/18)
Acknowledgements:
Marc Abou Jaoude | Manager
maboujaoude@deloitte.lu
