Strategies and business models
Institutions should account for ESG risks when developing and implementing their overall business and risk strategies, which should include at least:
understanding and assessing the business environment in which they operate, and how they are exposed to structural changes in the economy, financial system, and competitive landscape over the short, medium and long term as a result of ESG fac-tors;
understanding and assessing how ESG risks, in particular environmental risk drivers including transition and physical risks, can have an adverse impact on the viability of their business model and sustainability of their business strategy, including profitabil-ity and revenue sources, over the short, medium and long term;
considering how these ESG risks, in particular environmental risk drivers including transition and physical risks, may affect their ability to achieve their strategic objec-tives and remain within their risk appetite;
For the purposes of paragraph 47 and with a view to ensuring sufficiently informed strategies, institutions should consider insights gained from a combination of forward-looking risk as-sessment methods, including:
portfolio alignment methodologies, as described in Section 4.2;
environmental risk scenario analyses, taking into account the (potential) business en-vironment(s) in which they might be operating in the short, medium and long term, including a time horizon of at least 10 years;
climate or environmental stress tests performed by the institution.
Institutions should have a comprehensive understanding of their business model, strategic objectives and risk strategy from an ESG risk perspective and should ensure that their govern-ance, transition planning process and risk management framework, including risk appetite, are adequate to implement them.