climate and environmental risk integration within the prudential framework: sustainable-frtb

Climate change will continue for many decades to come, Banks should adequately incorporate climate-related and environmental risk within their governance and risk management frameworks in order to mitigate risks.

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One of the most important challenges facing financial institutions today is the measuring and monitoring of financial risks in portfolios with regard to climate change. More than 80% of banks acknowledge that they are materially exposed to climate risks, with more than 70% seeing risk in their current business planning horizon of three to five years.


How can banks satisfy the new market framework that is increasingly focused on sustainability?

The answer is: S-FRTB (Sustainable-FRTB)!

The model moves from the FRTB framework, through the inception of specific methodologies it improves the existing market risk prudential framework by capturing the sustainability risk sources. In other words: It integrates the market risk framework with environmental risk.

The main advantage of the S-FRTB is the improvement of E(SG)-related risk management processes through the availability of a more effective risk breakdown process, where the environmental contributions can be properly highlighted, defined and mapped.


Given both the cost of getting environmental (social and governance) reporting wrong and the benefits of getting it right, many financial firms will likely need to invest more in how they communicate their approach to environmental to their stakeholders.

This why together with the Sustainable FRTB we have also developed a “Sustainable Managerial & Risk Reporting” (SMERR) framework.

The SMERR deliver cutting edge tools in environmental reporting (see use case section):

  • Physical-risk heat map

    Atlas with indication of the geo-position of the assets in portfolio together with the risk, and type of risk, associated with each geography where the asset is located.

  • Portfolio concentration analysis

    in terms of sectors, scores, carbon-intensity, etc.

  • Operations monitoring

    assuming a black list of sectors/companies, monitor of the transactions (in trading book) over the time.

  • Scenario analysis

    embedding new scenario for possible reallocations to sectors with better ratings or however greener.

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Climate change will continue for many decades to come. Future climate change will increase climate-related extreme events, such as heavy rainfall, droughts, floods and storm surges in many European regions. Our Framework aims to support organizations in stepping forward in the compliance with the sustainability requirements unlocking performance data value beyond regulation to boost their competitiveness:

  • Competitive advantage: reporting environmental data within market risk data will help stakeholders to compare the organization with its competitors. This works in the organization’s favor if it is outperforming peers on the ESG front

  • Profitability: Including “E” data in an extended planning and analysis strategy allows to see how that data affects financial and operational data