Lecture 3 & 4 Flashcards
Double Materiality Concept
Financial sector impacts ESG, ESG impacts the financial sector.
financial risk
the impact of ESG developments on the valuation of financial assets.
If a company faces environmental issues like pollution, or governance problems such a s leadership scandals, it can affect the financial performance of their assets.
Reputational Risk
If a financial institution unknowingly supports businesses with a negative impact on the environment or society, it can lead to a tarnished reputation.
why ESG (from a business perspective) (5)
- streamlined regulatory compliance
- reduced operations costs
- better shareholder returns
- strong customer loyalty
- higher employee engagement
why ESG (investors perspective) (6)
- helping environmental causes
- holding companies accountable for their actions
- rewarding ethical companies based on their principles
- ensuring a positive impact on local communities
- obtainint decent returns
- managing firm’s risks (more resilient and sustainable portfolio’s ovet the long term)
market risk
credit risk
operational risk
market risk is lossess from trading and investements
credit risk is unexpected unpaid loans
operational risk is day-to-day operations (based on income and lending volume)
risk management (4)
IAAM
1. identification
2. assessment
3. application
4. monitoring
- identification
spot potential risks, imagine different scenarios, manage risks collectively
- assesment
evaluate how much and how likely risks might happen, collect data, and use various approaches to assess risks
- application
hedging (employ strategies to minimize risks)
exit or divestment if risks are too high
- monitoring
reporting- keeping an eye on risk status through regular reports
evaluation- continuously assessing and adjusting based on conditions
Risk Appetite guides Identification:
The organization’s risk tolerance directs the identification of risks. This ensures focus on risks aligning with what the organization is willing to handle.
Assessment Guides Risk Appetite:
The results of risk assessments directly inform and guide the organization’s risk appetite. This ensures that the organization’s willingness to accept or avoid certain risks aligns with the practical evaluation of those risks.
what’s the aim of The EU Sustainable Finance Action Plan? (2)
- leverage financial markets to support sustainable economic growth in europe
- manage risks temming from ESG issues
objectives of The EU Sustainable Finance Action Plan? (3)
- reorient capital flows to a sustainable economy
- mainstream sustainability into risk management (make sustainability a natural part of how org.’s think about risk
- foster transparency and long-terminism
approaches towards sustainable investments 5
- traditional
- responsible
- sustainable
- impact-first
- philanthropy
responsible approach
consideration, and avoidance of ESG risks
sustainable approach
enhence resilience by ading measures to assess the impact of ESG, and add measures to facilitate the transition of potential clients
-> avoid risks, capture opportunities
impact-first approach
trade off some financial return for the sake of ESG benefits
-> maximize impact
philanthropy approach
accept zero financial returns, and maximize impact
two components of the sustainable approach
- enhance resilience
- drive change
Key challenges for both enhancing resilience and driving change
1) DATA
2) QUANTIFICATION
double-entry bookkeeping
for every financial action a company takes, there are two entries – one showing where the money comes from (credit), and the other showing where it goes (debit).
financial accounts
keeping track of every financial move within a business. The goal is to figure out if the business is making a profit or not.
