Social risk moves to the top of the ESG agenda

Social risk is moving from afterthought to regulatory priority, forcing banks to rethink familiar frameworks and address risk model blind spots. Janice Daly and Jennifer Fahy delve into the details

Since the European Central Bank formalised its supervisory expectations for climate and environmental risks in its Guide on climate-related and environmental risks: Supervisory expectations relating to risk management and disclosure in November 2020, the materiality assessment has served as a foundational requirement for integrating climate and nature (C&N) risks into enterprise-wide management frameworks.

The assessment is a building block for how an institution identifies which risks matter most, helps determine what could affect the business and where to focus attention. The early regulatory push made climate risk methodologies familiar and widely embedded across institutions.

The publication of the European Banking Authority’s (EBA) Guidelines on the management of ESG risks in January 2025 marks the next stage. Credit institutions must now broaden their lens beyond C&N to encompass social and governance risks.

This raises a practical question: can existing C&N risk materiality assessments be extended to capture social risks, or is a more tailored approach needed?

What the EBA requires

Under the EBA Guidelines, institutions must conduct regular ESG materiality assessments; annually for most institutions and every two years for smaller, non-complex institutions (SNCI). This reinforces the need to assess ESG risks holistically, not just C&N drivers.

Institutions must reconsider whether a more traditional C&N materiality assessment can adequately capture these risks or whether more structured adaptations are needed.

For most institutions, governance risks tend to be well structured, audited and embedded across compliance, internal audit, business activities and risk functions.

Social risks are a different matter. Considerations such as customer vulnerability and fair treatment are often distributed across human resources, conduct, product oversight and corporate responsibility functions, without a single overarching framework to connect them.

Why social risk needs its own methodology

Social risks are shaped by distinct drivers. Understanding these drivers relies on broader, more diverse data sources and a wider range of stakeholders.

These risks also tend to unfold over different time horizons and through more complex impact pathways. Simply extending a C&N risk materiality framework to social risk will not produce a reliable assessment. It risks losing critical insight.

The structure may look familiar but the inputs, stakeholders and transmission mechanisms are different enough to require deliberate adaptation.

This means assessing how factors such as customer vulnerability, financial inclusion, conduct, employee well-being and societal expectations affect operational resilience, reputation, strategic outcomes and long-term sustainability.

A structured assessment that combines regulatory insight, business context and internal validation can make it easier to identify social risks and support stronger integration with existing risk management structures.

That means assessing how these social factors affect operational resilience, reputation, strategic outcomes and long-term sustainability.

Frameworks for future proofing

Social risk is inherent in financial institutions and the communities they serve. What is changing today is the expectation that institutions should be able to demonstrate that they understand, measure and manage it systematically.

This expectation will only grow as regulatory standards and global trends continue to evolve. A clear, documented and repeatable methodology is essential for understanding today’s exposures and anticipating how these risks may shift.

A structured approach can help institutions respond consistently and strengthen the resilience and accountability of their risk management frameworks as social risks continue to evolve.

Janice Daly is Advisory Partner at Grant Thornton

Jennifer Fahy is Associate Director in Sustainability Advisory at Grant Thornton