Risky Business: The Intersection of Sustainability and Credit Risk Assessment – a Strategic Perspective

Abstract: The imminent consequences of the deteriorating state of the socio-ecological systems pose significant challenges to the well-being of society and societal functioning. The financial sector, specifically banks, plays a crucial role in the transition toward sustainable development because they hold the financial resources and the power to allocate these resources. For banks to contribute to this transition, credit risk assessment (CRA) can serve as an impactful process for sustainability integration. However, as CRA is a well-incorporated process within banks, it is unclear if it is strategic enough to support a transition toward sustainability. This research, therefore, aims to analyse the key gaps, opportunities, and limitations for integrating sustainability considerations into the credit risk assessment process using a strategic sustainable development (SSD) lens. The Framework for Strategic Sustainable Development (FSSD) was used as a conceptual framework to give a better understanding of the sustainability challenge and to analyse how credit risk assessment can contribute to sustainable development. Data were collected through document review and semi-structured interviews with practitioners from Nordic banks who have relevant experience to explain how banks incorporate sustainability into their credit risk assessment practices within corporate lending and credit. A semi-systematic literature review was also done to determine the views and methods of integrating sustainability considerations into the credit risk assessment process according to academic literature. The findings were structured using the FSSD’s 5-Level Model (5LM) to identify the key gaps, limitations, and opportunities in literature and practice. The results suggest that the key gaps in integrating sustainability into the credit risk assessment process are sustainability data inadequacy, inaccessibility, incomparability, trustworthiness, and storage, and the qualitative manner of sustainability data. Further to these limitations is a competence gap where crucial skillsets needed include systems and sector-specific sustainability knowledge.