5.1 ESG risk management principles

For the purposes of integrating ESG risks into the institution-wide risk management frame-work in accordance with paragraph 152 of the EBA Guidelines on internal governance, insti-tutions should consider the role of ESG risks as potential drivers of all traditional categories of financial risks, including credit, market, operational (including litigation), reputational, li-quidity, business model, and concentration risks.

Institutions should embed ESG risks within their regular risk management systems and pro-cesses ensuring consistency with their overall business and risk strategies, including plans in accordance with Article 76(2) of Directive 2013/36/EU as further specified in Section 6. Insti-tutions should ensure that they have a fully integrated approach where ESG risks are properly captured and considered as part of risk management strategies, policies and limits. Where institutions have in place specific arrangements for ESG risks, they should ensure this is re-flected in, and feeds into, the regular risk management framework.

Institutions should develop a robust and sound approach to managing and mitigating ESG risks over the short and medium term and over a long-term horizon of at least 10 years, taking into account the principles outlined in paragraph 19.

Institutions should determine which combination of risk management and mitigation tools would best contribute to this, by considering a range of tools, including the following:

• a) engagement with counterparties aiming at better understanding the risk profile of the counterparty and at ensuring consistency with the institution’s risk appetite and stra-tegic objectives, in particular by:
• i. determining the scope of counterparties with whom to engage, taking into account the outcomes of the materiality assessment and of the risk measure-ment process;
• ii. establishing a dialogue with those counterparties to review their resilience towards ESG risks, taking into account the sectoral legislation that affects those counterparties and any transition plan they have developed;
• iii. where relevant and possible, providing relevant information and advice to clients on the assessment or mitigation of ESG risks they are exposed to; and

27

• iv. considering a range of counterparty-specific actions, such as adjustment to product offering, agreement on a plan and remedial actions to support tran-sition efforts and an enhanced resilience of the counterparty, or as a last re-sort cessation of the relationship when continuation is considered incompat-ible with the institution’s planning and risk appetite .
• b) adjusting financial terms (e.g. including contractually-agreed safeguards and correc-tive measures), conditions (e.g. tenor) and/or pricing based on ESG risk-relevant cri-teria and the institution’s risk strategy and internal capital policy;
• c) considering ESG risks when developing sectoral policies and when setting global, re-gional and sectoral risk limits, exposure limits and deleveraging strategies;
• d) diversification of lending and investment portfolios based on ESG risk-relevant crite-ria, e.g. in terms of economic sectors or geographical areas;
• e) other risk management tools deemed appropriate in line with the institution’s risk appetite, such as a possible reallocation of financing between and within sectors to-wards exposures more resilient to ESG risks.