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Financial Institution Risk Assessment in Belgium: Challenges and Opportunities in ESG Risk Management
A recent study by Dynafin, in partnership with the Solvay Business School, has shed light on the level of maturity of Environmental, Social, and Governance (ESG) risk framework implementation in Belgian financial institutions. The research highlights significant trends and challenges in ESG risk management, underscoring the need for regulators to provide clearer guidance and support.
Climate Change and ESG Risks
Climate change, environmental degradation, social issues, and other ESG factors pose substantial economic risks, threatening businesses and communities worldwide. In response, the European Union has established various plans to transition to a greener economy, leveraging financial institutions’ influence on economic actors. Initiatives such as the action plan on sustainable finance and delegated acts under MiFID II aim to achieve this goal.
EBA Regulatory Roadmap
The European Banking Authority (EBA) has been tasked with defining rules to strengthen ESG risk consideration in Basel’s three pillars. A new regulatory roadmap was published in December 2022, outlining key objectives and milestones for future evolution. Despite recent advancements, the financial sector faces numerous challenges in implementing an ESG risk framework.
Study Findings
The study surveyed 15 Belgian financial institutions, assessing their maturity based on axes such as:
- Risk appetite
- Methodology
- Strategy
- And others related to “E”, “S”, and “G” risks.
Results indicate that institutions subject to the EBA’s Article 449a disclosure requirement are more mature in ESG risk management, suggesting a correlation between regulatory obligations and resource allocation. Additionally:
- All institutions have implemented environmental risk frameworks
- Social and governance risk frameworks are less developed or non-existent
Regulatory Challenges
Implementing an ESG risk framework can be complex and challenging, with 90% of surveyed institutions seeking external support. Regulatory technology (RegTech) has emerged as a key solution provider, offering innovative solutions to manage ESG risks effectively. However, adoption remains relatively low, with only 30% of institutions reporting collaboration with fintech companies.
Interviews and Challenges
Interviews revealed that the main challenges faced by financial institutions include:
- Data collection
- Unclear regulation
- Data interpretation
Regulators’ support is crucial in addressing these challenges, as highlighted by respondents who perceived the EBA’s regulations as unclear.
Conclusion
The study concludes that while progress has been made in environmental risk management, social and governance risk frameworks require further development. Clearer guidance from regulators, combined with fintech innovations, can help financial institutions better understand and manage ESG risks, ultimately contributing to a more sustainable economy.