ESG – a regulatory imperative and a new dimension of risk management

Sustainable development has ceased to be an element of financial institutions’ image strategies. ESG has become firmly embedded in the language of regulation, supervision and risk management, emerging as one of the key factors influencing banks’ stability, access to capital and the assessment of portfolio quality. What only a few years ago functioned as an area of voluntary commitments and good practices, now constitutes one of the foundations of the banking sector’s operation in the European Union. ESG has ceased to be an add-on to strategy – it has become an integral part of it.

What ESG is and why it matters for the financial sector

The ESG acronym refers to three interrelated areas used to assess business and financial activity. E stands for environmental factors, including climate impact, energy consumption, greenhouse gas emissions, buildings’ energy efficiency and the exposure of assets to physical and transition risks. S, the social dimension, includes, among others, the quality and safety of the surrounding environment, access to public infrastructure, the impact of investments on local communities, as well as living and working conditions. G represents corporate governance, understood as the way an organisation is managed, the transparency of decision-making processes, the quality of internal controls and the ability to identify and manage risk. In banking, all of these elements translate directly into financial stability, client credibility and the long-term value of collateral.

The EU regulatory revolution as a turning point

A turning point for the banking sector was the intensification of legislative action at the European Union level. The EU Taxonomy, the SFDR Regulation and the CSRD Directive have clearly shifted ESG from the realm of good practice into the sphere of hard legal obligations. Banks have been required to report not only their own impact on the environment and society, but also the risks and exposures arising from clients’ financed activities. This means the need to analyse entire credit and investment portfolios in terms of alignment with climate objectives and sustainable development standards. Complementing this regulatory landscape is the Omnibus Package, the purpose of which is not to reduce ESG requirements, but to organise and harmonise them. The emphasis has been placed on regulatory coherence, comparability of indicators and the quality of the data used in reporting. For banks, this means moving away from fragmented, manual processes and building unified, resilient information systems capable of supporting both supervisory requirements and management needs.

ESG as an integral part of risk management

In this context, ESG has ceased to be solely a reporting area and has become an integral element of risk management. Climate, environmental and social risks are increasingly materialising within classic banking risk categories – credit, market and operational. ESG risk on the client side, in practice, becomes the bank’s risk, affecting creditworthiness, collateral values and long-term portfolio stability.

Real estate and ESG data

Within banks’ ESG activities, the real estate market has gained particular importance, as it is one of the largest components of credit portfolios, while also being one of the key sources of energy consumption and greenhouse gas emissions in the economy. Real estate largely determines the environmental profile of a bank’s portfolio and its alignment with the European Union’s climate objectives, which in practice means the need to systematically obtain and integrate data on buildings’ energy efficiency, technical characteristics, functional standard and exposure to physical and transition climate risks. This information is necessary not only for reporting alignment with the EU Taxonomy or calculating financed emissions, but also for a realistic assessment of the long-term value of credit collateral, because banks must now take into account the risk of value decline for energy-inefficient properties, the costs of future upgrades and the impact of regulatory changes on asset liquidity and attractiveness.

At the same time, one of the greatest challenges of the ESG transformation remains the quality and availability of data, especially with regard to older property stock and historical portfolios, which the Omnibus clearly identifies as a key element in assessing the credibility of reporting, promoting an approach based on a smaller number of precisely defined, comparable indicators and the growing role of specialised external data sources.

The ESG report prepared by the AMRON Centre as a response to banks’ needs

A response to these needs is the ESG report developed by the AMRON Centre, comprising 46 attributes dedicated to residential buildings in Poland. The scope of the report was preceded by a needs assessment of the banking sector, which clearly indicated demand for reliable data on environmental risks and the quality of the property’s surroundings. The report provides standardised, comparable and auditable information on all residential buildings in Poland, covering both the building itself and its immediate surroundings. The collected data include, among others, energy efficiency, CO₂ emissions, heating sources, sustainable construction certificates and the availability of social and transport infrastructure. They are complemented by information on potential nuisances and environmental risks. The entire solution has been designed so that it can be used directly in banks’ reporting, analytical and decision-making processes.

The use of ESG data in the banking and financial sector includes, among others:

• assessing the exposure of the real estate portfolio to climate and environmental risks,
• identifying properties eligible for green financing,
• supporting compliance processes with regulatory requirements such as the EU Taxonomy, CSRD or EBA guidelines,
• building credit risk assessment models that incorporate ESG factors.

ESG as a competitive advantage for the financial sector

Under conditions of growing regulatory pressure, ESG ceases to be solely a cost of compliance and becomes a lasting element of banking’s regulatory and management landscape. For financial institutions, this means not only the need to meet supervisory requirements, but above all the opportunity to improve risk management, build stakeholder trust and develop sustainable financial products. Banks that already invest in data quality and the integration of ESG factors into decision-making processes gain a tangible competitive advantage and greater balance-sheet resilience over the long term. In this context, access to reliable, up-to-date and comparable ESG information ceases to be support and becomes a condition for the effective and stable functioning of the financial sector in the years ahead.

Klaudia Jastrzębska
Buildings Database Project Coordinator