### A Holistic Approach to ESG Risks in the Banking Sector

In recent years, the growing awareness of the environmental, social, and economic impacts of climate change has prompted financial institutions to reassess their policies and practices. New regulations aim to build a more resilient banking system capable of facing current and future challenges that are already underway and expected to intensify. This article explores how ESG (Environmental, Social, and Governance) risks influence the financial landscape, individual banks, and the operational consequences of new guidelines.

#### ESG Risks and Their Impacts

The European Banking Authority (EBA) has emphasized that ESG risks can significantly impact all traditional categories of financial risk, including credit risk, market risk, and operational risk. In particular, environmental risks deserve special attention. These fall into two main categories:

1. **Physical Risks**: These are linked to extreme events such as floods, fires, and storms. Such events can damage physical infrastructure and compromise the financial stability of many businesses.

2. **Transition Risks**: These refer to the challenges associated with the shift toward a low-carbon economy. These risks can arise from government policies, technological changes, and market demands for more sustainable practices.

Alongside these environmental risks, there are also significant social considerations. Issues such as human rights violations, demographic changes, and corporate governance practices—including diversity and inclusion—represent equally critical sources of risk that cannot be ignored.

#### Integrating ESG Risks into the ICAAP

The EBA’s new guidelines, while not explicitly detailing operational aspects regarding the treatment of capital for ESG risk exposures, require banks to integrate these factors into their Internal Capital Adequacy Assessment Process (ICAAP). This tool enables financial institutions to assess whether the capital they have allocated is sufficient to cover potential losses related to ESG factors.

In practice, credit institutions must now carefully examine how ESG risks impact the quality of their portfolios. They need to analyze how climate-related events and social factors may threaten their overall risk exposure. Supervisory authorities are responsible for verifying the proper implementation of these guidelines and must intervene in cases of non-compliance.

#### A Paradigm Shift for the Banking Sector

The adoption of these new rules represents a significant shift in the banking landscape. It compels banks to take a more forward-looking and proactive approach to risk management. Addressing the challenges of transitioning to a sustainable economy is not only a matter of social responsibility, but also becomes a business imperative for survival and competitiveness.

This new paradigm could gradually lead to a reallocation of capital toward more sustainable activities. Furthermore, financial institutions will be called upon to be more transparent in their communication regarding ESG risks, thereby contributing to greater awareness among both customers and investors.

#### Implementing New Regulations

However, implementing these rules poses a significant challenge. Banks must invest in human resources and information systems to ensure proper compliance with regulations and effective integration of ESG risks into their business models. This will require considerable commitment, both in terms of training staff and developing operational practices and reporting systems.

Supervisory authorities, for their part, play a crucial role in this process, needing to provide adequate guidelines and technical support to financial institutions. Only through a collaborative approach can these new challenges be addressed and true sustainability in the banking sector be promoted.

#### Conclusions

The integration of ESG risks into the financial world represents not only a necessary evolution but also a critical opportunity for banks to enhance their resilience, foster sustainable growth, and meet the evolving expectations of stakeholders.