Helping a bank understand ESG risks and opportunities using stress testing and scenario analysis

CASE STUDY

RiskSphere supports clients in financial services and beyond in achieving and maintaining regulatory compliance. We offer expert knowledge and skills across the risk management cycle to help manage the risks and seize the opportunities of sustainability.??

One of our clients, a Dutch promotional bank, aimed to increase the comprehensiveness of their ESG risk management approach. They asked RiskSphere to assist in creating a methodology linking the risk identification with stress testing and scenario analysis capabilities, resulting in more insight and a robust framework.??

The Challenge?

Our client is in balance sheet size one of the largest banks in The Netherlands. It is a promotional bank, meaning it has a specific task in execution of the public agenda. The bank is typically involved in long term relationships with clients in need for capital-intensive long-term financing against the most favourable conditions (including pricing).??

As a D-SIB, our client needs to comply with all applicable regulation. This includes ESG and sustainability risk management guidelines. Due to the specific nature of the bank’s financing, there might be more and or different mechanisms at work in the interaction between the bank and the environment and society at large. Especially when compared to traditional banks.?

The risk management function of the bank aimed to have a comprehensive framework to identify and understand risks and opportunities across various horizons and treat these in a coherent and fit for purpose way.??

The approach and solution

RiskSphere built an ESG risk management framework, starting with risk identification (including the risk materiality assessment). The results of this assessment now feed into either stress testing or scenario analysis, depending on the horizon. Templates were introduced and are used to enhance consistency and demonstrability. The whole framework was included in a new ESG risk management policy, which also increased the overall design and operating effectiveness of the tools and techniques.??

Environmental and Social narratives were predefined and included in a repository for future use in e.g., ICAAP. In workshops with senior management and a broad group of representatives within the bank, the concept of scenario analysis was further detailed and handed over. As well as exploring very long-term horizons using – for this pilot – the Network for Greening the Financial System (NGFS) scenarios.??

“We are proud to have been able to help our client by designing and implementing a comprehensive approach to ESG, investigating risks and opportunities across various time horizons.” ?

- Henk-Jelle Reitsma, partner RiskSphere??

How we can help you!

RiskSphere can help you increase your stress testing and scenario analysis capabilities. Would you like to know more? Contact our partner Henk-Jelle Reitsma by sending him a message on LinkedIn! Or keep an eye out for our website (more coming soon).

RiskSphere. Doing well by doing good.