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E&S Risk Management
Insights from International Banks
Olivier Jaeggi
Managing Director
T +41 44 350 60 60
F +41 44 350 60 20
W ecofact.com
Copyright © 2018 ECOFACT AG. All rights reserved. Reproduction in whole or in part on paper, online, or in information storage and retrieval systems without written permission is prohibited. ECOFACT® is a registered trade mark.
Agenda
1. Introducing ECOFACT
2. Frameworks
3. Setting up the E&S Risk Management System
4. Where Do the International Banks Stand Today?
GCPF E&S Workshop • April 26, 2018 2
Agenda
1. Introducing ECOFACT
2. Frameworks
3. Setting up the E&S Risk Management System
4. Where Do the International Banks Stand Today?
GCPF E&S Workshop • April 26, 2018 3
GCPF E&S Workshop • April 26, 2018 4
Introducing ECOFACT
ECOFACT AG was founded in 1998 as a spin-off from an international bank. It is a fully independent, privately held company. We work primarily for banks, insurers, institutional investors, and international standard-setters.
Due Diligence
We assist our clients in designing risk assessment processes and conducting due diligence.
Issue monitoring
Policy development
Portfolio screenings
Individual risk assessments
Engagement services
Research Products
The Policy Outlook covers regulatory change pertaining to ESG and corporate responsibility issues.
The ECOFACT Quarterly focuses on environmental and social risk.
Agenda
1. Introducing ECOFACT
2. Frameworks
3. Setting up the E&S Risk Management System
4. Where Do the International Banks Stand Today?
GCPF E&S Workshop • April 26, 2018 5
Understanding Sustainable Finance
GCPF E&S Workshop • April 26, 2018 6
Financial Institutions
Sustainability Challenges
The Evolving Risk Landscape
GCPF E&S Workshop • April 26, 2018 7
(d)
New and stricter minimum
requirements
(e)
Advances in
business practices
(b)
Changing perceptions and
expectations
(a)
Growing materiality
of E&S risks
(c)
Greater transparency
and accountability
Five main drivers reshape
the risk landscape
The Evolving Risk Landscape
GCPF E&S Workshop • April 26, 2018 8
(d)
New and stricter minimum
requirements
(e)
Advances in
business practices
(b)
Changing perceptions and
expectations
(a)
Growing materiality
of E&S risks
(c)
Greater
transparency
Five main drivers reshape
the risk landscape
(a) The growing materiality of sustainability challenges
influences (b) how these challenges are perceived by the
public and, therefore, influences the expectations towards
financial institutions.
(c) Greater transparency and accountability, (d) new and
stricter minimum requirements, and (e) advances in
business practices, particularly those by peers, increase
the necessity for financial institutions to address the risks
related to sustainability challenges more actively.
E&S Risks: Financial Risk Categories
GCPF E&S Workshop • April 26, 2018 9
Primary risks Operational risks
Credit risk
Market risk
Funding and liquidity risk
Transaction processing risk Compliance risk
Legal risk Liability risk
Security risk Tax risk
Reputational risks
E&S Risks: Financial Risk Categories
GCPF E&S Workshop • April 26, 2018 10
Primary risks Operational risks
Credit risk
Market risk
Funding and liquidity risk
Transaction processing risk Compliance risk
Legal risk Liability risk
Security risk Tax risk
Reputational risks
The Financial Stability Board on Climate Change
GCPF E&S Workshop • April 26, 2018 11
Agenda
1. Introducing ECOFACT
2. Frameworks
3. Setting up the E&S Risk Management System
4. Where Do the International Banks Stand Today?
GCPF E&S Workshop • April 26, 2018 12
"Where does my bank stand in comparison to international banks?"
GCPF E&S Workshop • April 26, 2018 13
Level of expertise
Level of implementation
"This is what I expected."
GCPF E&S Workshop • April 26, 2018 14
Level of expertise
Level of implementation
My bank
International banks
"This is what I believe now."
GCPF E&S Workshop • April 26, 2018 15
Level of expertise
Level of implementation
My bank
International bank
Our bank's E&S Risk management system
The Key Elements of an E&S Risk Management System
GCPF E&S Workshop • April 26, 2018 16
The business case
• Make the case: why do this?
Values, meet expectations, compliance,
financial objectives, risk management?
The business case
• Make the case: why do this?
Values, meet expectations, compliance,
financial objectives, risk management?
Our bank's E&S Risk management system
Senior management
• Find a champion
• Gain senior management buy-in
• Reporting
The Key Elements of an E&S Risk Management System
GCPF E&S Workshop • April 26, 2018 17
The business case
• Make the case: why do this?
Values, meet expectations, compliance,
financial objectives, risk management?
Our bank's E&S Risk management system
Senior management
• Find a champion
• Gain senior management buy-in
• Reporting
The Key Elements of an E&S Risk Management System
GCPF E&S Workshop • April 26, 2018 18
Policies
• Issues to cover?
• Internal or external
policies?
• Alternative ways to
collect internal
positions?
The business case
• Make the case: why do this?
Values, meet expectations, compliance,
financial objectives, risk management?
Our bank's E&S Risk management system
Senior management
• Find a champion
• Gain senior management buy-in
• Reporting
The Key Elements of an E&S Risk Management System
GCPF E&S Workshop • April 26, 2018 19
Policies
• Issues to cover?
• Internal or external
policies?
• Alternative ways to
collect internal
positions?
Processes and tools
• On what to focus first?
The "worst"; the most relevant?
• E&S risk identification and assessment:
Larger clients: how and on what to engage?
Smaller clients/transactions: standardized process.
• Decision making/power, escalation
• Resources
The business case
• Make the case: why do this?
Values, meet expectations, compliance,
financial objectives, risk management?
Our bank's E&S Risk management system
Senior management
• Find a champion
• Gain senior management buy-in
• Reporting
The Key Elements of an E&S Risk Management System
GCPF E&S Workshop • April 26, 2018 20
Policies
• Issues to cover?
• Internal or external
policies?
• Alternative ways to
collect internal
positions?
Processes and tools
• On what to focus first?
The "worst"; the most relevant?
• E&S risk identification and assessment:
Larger clients: how and on what to engage?
Smaller clients/transactions: standardized process.
• Decision making/power, escalation
• Resources
Training
• Make it relevant for
participants
Real-live examples;
Overcome skepticism,
illustrate the business case;
Help them to create value
for clients.
What Has Worked
● Focus on material risks first (there may not be a financial gain at first). Mitigate these risks.
● Provide the business with the knowledge they need to help their clients to mitigate the risks.
● Remember: In most cases the client is affected first - the bank suffers when the client suffers.
● Create value by advising your business on how to address these issues more professionally than your competition does.
● Don't forget to look for (such) opportunities.
● In-house ecology is important, it's the homework that must be done. But keep this separate from what you are doing in the business.
GCPF E&S Workshop • April 26, 2018 21
Source: The University of the Philippines Nationwide Operational Assessment of Hazards (UP-NOAH)
Gaining Senior Management Buy-In (1/2)
Compliance with investor requirements is still an important driver, as in many countries multilateral development banks are pushing on these issues. The objective is to achieve sustainable development. Some of the larger FIs are now listed in the Dow Jones Sustainability Index. This motivates the next tier of FIs to start their own sustainable finance programs.
GCPF E&S Workshop • April 26, 2018 22
Gaining Senior Management Buy-In (2/2)
Leading FIs have also started to systematically limit their exposure in certain sectors and/or certain clients. Affected clients then move down to other banks that do not have an E&S risk management system, which results in a risk transfer. An E&S risk management system aims at enhancing the risk management system. Risks are assessed more broadly. This allows to identify potential "bombs" when analyzing the portfolio. Some banks are developing risk maps for certain risks (for vulnerable flood plains or high-risk deforestation areas, for example). Such information also helps banks to support clients with better advise. This is an organizational learning process, that eventually gives FIs an edge over their competitors when exploring new market opportunities or new products.
GCPF E&S Workshop • April 26, 2018 23
Source: Lisette van der Kroon
Reporting to Senior Management
GCPF E&S Workshop • April 26, 2018 24
Materiality of
issues
Regulatory
expectations
Implementation;
performance
Agenda
1. Introducing ECOFACT
2. Frameworks
3. Setting up the E&S Risk Management System
4. Where Do the International Banks Stand Today?
GCPF E&S Workshop • April 26, 2018 25
Policies and Certification
GCPF E&S Workshop • April 26, 2018 26
Priorities
GCPF E&S Workshop • April 26, 2018 27
Risk Appetite and Assessment Criteria
GCPF E&S Workshop • April 26, 2018 28
Processes and Tools
GCPF E&S Workshop • April 26, 2018 29
Relevant Standards
● Equator Principles Guidelines for E&S risk management in asset-specific financing http://equator-principles.com
● IFC Environmental, Health, and Safety Guidelines tailored to approx. 60 industry sectors.
● IFC Performance Standards "Define IFC clients' responsibilities for managing their E&S risks."
● UN Guiding Principles on Business and Human Rights Human rights risk assessments / due diligence. Guidance: http://www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf
Video: https://www.youtube.com/watch?v=BCoL6JVZHrA
● OECD Guidance for responsible business conduct (RBC) in the financial sector Initial document for institutional investors; second document is being produced on RBC in corporate lending/finance. http://mneguidelines.oecd.org/rbc-financial-sector.htm
● FSB Task Force on Climate-Related Financial Disclosure Climate risks. https://www.fsb-tcfd.org/
● Sector-specific standards, such as the Roundtable on Sustainable Palm Oil Due diligence. https://www.rspo.org/
GCPF E&S Workshop • April 26, 2018 30
Summary
● The risk landscape is changing. Several drivers increase the necessity for banks to address E&S
risks more actively.
● E&S risks present credit and market risks, as well as compliance and reputational risks.
● Climate change presents physical and transition risks.
● There are several factors that can be used to successfully implement an E&S risk management
system: focusing on material risks and gaining senior management buy-in are two of them.
● International banks have implemented more or less sophisticated E&S risks. However, they still
face challenges - particularly when it comes to day-to-day business decisions.
● Regulatory change is happening (at the level of soft and hard law).
● Don't forget to explore potential business opportunities.
GCPF E&S Workshop • April 26, 2018 31