ESG integration into the risk framework (ICAAP)

Why do banks need to integrate ESG risks into their risk framework?

Magdalena Auer, Consultant at zeb: The Minimum Requirements for Risk Management (MaRisk) are part of BaFin’s new ESG requirements. The 7th MaRisk amendment was based partly on the BaFin Guidance Notice on Dealing with Sustainability Risks and partly on the EBA guidelines on loan origination and monitoring. One component of this was the integration of ESG risks into the risk framework (ICAAP). In this context, we were commissioned by various regional banks to provide implementation support. Within these projects, we worked on the new minimum requirements for risk management in structured collaboration with our clients.  

That sounds like a major effort and change for the bank. 

Magdalena Auer: Yes, very much so. But we were able to create pragmatic solutions for our clients. zeb knows regional banks and the existing systems, processes and data, down to the last detail. This enabled us to overcome the challenges quickly and well, as we knew which data was available where and which tools were at hand for certain calculations. This approach involved only few alterations for risk controlling and was therefore rather smooth.

What remains to be done now?

Magdalena Auer: With the EBA’s draft guidelines on the management of ESG risks (EBA/CP/2024/02) the next regulatory requirements are already in sight. Although some of these are already familiar from the requirements of the 7th MaRisk amendment, others go beyond what was previously known and require early consideration in order to ensure full and timely implementation. 

Fields of action in the context of integrating ESG risks into the risk framework (ICAAP)

•    Implementation of an ESG risk inventory
•    Design and execution of ESG scenario calculations
•    Integration into risk-bearing capacity calculation
•    Review of the need for adjustments regarding risk strategy and risk appetite 
•    Expansion of risk management and risk reporting
•    Expansion of the data warehouse to include ESG
•    Review of the need for adjustments regarding risk governance