The financial sector is severely affected by climate and structural change. Borrowers are facing new challenges that affect their ability to service a loan. Financial institutions (FIs) need to act now and position their organization in the market in a sustainable and risk mitigating way.

The ESG Risk Radar is a cost-effective, tried and tested method offered by the German Sparkassenstiftung in cooperation with Kempten University of Applied Sciences. Financial institutions can use it to analyze the environmental, social and governance risks in their loan portfolio and implement successful risk management strategies.

The tool provides detailed insights into the country's economic sectors, assesses the extent to which they are affected by climate and structural change and determines a risk assessment for each sector. The analysis provides a complete overview of the ESG risks in the credit portfolio and enables financial institutions to analyze risk concentration on several levels, for example through a heat map analysis that is compatible with the recommendations of the Bank for International Settlements (BIS).

With a structured method that evaluates and compares risks, financial institutions and supervisory authorities can more easily recognize which risks exist and how they can implement successful risk management strategies.

How does the process work?

• Onboarding with an introductory workshop for methodology and target explanations.
• Desk research resulting in ESG risk assessment on sector-level based on public and non-public sources of information, international reports and conducting comprehensive literature research.
• Integration of local expertise and scientific institutions for the evaluation and optimization of the
  assessments in a multi-stakeholder process.
• Compilation of an extensive ESG risk database on sector level as well as explanatory sector profiles (detailed reports for sectors with high ESG risk).
• “Heat Map” assessment for individual FIs as well as aggregated on country-level.
• Optional: development of sector-modifiers as a mean to use the ESG risk sector score as a basis for ESG risk assessment on loan-level.
• Full disclosure of the findings and method of calculation of the analysis for the evaluation, use and needs adjustment of the data for the FIs.

Result:

The tool provides essential information that FIs need for sustainable implementations to support resilient financial markets and better adapt to climate change. Every loan that financial institutions offer to their clients now goes through a risk assessment process to determine whether the client's business shares the risk assessment of its sector or whether its risk mitigation is sufficient. Therefore, the ESG Risk Radar can be used as a standard risk management tool for financial institutions.

With the support of the ESG Risk Radar, every financial institution is fit for the future.