The ESG criteria used to measure the sustainability and ethical impact of an investment in a business are now just one part of a wider agenda that encompasses climate risk, corporate behavior and social responsibility, inclusion, equality, diversity and an expanding range of other societal issues. Geopolitical and climate-change risks are two of the top 10 major risks to manage over the next decade.
This wider set of issues places increased expectations on corporate risk management, including new board responsibilities and reporting to shareholders, along with enhanced internal governance and comprehensive mapping of rule requirements to bank processes and controls. The aim is for banks to evolve into more aware, more responsible corporate entities which deliver improved conduct and ethical behavior and more desirable social outcomes.
Evolving to encompass emerging risks
These changes will have a significant impact on risk management frameworks. How much more will banks need to change if regulators are asked to promote broader social goals in the financial market space?
Over the next 12 months and beyond, the climate risk agenda will certainly evolve. Policymakers across Asia and Europe have made sustainability and climate risk a prominent feature of their work programs. More than half (52%) of banks view environmental and climate change matters as a key emerging risk over the next five years, up from just over a third a year ago.
And, although ESG disclosure proposals in the US have only gained limited traction so far, the issue is gaining prominence. In 2020, we will look more closely at sustainability and climate risk as these policy proposals continue to develop.
It will be interesting to see the extent to which policy responses in the banking sector resonate with political leaders in terms of developing broader economic and social policy, and how those policy priorities could shift as economic conditions change.