About the Risk centre

The United Nations Environment Programme Finance Initiative (UNEP FI) Risk centre is a centre of expertise that provides financial institutions with a coherent and practical approach to systematically integrate sustainability considerations into existing risk management. Launched in 2024, the centre undertakes research and develops knowledge resources to inform various aspects of sustainability risks. It works closely with banks, insurers, and regulators to create actionable insights and practical resources for risk professionals.

About this report

Sustainability is increasingly central to prudential risk management, yet integration remains uneven. Consultations in 2026 indicated that over 90 per cent of banks would benefit from a structured reference framework for sustainability risk integration. This document presents the UNEP FI Risk centre’s Conceptual framework, which defines seven core elements that function as an interconnected system. The framework is bank-focused, jurisdiction-neutral, and structured around the typical risk management life cycle.

Executive summary

The Conceptual framework treats sustainability risk as transversal, meaning sustainability factors act as drivers and amplifiers of established prudential risk categories rather than a standalone risk type. Its central proposition is that sustainability considerations should be embedded within existing architecture. The seven core elements are risk strategy, governance, risk taxonomy and scope, risk identification, measurement and materiality, risk appetite, risk management actions, and risk monitoring and reporting. These elements are designed to be scalable and proportionate to institutional size and complexity.

Introduction

Sustainability risks like climate change and biodiversity loss transmit directly into credit, market, operational, and liquidity risk. This document constitutes Part A of the UNEP FI Risk centre’s Approach to sustainability risk integration. It establishes the ‘what’ of the integration approach without prescribing specific methodologies. It is intended for chief risk officers, second-line risk managers, and board risk committees.

Defining sustainability risk

The Risk centre views sustainability as a driver and amplifier of existing risk types. It changes the severity, timing, and distribution of familiar risks. For instance, climate transition could drive credit risks through asset impairment, while nature loss may affect collateral values. This framing ensures considerations are embedded into existing risk strategy and governance rather than parallel structures. Governance remains an enabling factor, as weak governance can amplify environmental and social risks.

The case for the conceptual framework for sustainability risk integration

The demand for a common reference is strongest among banks furthest along the integration journey. Notably, banks with frameworks already in place were more likely to report integration difficulty (62 per cent) than those still considering one (57 per cent), indicating that challenges grow as implementation deepens. The framework aims to provide a single internal architecture that connects disclosure standards, voluntary commitments, and supervisory expectations.

The building blocks for sustainability risk integration

The framework identifies seven foundational components:

Risk strategy defines the types of risk a bank is willing to accept. Sustainability drivers are embedded here because they affect long-term business model viability and extend beyond conventional planning cycles.

Governance provides the framework for board and senior management oversight. It utilizes the ‘three lines of defence’ model where the first line owns risk at origination, the second provides oversight, and the third provides independent assurance.

Risk appetite operationalises risk strategy through quantitative limits and qualitative conditions. It is expressed via a Risk Appetite Statement (RAS) and Risk Appetite Framework (RAF).

Risk taxonomy and scope translates sustainability issues into concrete risk categories. The framework treats sustainability as a transversal driver of other prudential risks, such as embedding nature risks within a credit risk taxonomy by treating nature-dependent collateral as a contributing factor.

Risk identification, measurement and materiality acts as the analytical engine. It determines which drivers are present and estimates their financial significance. Scenario analysis and stress testing are vital due to the long time-horizons involved. Box 1 notes the importance of double materiality (inward and outward impacts) and dynamic materiality (how risks evolve over time).

Risk management actions are operational responses like sector exposure limits, concentration controls, and enhanced due diligence. Client engagement is viewed as a key risk management instrument to assess transition readiness.

Risk monitoring and reporting is the ongoing process of tracking exposures. It combines backward-looking performance indicators with forward-looking metrics, such as scenario-based projections.

Managing deforestation risk in an agribusiness lending portfolio

The report includes a hypothetical example involving ‘Bank A’ and ‘Firm B’. Routine monitoring identified land clearing associated with a large palm oil borrower. Analysis showed that 18 per cent of the borrower’s plantation operations were on recently cleared land. Internal modelling suggested that under an adverse scenario, loss of market access could reduce EBITDA by 25 per cent and increase the probability of default from 1.7 per cent to 3.4 per cent. At the portfolio level, the bank identified US$1.4 billion in similar exposures, with an expected shortfall estimated at US$115 million under the adverse scenario. Management actions included enhanced due diligence and a remediation plan with revised loan covenants.