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By Prof. Dr. Gunther Friedl and Prof. Dr. Sebastian Müller, Technical University of Munich

In our research project “New Regulation of Sustainability and ESG Risks: Implications for Portfolios and Investment Decisions”, we are investigating how sustainability and ESG risks might be anchored in regulation in the future and what implications this might have for financial market actors. On the basis of existing regulatory provisions and initiatives by various players in this area, for example on the part of the ECB, the EU, individual nation states (Bank of England in England, BaFin in Germany) or the major rating agencies, regulation is likely to increase further.

We want to answer two central questions, namely how sustainability risks can be implemented concretely as an additional risk driver instead of a separate risk type, and how these sustainability risks can be integrated operationally into scenario analyses and stress tests. In this process, we will always be guided by two interdependencies of effects, especially when it comes to the concrete anchoring in regulatory mechanisms. While the inside-out perspective looks at the impact of the financial industry’s actions on the environment, the outside-in perspective focuses on corporate exposure to long-term climate change and short-term climate disasters.

Throughout the project, we collaborate closely with a number of practitioner partners to incorporate both academic and practical perspectives and to discuss immediate implications with financial market actors.

Few topics are as topical and are discussed as intensively as the issue of sustainability. Our work aims to look into the future of potential regulation of sustainability and ESG risks in the financial sector and to work with stakeholders to develop possible regulatory mechanisms that the financial sector can then adapt to in the future.