# BaFin Guidance on Sustainability Risks – A Practitioner’s View
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-01-13
Category: BANKING
Category URL: https://financedigest.com/category/banking
Meta Title: BaFin Guidance on Sustainability Risks: Key Recommendations
Meta Description: Learn about BaFin's non-binding recommendations for integrating climate-related risks into risk management processes for EU Banks and financial
URL: https://financedigest.com/bafin-guidance-on-sustainability-risks-a-practitioners-viewhtml

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_By **Sudalaimuthu Gurusamy,** Domain Consultant with the Risk Management practice of the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS)._

**1\. Overview of Guidance**

BaFin has conducted consultation during early part of 2020 and further published guidance notice with non-binding recommendations to supervised organizations to integrate climate related risks into risk identifications, management, and control processes. Recommendations from BaFin guidance notice are broadly categorized under 6 pillar dimensions.

![Overview of Guidance](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/bafin-guidance-on-sustainability-risk-image-1-1736836444476-compressed.jpg)

**2\. Implications of BaFin guidelines to EU Banks**

Though the guidance paper doesn’t recommend any specific timeline for adherence , it is essential for institutions to develop [core capabilities](https://www.financedigest.com/de-surinaamsche-bank-expands-relationship-with-fiserv-to-upgrade-core-banking-platform-and-add-new-digital-banking-capabilities.html "De Surinaamsche Bank Expands Relationship with Fiserv to Upgrade Core Banking Platform and Add New Digital Banking Capabilities") essential to address these 6 dimensions of impact.

Implementation of BaFin guidance requires supervisory entities to [develop key capabilities which has an impact across](https://www.financedigest.com/cordant-projects-to-develop-eleven-moxy-hotels-across-uk.html "Cordant Projects to develop Eleven Moxy Hotels across UK") data , process, technology, and culture.

Majority of these [Key interventions could be achieved through common capabilities of risk management](https://www.financedigest.com/6-keys-to-managing-a-remote-first-workforce.html "6 Keys to Managing a Remote-First Workforce") applicable to any enterprise risks but carefully enhanced to match with sustainability risks management

Since BaFin recommends considering sustainability risk as cross cutting risk category and not as separate risk type, institutions [need to carefully plan for integrating sustainability](https://www.financedigest.com/why-coding-needs-to-be-re-evaluated-for-sustainability-objectives.html "Why coding needs to be re-evaluated for sustainability objectives") dimensions in identification, assessment, measurement, monitoring and reporting stages of ERM framework

![Implications of BaFin guidelines to EU Banks](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/bafin-guidance-on-sustainability-risk-image-2-1736836444479-compressed.jpg)

Recommendations from BaFin span across complete sustainability [risk management](https://www.financedigest.com/managing-corporate-currency-risk-the-cfos-balancing-act.html "Managing Corporate Currency Risk: The CFO’s Balancing Act") value chain and need to be approached by institutions in structured manner. As a first step, it is important to conduct [capability assessment and mapping for each of the principal requirements](https://www.financedigest.com/thomson-reuters-announces-suite-of-reference-data-capabilities-to-help-financial-industry-meet-mifid-ii-transparency-and-reporting-requirements.html "Thomson Reuters Announces Suite of Reference Data Capabilities to Help Financial Industry Meet MiFID II Transparency and Reporting Requirements"). It will provide necessary inputs for planning strategic programs for [managing sustainability risks](https://www.financedigest.com/aon-announces-agreement-to-acquire-risk-management-firm-creating-a-comprehensive-cyber-risk-management-advisory-group.html "Aon announces agreement to acquire risk management firm, creating a comprehensive cyber risk management advisory group").

Depending on organization’s size and maturity of their current risk management frameworks, [firms can consider](https://www.financedigest.com/pizza-firm-dp-eurasia-considers-divestment-of-russian-business.html "Pizza firm DP Eurasia considers divestment of Russian business") more granular mapping as part of impact assessment. As suggested by TCFD recommendations, it is important to categorize type of impact and overlap with any ongoing [risk management initiatives and potential enhancements](https://www.financedigest.com/trendrating-1-3-delivers-faster-data-analysis-and-enhanced-risk-control-tools.html "Trendrating 1.3 delivers faster data analysis and enhanced risk control tools") required. Any newer capabilities required dedicatedly for sustainability [risks need](https://www.financedigest.com/what-banks-need-to-prepare-for-eba-pillar3-disclosure-of-esg-risks.html "What Banks Need to Prepare for EBA Pillar3 Disclosure of ESG Risks") to be prioritized.

Below is the high-level [impact mapping created for chapters of BaFin’s guidance on sustainability risks](https://www.financedigest.com/russia-could-hike-rates-in-2023-if-inflation-risks-have-big-impact-cenbank.html "Russia could hike rates in 2023 if inflation risks have big impact -cenbank").

![impact mapping created for chapters of BaFin’s guidance on sustainability risks](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/bafin-guidance-on-sustainability-risk-image-3-1736836444520-compressed.jpg)

**3\. Overlap with TCFD Guidance**

BaFin guidance is structurally broadly aligned to the work done [globally including](https://www.financedigest.com/veraviews-included-on-iab-global-vendor-list.html "VeraViews Included on IAB Global Vendor List") TCFD covering key pillars of Strategy, Governance, Risk Management, and Metrics & targets. There are numerous overlaps with TCFD guidance & complying with BaFin ESG guidance.

For Banks & [Financial institutions](https://www.financedigest.com/what-the-future-holds-for-financial-institutions-in-2023.html "What the Future Holds For Financial Institutions in 2023") in Germany which are planning to comply with TCFD guidance on disclosing climate risk , we strongly recommend conducting a gap assessment to understand overlapping capabilities and focus on enhancing incremental capabilities.

Significant attention must be devoted to understanding intricacies of potential reputational risks in non-disclosure of [climate](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk") risk reports. For effective reporting & insight generation around ESG risks it is very important to evaluate [industry taxonomy like EU Taxonomy of sustainable](https://www.financedigest.com/applying-a-sustainable-lens-to-the-financial-industrys-future.html "Applying a sustainable lens to the financial industry’s future") activities and assess how their sustainability categorization is aligned, how much percentage of portfolio is taxonomy aligned. Early assessment of taxonomy alignment will give competitive edge over other firms in terms of [market position & raising](https://www.financedigest.com/cosmetic-procedures-market-to-raise-at-a-cagr-of-7-5-over-the-forecast-period-2017-2025.html "Cosmetic Procedures Market To Raise At A CAGR Of 7.5% Over The Forecast Period 2017-2025") liquidity.

![Overlap with TCFD Guidance](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/bafin-guidance-on-sustainability-risk-image-4-1736836444556-compressed.jpg)

**4\. Conclusion – What are Next Steps ?**

- Based on our expertise & understanding of TCFD and BaFin guidance we [see that there is large scope of overlap between core compliance](https://www.financedigest.com/thomson-reuters-report-reveals-risk-compliance-staff-expect-to-see-significant-benefits-from-artificial-intelligence-ai-and-distributed-ledger-technologies.html "Thomson Reuters Report Reveals Risk & Compliance Staff Expect to See Significant Benefits from Artificial Intelligence (AI) and Distributed Ledger Technologies") components.
- We realize that the impact of guidance is throughout value chain of ESG risk management, and it is practical for [enterprises to assess current risk management](https://www.financedigest.com/managing-mobility-in-the-enterprise-must-have-consideration.html "Managing mobility in the enterprise must have consideration") systems and capabilities and prepare a road map for implementing additional capabilities.
- Through high level assessment of guidance for impact dimensions , we foresee that there will be [major impact on risk](https://www.financedigest.com/u-s-dollar-advances-vs-major-currencies-as-risk-appetite-fades.html "U.S. dollar advances vs major currencies as risk appetite fades") management processes and risk modeling and firms can prioritize & equip their 2nd LOD teams to take care of additional obligations.
- While most of the organizations today rely on ESG rating providers for comparative assessment of ESG performance & BaFin guidance clearly calls out plausibility checks of [data inputs shared](https://www.financedigest.com/shares-slip-yields-rise-as-u-s-data-sparks-rate-hike-concerns.html "Shares slip, yields rise as U.S. data sparks rate hike concerns") by third-party ESG rating providers. We feel that this obligation will revamp current practice and methodology adopted by [firms when using ESG data](https://www.financedigest.com/sterling-holds-firm-after-uk-jobs-data-muddies-rate-outlook.html "Sterling holds firm after UK jobs data muddies rate outlook") from providers.
- In terms of ESG integration , it will not be a simple & straight forward [experience to engage with wide variety of stakeholders from multiple business](https://www.financedigest.com/lockdown-unlocked-testimonials-of-hospitality-businesses-reinventing-the-service-experience.html "Lockdown Unlocked: Testimonials of hospitality businesses reinventing the service experience") lines for ex. Customer onboarding, credit origination, Investments teams, it is important for firms to encourage ESG risks through trainings and collaboration across sustainability, business divisions, [climate risk](https://www.financedigest.com/financial-risks-of-climate-change-overplayed-senior-hsbc-banker-says.html "Financial risks of climate change overplayed, senior HSBC banker says") modeling, risk policy management team, regulatory teams. Early adopters will benefit from competitive advantage and [reap](https://www.financedigest.com/can-finance-reap-the-benefits-of-the-cloud-without-compromise.html "Can finance reap the benefits of the cloud without compromise?") comparative benefits as industry view on ESG performance grows manifold.

**_Author’s Bio_**

_Sudalaimuthu Gurusamy is a Domain Consultant with the [Risk Management practice of the Banking](https://www.financedigest.com/strategies-banks-use-to-manage-liquidity-risk.html "Strategies Banks Use to Manage Liquidity Risk") and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). During his 13 [years of experience](https://www.financedigest.com/2021-the-year-of-buyer-experience.html "2021: The year of buyer experience") in consulting, he has worked on several global risk and compliance engagements as Risk Domain Consultant/Senior Business Analyst._

_A GARP certified [Financial Risk Manager™ and Sustainability](https://www.financedigest.com/cobots-in-the-financial-workplace-reducing-costs-attracting-talent-and-enhancing-sustainability.html "Cobots in the financial workplace: Reducing costs, attracting talent and enhancing sustainability") & Climate Risk™ professional, Sudalaimuthu holds a master’s degree in Business Administration from the Anna University, Chennai, India. His [risk consulting experience revolves around Credit risk Transformation, Risk Data](https://www.financedigest.com/tesla-to-warn-of-data-privacy-risk-from-car-security-cameras-in-germany.html "Tesla to warn of data privacy risk from car security cameras in Germany") Transformation Initiatives, BCBS 239, BASEL II, BASEL III, Liquidity risk management, Loan loss forecasting and provisioning, and risk regulatory reporting. Recently he is working on developing risk solutions to cater to emerging [risks domains including operational resiliency & climate risk](https://www.financedigest.com/mitigating-operational-risk-through-centralising-reconciliation.html "MITIGATING OPERATIONAL RISK THROUGH CENTRALISING RECONCILIATION")._


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