Incorporating Sustainability Considerations into Lending Decisions and the Management of Bad Loans: Evidence from Greece

Abstract

The financial sector’s role is undeniably crucial in modern economies. Yet, this sector often attracts criticisms. Of particular concern is the negligence of proper credit risk management, which may undermine (macro)economic stability. The absence of appropriate policies (industry and institutional) draws attention to firm performance indicators, which remain short-sighted in assessing the provision of sustainable risk management. The sector and, in particular, financial intermediaries (FIs) must confront the complex task of assessing their impacts and, in doing so, actively endorse enabling conditions towards sustainable development. Our paper offers managerial insights from a wide range of financial intermediaries (FIs) currently active in Greece. We address the critical question of how FIs incorporate sustainability in credit risk management. A mixed-methods approach of online questionnaires and semi-structured interviews was utilized to link and investigate managerial perspectives of sustainability risks and their impact on bad loans. The executives’ responses revealed that sustainability risk management indeed exists, but it has yet to penetrate core processes. It does provide strong motives over new management techniques and contributes to a higher level of materiality of FI’s core operations. Nonetheless, there is still plenty of room for improvement before sustainability risk assessments are comprehensively incorporated in all phases of the credit risk management process so that a robust sustainability management approach underpins FI’s core mission and goals.