Risk appetite

Institutions should ensure that their risk appetite clearly defines and addresses ESG risks which are part of their risk inventory following the materiality assessment. The risk appetite should specify the level and types of ESG risks institutions are willing to assume in their port-folio, including as regards the portfolio’s concentration and diversification objectives. The in-tegration of ESG risks in the risk appetite should be consistent with the institution’s strategic objectives and commitments and with the plans and targets specified under Section 6.

The risk appetite should be implemented with the support of ESG-related KRIs, including e.g. potential limits, thresholds or exclusions. For the determination of relevant and appropriate KRIs, institutions should consider the results of their materiality assessment and the specific features of their business model, taking into account relevant business lines, activities, prod-ucts, and exposures towards economic sectors and geographies, including jurisdictions and more granular geographical areas. Institutions should consider the metrics listed in Section 5.7 when determining which selected KRIs to use in their risk appetite framework.

Institutions should ensure that all relevant group entities and business lines and units bearing risk properly understand and implement the institution’s risk appetite in terms of ESG risks. In particular in large institutions risk limits should be set at different levels within the institu-tion, ensuring consistency with the overall risk appetite, and should anchor ESG risk consid-erations in relation to the products or financial instruments issued, originated or held by the institution, client segments, type of collateral and risk mitigation instruments.

The institution’s risk appetite and associated KRIs should be subject to monitoring and esca-lation processes as set out in paragraph 80.