Over the past decade and a half, banks have significantly strengthened their risk management frameworks. In the wake of the global financial crisis in 2008, institutions invested heavily in governance, controls, stress testing, and capital adequacy to better manage credit, market, liquidity and operational risks. Today, however, a new category of risk drivers is reshaping the landscape: sustainability-related risks related to climate change, nature loss, pollution and social pressures.

These risks are no longer distant or theoretical. The UK heatwave in June 2026, an example of a climate change physical risk, led to a £1.15 billion hit to the UK economy due to a loss in working hours.¹ This affected borrowers’ financial resilience and operational risk, which in turn increased banks’ credit risk. Supervisors and policymakers around the world have started treating sustainability risks as prudential risks, and therefore expecting banks to identify, measure, manage and govern them.

Sustainability risk integration: from risk to return

By understanding and managing risks effectively, banks are better placed to pursue opportunities with confidence. Sustainability risks are no different.

Climate transition risks affect the creditworthiness of clients and entire sectors. Physical climate risks can disrupt operations and asset values. Nature loss and social risks can affect supply chains, productivity and long-term economic stability. Left unaddressed, these drivers can undermine portfolio quality and increase volatility. When systematically integrated into risk management, however, they not only help banks to avert or mitigate losses, but to also identify relevant opportunities.

Banks that understand and integrate sustainability risks at the counterparty and portfolio levels are better able to finance the climate transition, support climate adaptation and resilience, and develop new products and services aligned with evolving client needs. Robust risk integration also allows institutions to price risks more accurately, allocate capital more efficiently and engage clients earlier on transition pathways. In short, it may enable banks to pursue high-return opportunities while safeguarding resilience.

The missing link in existing risk management frameworks

Despite significant progress, many banks face a common challenge: sustainability risks are often addressed through fragmented processes that sit alongside, rather than within, established risk management frameworks. Climate, nature and social risks may be assessed in separate exercises, using different methodologies and language, making it difficult to translate insights into core risk processes and decision-making in a consistent and coherent way.

This fragmentation creates uncertainty for risk teams and sustainability teams alike. Risk professionals are seeking clarity on how to operationalize evolving regulatory expectations within existing frameworks. Sustainability specialists, meanwhile, often struggle to connect their analyses with mainstream risk language and governance processes. The result is inefficiency and missed opportunities.

A new conceptual framework for sustainability risk integration

To address this fragmentation gap, UNEP FI’s Risk Centre last month released a new conceptual framework to help banks systematically integrate sustainability risks within their existing risk management frameworks and processes. Rather than requiring a risk management overhaul, it enhances what banks already have in place.

The framework is the first part of the Risk Centre’s approach to sustainability risk integration and is designed with risk professionals firmly in mind. It builds directly on seven core elements of risk management: risk strategy; governance; risk identification, measurement and materiality; risk taxonomy and scope; risk appetite; risk management actions; and risk monitoring and reporting. The framework was designed after consulting UNEP FI member banks and builds on findings from a recent Risk Centre publication, which assessed the extent to which sustainability risks are being integrated by the global banking sector. This new tool recognizes that banks are at different stages of maturity and operate across diverse jurisdictions and regulatory environments, and institutions can apply the framework in a way that reflects their size, complexity and starting point.

“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.” said Eric Usher, Head of UNEP FI.

Looking ahead

The integration of sustainability risks into bank risk management frameworks is essential for building resilient financial institutions and supporting a robust financial system.

By embedding sustainability into the core of risk management, banks can better navigate uncertainty, align with supervisory expectations and position themselves for long-term value creation in a rapidly changing world. The Risk Centre’s conceptual framework for sustainability risk integration offers a practical step towards that goal. The framework will be followed by the operational playbook for sustainability risk integration, which will be the second part of the Risk Centre’s approach to sustainability risk integration.

 

About the Risk Centre

Designed for financial risk professionals, UNEP FI’s Risk Centre helps banks and insurers stay on top of emerging approaches to sustainability risk, keep abreast of regulatory developments, and enhance capabilities in an increasingly complex landscape. UNEP FI members can access practical resources and participate in our deep-dive research programme to build skills and technical knowledge, and assess, manage, and report on their sustainability-related risks. For more information, email the Risk Centre.

 

¹June heatwave cost UK economy more than £1 billion, study finds, LSE press release, 23 July 2026