Sustainability risks should be treated as core financial risks rather than peripheral environmental or social issues, according to a new report from the United Nations Environment Programme Finance Initiative, which argues that banks must integrate them into mainstream risk management frameworks.

The report, Climate Change: Risk Management in the Banking Sector, says climate change, nature loss, pollution and social issues are increasingly affecting traditional banking risk categories, including credit, market, liquidity and operational risk. As a result, banks should move beyond treating sustainability as a standalone function and instead embed it throughout governance, strategy and risk management processes.

According to UNEP FI, sustainability-related risks can no longer be viewed as emerging or specialist concerns. Instead, they are becoming material drivers of financial performance, requiring the same level of oversight and integration as other principal risks.

The report sets out a framework to help banks incorporate sustainability risks into existing enterprise risk management systems. It covers governance arrangements, risk appetite, policies, processes, data, metrics and scenario analysis, while also considering the role of internal controls and disclosure.

UNEP FI said effective integration could help institutions identify vulnerabilities earlier, strengthen strategic decision-making and improve long-term resilience. Eric Usher, head of UNEP FI, said: “The banking sector is entering a critical phase where sustainability risks are no longer peripheral considerations but core drivers of financial performance and resilience. This new framework provides the structure banks need to move from uneven progress to systematic integration of sustainability risk drivers across risk management functions.”

---