Credit portfolio managers are divided over whether environment, social and governance (ESG) pillars primarily represent downside risks to be managed or upside opportunities to be captured, with European respondents most bullish on opportunities, according to a new global study from Bain & Co.
The study. which canvassed 55 International Association of Credit Portfolio Managers (IACPM) members with total assets of over $40 trillion, found that 65% had not created a primary role that is accountable for “identifying and addressing climate risks within their operations.”
Meanwhile, 55% said there are still “unclear roles and responsibilities for managing climate risk between their companies’ business and corporate functions.”.
The study noted that the divergence is partly due to uncertainties around the extent and shape of certain risks.
For instance, how climate change will affect individual consumers and businesses, including their demand for financial products and services, as well as the time frame for material changes in temperatures, water levels, and so on, has yet to be determined.
There’s also a dearth of data and a lack of consensus on transition risks pertaining to changes in policy and customer preferences.
These include the speed of a shift in lending from heavily polluting industries and projects to cleaner ones, and the effect on revenues and profits.
Getting good data on the likelihood of these risks and the potential effects would allow financial institutions to reprice credit risk and strengthen capital buffers to absorb credit and operational losses from future events.
To better understand how the industry is responding to ESG pressures, Bain recently conducted the survey of IACPM member firms, augmented by conversations with respondents and the group’s advisory council, as well as senior executives in risk, finance, and sustainability functions.
Globally, the view is that external pressures for more ESG activities will only increase, with 83% of respondents expecting more influence from regulators, versus 67% from customers and 53% from shareholders.
On a regional front, European and Asian respondents feel more influence from regulators than their counterparts in the Americas do, while shareholders have greater sway in the Americas.
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