If you want to have the credit risk accepted, you need to comply with the latest EBA Guidelines on ESG risks. Here are some key points:

Financial institutions must collect more specific ESG data from their clients. What are the clients business practices? If it includes: fossil fuels, deforestation, or serious human rights violations its very likely that these companies might be excluded from credit risk.

The authority has defined that financial institutions should identify and measure risks at an individual, portfolio and industry level. They also need to have a plan to manage and mitigate risks over at least 10 years.

But thats not everything, non-traditional risks must be included such as physical risks related to climate change (devastating floods, droughts, wildfires, sea-level rise, and biodiversity loss), transition risks (carbon taxes increasing costs, stranded fossil fuel assets, consumer demand shifts to electric vehicles, and increased litigation), reputational risks (linked to social or environmental scandals), and legal risks (liability for environmental damage, greenwashing lawsuits, breaches of contract, and failure to meet fiduciary duties regarding climate risk management). All these risks are increasingly material.

According to the information above, an assessment is needed. In this way, classifying clients vulnerable to these risks, can help financial institutions to minimize their exposure to high emitters. The ESG risks need to be evaluated on financial positions over short, medium, and long-term horizons.

Large financial institutions need to conduct an annual assessment while smaller ones every 2 years. Obviously, these risks need to be monitored; setting metrics (like KPIS) is useful so there are alerts in case of material deviations.

As you can see, credit risk is changing; is no longer an assessment of a companys financial information; it includes many new risks for funding to be done. The objective of the authority is clear: decarbonization by 2050.

Thus, if you want the credit risk accepted, say yes! To attend the 7^th annual credit risk management forum.

Also, check out the upcoming masterclasses for the Finance Industry.

By Mónica Ramírez Chimal, International Speaker & Trainer, Writer, Consultant-Partner at Asserto RSC