ESG Risks Top the List of Near-Term Concerns for Bank Executives

(Bloomberg) -- Risks related to climate change and social issues will intensify the most in the next two years, finance executives predicted in a survey, and firms will have to find ways to cope.

Environmental, social and governance issues topped the list of risk managers' concerns in a Deloitte poll to be released on Monday, followed by cybersecurity and credit matters. More than half of the 57 firms surveyed were banks while the rest were in insurers, asset managers and other financial-services providers.

“For financial firms, it's harder to adapt to changes in the ESG environment because it's not only about their own carbon footprint or other impact, they also have to look at their clients' footprint, social impact,” said J.H. Caldwell, head of the financial services risk advisory group at Deloitte.

Among the first things new U.S. President Joe Biden did was rejoin the Paris climate agreement. Last week, the main banking regulator froze a rule that would require firms to do business with companies such as oil drillers and gun manufacturers that they might avoid because of perceived reputational risk. The largest banks have committed billions of dollars to help racial minorities after nationwide protests last year rekindled awareness of systemic oppression.

Looking at the potential impact of regulatory and supervisory changes in the next two years, risk managers predicted cybersecurity rules are most concerning, with ESG coming in fourth. That probably indicates regulators are closer to coming up with stronger rules on cybersecurity than on environmental issues, especially in the U.S., said Caldwell.

U.K. and France supervisors are already including climate-change scenarios in their big-bank stress tests this year. The European Banking Authority is working on a dedicated climate-related test. The U.S. Federal Reserve has just formed a committee to supervise banks on climate matters.

A global financial crisis and further pandemics could emerge as macro trends affecting the industry in the next two years, risk managers also predicted in Deloitte's survey, which was conducted between March and September last year. Credit-quality deterioration followed those two trends closely.

“Especially in the first half of last year, there was a lot of uncertainty about the economy, which still lingers somewhat,” said Caldwell. “And the pandemic has made people realize we might get other pandemics in the future.”

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