ESG RISKS OF BANKS

Abstract

The Eurozone countries have begun to actively implement the European Green Deal, which is based on the support of the proposed three key pillars from the point of view of the finance component: The Taxonomy Regulation, the Directives and Regu­lations on the formation of non-financial reporting and additional prudential regulations by the European Banking Authority (EBA). This has led to the need to implement ESG (Environment, Social and Governance) considerations in the activities of both domestic banks and their clients, taking into account the latest developments of the European financial community, which is steadily moving towards a declared Green Deal. In the near future, domestic banks, especially those belonging to the category of small and medium-sized banks, may face difficulties in assessing the creditworthiness of borrowers, taking into account their ESG factors, as well as forming a risk management infrastructure with a focus on sustainable financing, the main component of which is "green" lending. The purpose of this paper is to disclose the ESG risks of foreign banks in terms of compliance with the key pillars of the European Green Deal, proposed in the finance component, and to implement their findings in the activities of domestic banks, taking into account national peculiarities. In the course of the research, a set of well-known methods of scientific cognition were used: comparison, analysis and synthesis, grouping, abstraction, observation, etc. The article outlines the content of the proposed key pillars of support for the European Green Deal from the point of view of the "finance" component. ESG factors have been identified and their impact on the traditional bank risks has been determined. The practice of taking into account ESG factors in the process of risk management of individual European banks is considered. The difficulties that domestic banks may face today in carrying out a compre­hensive assessment of the ESG risks of their borrowers have been identified. In order to overcome them, the measures at the macro level are justified (to form mechanisms for insurance, public and private protection of the countryʼs transition to the European Green Deal); micro level (to deter­mine the risk appetite and implement ESG risks in the operational activities of banks; develop tools for assessing ESG risks, procedures for forming reserves to cover expected losses, taking into account the "environmental" component of borrowers and issuers of securities; assess the level of ESG risks of borrowers and carry out their clustering; develop internal management reporting on sustainable financing).