Following the publication of the EU’s Sustainable Finance Action Plan, many central banks and institutions of banking supervision at both European and global levels have published guidelines on ESG risk management. These consider especially climate-related risks, comprising both physical climate risks and transition risks with their damaging potential on investment or loan portfolios, which financial institutions are expected to understand, assess, and manage.
However, it is often overlooked in this context that the basis of ESG risks—namely ESG factors—can also have a very positive impact on the financial performance or solvency. While banking supervision is strictly focused on their negative impact, investors and banks need to always consider the positive aspects of ESG as well in order to avoid excluding business opportunities along with the risks.
This is especially true for transition risks: The very same political, technical, and market-driven developments that can cause massive disruption for some companies constitute the core of the success of others—like the proverbial wave on which one surfer is carried along and another is crushed underneath depending on their skill and positioning.
In this chapter, the dual nature of ESG and transition will be explored, analyzed, and structured. Providing an overview of both ESG risks and their management approaches and ESG opportunities combined with their potentials and perspectives, the result is a pragmatic approach to an inclusive, coherent, and structured manner of ESG risk and opportunity management.
