General principles
As part of the minimum standards to identify and measure ESG risks, institutions’ internal procedures should include tools and methodologies to assess ESG risk drivers and their trans-mission channels into the different prudential risk categories and financial risk metrics affect-ing the institution’s exposures, including with a forward-looking perspective.
To ensure a proper identification and management of ESG risks, institutions should consider the potential impact of these risks in the short, medium and long term. The level of granularity and accuracy of data points, quantification tools, methods and indicators used by institutions should take into account their materiality assessment and their size and complexity and gen-erally be higher for the short and medium term. Long-term time horizons should at least be considered from a qualitative perspective and support strategic assessments and decision-making.
With regard to environmental risks, internal procedures and methodologies should allow in-stitutions to:
quantify climate-related risks, such as by estimating the probabilities of materialisa-tion and magnitude of financial impacts stemming from climate-related factors;
properly understand the financial risks that may result from other types of environ-mental risks, such as those stemming from the degradation of nature, including bio-diversity loss and the loss of ecosystem services, or the misalignment of activities with actions aimed at protecting, restoring, and/or reducing negative impacts on nature;
establish key risk indicators (KRIs) covering at least short- and medium-term time ho-rizons and a scope of exposures and portfolios determined in line with the results of the materiality assessment.
With regard to social and governance risks, where quantitative information is initially lacking, institutions’ internal procedures should provide for methods that start by evaluating qualita-tively the potential impacts of these risks on the operations of, and financial risks faced by, the institution, and should progressively develop more advanced qualitative and quantitative measures. Institutions should gradually enhance their approaches in line with regulatory, sci-entific, data availability and methodological progress.
With regard to the interactions between the different categories of, respectively, environ-mental, social and governance risks, institutions’ internal procedures should ensure that each category of risk is first assessed taking into account its specific characteristics, before consid-ering potential interconnections and interdependencies in the measurement of these risks.