Integrating ESG Risks Into Credit Assessment: A Practical Perspective for Banks

ESG, an acronym for environmental, social, and governance, represents a set of factors that measure an organization’s impact on the environment and society, and how transparent and accountable the organization is regarding the same. As per the World Bank’s ESG Investing Report, ‘the term ESG, often used interchangeably with sustainable investing, denotes an investment approach in which analysis goes beyond purely financial factors’.

This whitepaper focuses on financial institutions’ wholesale banking portfolios and explores how banks can meaningfully integrate the borrowing organization’s ESG performance into the assessment of the creditworthiness of the borrowers. This exploration is made in the context of the practical challenges associated with such integration, such as:

• Lack of historical ESG-related data of borrowers for any meaningful statistical analysis
• Presence of multiple reporting frameworks, and the lack of comparability across disclosures by different companies and sectors
• Data integrity issues of reported disclosures
• Need to integrate new ESG parameters without affecting the stability of currently approved and accepted credit models

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