In recent years, the discourse around environmental, social, and governance (ESG) factors has gained significant momentum within the financial services industry. Organisations are under increasing pressure to incorporate climate-related risks and opportunities into their operations and reporting practices. As regulatory bodies across the globe continue to announce sustainability standards and mandatory disclosure requirements, financial institutions face the daunting task of navigating the intricate landscape of climate risk management.

During a recent discussion led by Jacob Elkhishin, Alex Kotsopoulos and Kareem Abu Eid shed light on the evolving dynamics of sustainable finance. With a focus on banking, they explored the global service growth opportunity within the context of climate risk integration.

Exploring Financial Services and ESG Opportunities

Assessing climate risk is an essential part of any organisation’s sustainability strategy. With the increased focus on Environmental Sustainability and Governance (ESG) reporting and the interoperability of risk management frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) framework, it is necessary for businesses to identify, assess and quantify climate-related risks. This is particularly true for the banking and financial sector, where regulators demand rigorous integration of climate risk considerations into risk management functions.

RSM’s ESG and actuarial practices have developed an environmental risk scoring (E-Score) methodology to assist financial institutions in quantitatively integrating climate risk into their operations. This approach not only aligns with regulatory mandates but also addresses the broader imperative of long-term sustainability. By leveraging tools like RSM’s proprietary E-Score methodology and our risk modelling software, known as DIVA, RSM is enabling banks to navigate the complexities of climate risk management more effectively.

Banking case study: ESG climate risk and resilience

Illustrating the practical application of its approach, RSM recently completed a climate-related risk engagement for a bank in the MENA region. As the global regulatory environment continues to evolve to meet contemporary ESG demands, the bank faced regulatory pressure to integrate climate-related risks into their Internal Capital Adequacy Assessment Process (ICAAP) to ensure it had enough capital to address these risks at a quantitative level. RSM was engaged to evaluate the bank’s current climate risk profile and develop policies and procedures to enable the bank to lower and mitigate those risks. Through a tailored solution incorporating RSM’s E-Score methodology and DIVA, RSM facilitated the bank's compliance with its new regulatory requirements while enhancing its resilience against climate-related risks.

ESG and impact on financial markets

This case highlights the global rise in climate risk disclosure requirements and the impact they are having on financial institutions. From direct mandates targeting banks and insurers to broader regulations affecting the entire financial sector, the regulatory landscape is evolving rapidly. Recognising the interconnectedness of financial markets with environmental factors, regulators worldwide are pushing for greater transparency and accountability. This is evident in the development of regional climate-related disclosure legislation, such as the Sustainable Finance Disclosure Regulation (SFDR) in the EU, the Singapore-Asia Taxonomy for Sustainable Finance, and the proposed SEC climate-related disclosure requirements in the US.

Central to RSM's approach is not just risk assessment but also proactive risk mitigation. Through our E-Score methodology and DIVA, RSM assists companies in transitioning their asset portfolios towards lower climate risk industries. By quantifying the impact of such measures, RSM empowers financial institutions to make informed decisions that align with both financial prudence and environmental stewardship.

In addition to climate risk integration, RSM offers an array of ESG services, each of which can be tailored to meet the unique demands of financial institutions in today's rapidly changing landscape:

• RSM ESG Maturity 360֯ Assessment: Benchmark with global and regional peer companies and assess current state with global standards (such as GRI, TCFD, SASB, SDGs, etc.), establish a baseline for an organisation’s ESG journey and evaluate an organisation’s preparedness against ESG risks and opportunities.
• ESG Strategy Framework: Create long-term strategy to steer the organisation through an uncertain risk and policy environment and align the organisation’s operations with ESG principles to ensure better preparedness against risks.
• Sustainable Finance Framework: Align policies and product features with sustainable finance guidelines provided by the International Capital Markets (ICMA) coalition, and the Loan Syndications and Trading Association (LSTA), assess existing product portfolio and offer ESG-linked products and instruments to clients.
• ESG and Sustainability Reporting: Communicate the company’s ESG journey with stakeholders, align with global standards (such as GRI, TCFD, SDGs, etc), showcase achievements to prospective clients and partners and position the organisation as an industry leader in best practices.
• Capacity Building: Create competencies within workforce to manage ESG issues, risks and opportunities, targeted capacity building for personnel in departments who are in charge of specific issues and preparedness for regulatory changes.

How you can help your banking and financial services clients

RSM's climate risk integration approach represents a crucial step towards fostering sustainable finance practices within the banking sector. By combining robust risk assessment methodologies with proactive mitigation strategies, RSM equips financial institutions to navigate the complex interplay between climate risk and financial stability. As regulatory pressures mount and stakeholder expectations evolve, embracing sustainable finance principles becomes not just a regulatory imperative but a strategic imperative for long-term viability in a rapidly changing world.

RSM is ready to support financial institutions in their ESG endeavours. Armed with a wealth of experience and a robust suite of services, RSM stands ready to guide banks towards a more sustainable and resilient future.

If you have banking and financial services clients who may be impacted and need support, please contact: [email protected]