An increasing number of financial institutions are restructuring their internal risk cycles and ESG reporting to align with ILAAP and ICAAP guidelines. In a discussion about the future of risk reporting in finance, Suresh Sankaran, head of model risk governance at Metro Bank, addressed the role of risk in greening finance and financing green initiatives.
Sankaran compared ESG to liquidity, highlighting the uncertainty surrounding who is responsible for it—whether government, shareholders, regulators, or consumers. He described ESG as a set of aspirations for the economy’s objectives, noting that it’s poorly defined, executed, and measured.
He emphasized that capital plays a crucial role, existing along a spectrum from mandatory regulatory requirements to voluntary initiatives. The ultimate goal, according to him, centers on profitability and pricing structures. As a result, ESG significantly impacts valuation and risk management, with sustainable competitiveness related to customer differentiation.
From a risk management perspective, Sankaran asserted the importance of cash flow, regardless of the risk category—be it market, credit, liquidity, or operational risk. He pointed out the unique challenge that climate-related risks present, particularly with net-zero targets on the horizon. Unlike traditional balance sheet management that typically focuses on three to five-year horizons, climate risks require understanding data projections that extend decades into the future.
He raised questions about the discount factors involved when collecting this long-term data and how climate impacts can be factored into house prices and mortgage ratings, as well as incorporated into regular stress testing.
According to MIT, ESG metrics have yet to be effectively integrated into core balance sheet management and stress testing frameworks. Sankaran suggested that institutions start with short-term focuses like ALM valuation and liquidity, gradually incorporating climate-related data into their cash flow models. He stressed that while data is abundant, its utility hinges on actionable insights, with cash flows at the center of risk management.
He urged financial institutions to embed ESG risks in their primary risk management frameworks such as ICAAP and ILAAP, suggesting that sometimes, it is essential to transcend mere regulatory compliance for the organization’s benefit.
Sankaran concluded that as regulators’ resilience evolves, financial institutions must independently integrate their risks to address ESG challenges accurately. He warned against the misconception that regulatory compliance equates to financial sustainability.
He also shared insights on the iterative nature of regulations, stating that the current regulations are just the beginning, with further incorporation of ESG variables inevitable.
Following Sankaran’s presentation, Richard Peers, founder of ResponsibleRisk, led a discussion on the future of risk compliance and ESG reporting. In addressing differential pricing, climate stress tests, and ESG risk ratings, Sankaran voiced his support for a differential pricing structure while expressing skepticism about the prospects for harmonized ESG ratings, especially given the pushback in the U.S.
During a subsequent panel at Sustainable Finance Live focused on embedding sustainability in regulation and risk, various speakers, including Guillaume Levannier from Lombard Odier Investment Managers, emphasized the need for clarity in sustainable investment definitions. Matt Bullivant from OakNorth stressed that banks should utilize their data more granularly to prepare for uncertainties surrounding climate change.
He cautioned against merely chasing regulatory objectives, urging a focus on actionable steps leading to the 2050 goals. Adam Webb from ICBC Standard Bank provided an overview of sustainability regulations in the UK, noting upcoming key regulations such as the UK SDR, TNFD, and CSRD.
Darshna Shah from ElastaCloud acknowledged the multiple regulations as a foundation for improvement, while Adrian Sargent, founder of ESG Treasury, highlighted the necessity for the industry to adapt swiftly as regulations evolve, emphasizing the importance of proactive assessment and decision-making for the future.