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Prudential Treatment Of Esg Risk

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Abstract

In May 2022, the European Banking Authority (EBA) published a discussion paper with the aim of evaluating the appropriateness of the current prudential framework to accurately assess the rising risks resulting from environmental issues. A key question the discussion paper seeks to address is: does the current Pillar 1 framework adequately cover new risks, such as environmental risk, or should they be subjected to a new dedicated treatment? In this article, we present the key concepts of environmental risk and examine the EBA’s analysis of the interaction between environmental risks and the traditional prudential risk categories – such as credit, market, operational, and concentration risks – in order to determine whether the tools used for the latter could be modified to manage the former. We further outline the key actions firms need to take to prepare themselves for a potentially binding Pillar 1 treatment, while awaiting further regulatory guidance.

Suggested Citation

  • Campagne, Guillaume & Rizk, Léa, 2023. "Prudential Treatment Of Esg Risk," Journal of Financial Transformation, Capco Institute, vol. 57, pages 125-129.
    • Handle: RePEc:ris:jofitr:1697
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    More about this item

    Keywords

    ESG; Climatic risk; Financial risk management; Prudential treatment; Pillar 1;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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