Evaluation of environmental and social risks is an integral part of our risk management
In brief
- Strengthened support for business units with new training
- Significant increase in the number of transactions assessed
- Engagement with a wide range of stakeholders on carbon asset risk
Applying high standards of ethics and integrity is one of Deutsche Bank’s core values. This includes supporting environmental protection and avoiding negative impacts on people as a result of our business activities.
As a global bank, we have clients across all sectors of the economy, including in places where businesses may have negative environmental and social impacts. We need to understand the environmental and social risks (ES risks) associated with an industry, client or transaction, just as we do with traditional banking risks.
ES risks are very complex. They range from air, water and soil pollution and threats to endangered species to social conflicts over land ownership and impacts on communities’ health and safety. Managing these risks effectively is essential to avoid having a negative effect on nature and society, and to uphold our commitments to international standards.
Disregarding environmental and social issues might also lead to reputational and financial risks for Deutsche Bank and restrict its potential business opportunities. Thorough evaluation of ES risks is therefore an integral part of our risk management process. It requires a case-by-case approach rather than blanket bans on certain activities, with the exception of our policy of not financing activities related to pornography and cluster munitions.
Effective governance of risk management
The Environmental and Social Reputational Risk Framework (ES Risk Framework), which we introduced in 2011, governs the ES risk management process. It is integral to Deutsche Bank’s Reputational Risk Management Program policy (RRM Program).
The RRM Program creates common standards to identify, escalate and resolve reputational risks from new business. Under the RRM Program, the Management Board has assigned the Group Reputational Risk Committee (GRRC) the authority to take decisions concerning reputational risks. The GRRC is chaired by a member of the Management Board.
The GRRC’s key tasks and responsibilities include making decisions on transaction-related reputational risks, or as required by group policies such as those relating to new client adoption. (See Control processes)
In 2014, five regional and three divisional committees were responsible for the implementation of the RRM Program, a structure which ensures the appropriate escalation of reputational risks and due consideration of all relevant regional aspects.
These high-level committees included senior representatives of the control functions and the business division. The majority of cases were decided without the involvement of the GRRC.
The GRRC receives a quarterly report on sensitive topics involving reputational risk, including Deutsche Bank’s exposure to ES risks, progress in managing these risks and evolving ES trends and regulations. The committee reports at least monthly to the Risk Executive Committee and provides regular updates on reputational risk to the Management Board.
Embedding the ES Risk Framework into Reputational Risk Management
Defining a clear process and responsibilities
The ES Risk Framework is applicable globally. It defines a procedure and clear responsibilities for all process elements:
- Risk identification
- Risk assessment
- Decision-making
- Post-transaction follow-up
In accordance with the RRM Program Policy, business divisions have the initial responsibility to identify risks. A Reputational Risk Analysis Desk Guide, which is part of the RRM Program Policy, is the starting point. First, it defines the sectors which are particularly sensitive:
- Aerospace and defense
- Chemicals
- Steel, metal and mining
- Oil and gas
- Pulp, paper and forestry
- Utilities
- Any other sector with a high carbon intensity
The Desk Guide also contains questions to support business units in identifying risks. Initial questions cover the following ES categories:
- The region
- The industry
- Environmental considerations
- Community impacts
- Human rights
- Opposition to the proposed activity
ES Risk Framework transactions
Detailed questions related to these categories and guidelines are provided in the ES Risk Framework in order to help business units further assess issues that may arise.
If risks are identified, business units are required to involve the Bank’s sustainability specialists to obtain a further risk evaluation. At this stage, all critical issues are discussed and the information necessary to the progress of the assessment is compiled. In addition to due diligence and direct interaction with the client, further tools are available to support the risk evaluation process, including external databases such as MSCI Rating. We may also consult independent experts in the specific subject matter.
The final ES risk profile reveals if risks are acceptable, acceptable subject to specific mitigation measures or entirely unacceptable for Deutsche Bank. The final decision can be escalated to an appropriate Reputational Risk Committee.
ES Risk Framework – process and responsibilities
When specific mitigation is required, a positive decision is made only if the client is willing and able to deliver on agreed actions. A follow-up process has been established for conditionally approved transactions. The form and method of monitoring, including its frequency, is dependent on the structure and conditions of the deal. It may range from one-off receiving additional information to a regular monitoring including site visits supported by third party experts.
Improving the operational environment
As of 2015, we have moved the ES review process to a specifically designed IT platform. This involved a design process, the selection of a suitable IT provider, and the building and testing of the platform. Its development was completed in 2014 and the IT platform now fully supports the ES review process. The benefits are:
- A clear, auditable process: Every decision, all documents and the latest status of a transaction are entered in the system.
- Standardization: Every transaction in every region is considered in the same way with the same basic information, which the system prompts users to provide.
- Increased efficiency: Standardization allows us to review transactions more efficiently because all the information necessary for a first assessment must be entered before the transaction can be submitted.
Expanding ES risk management
We monitor global developments in order to identify emerging environmental and social trends and potential pressure points. Engagement with civil society organizations, industry and academic experts improves our understanding of critical issues and informs decisions. When it is necessary, we develop new guidelines or other requirements to manage and mitigate ES risks satisfactorily. When it is practical, we collaborate with our peers since we believe that progress can be faster if the market addresses certain risks collectively. Notable examples in 2014 include the launch of the BEI Soft Commodities Compact and guidance concerning carbon asset risk.
Continuing to expand the advice available to business units, we clarified our position on activities in or near World Heritage Sites in 2014. In addition, we decided to develop a specific guideline for the fishery sector which we expect to finalize in 2015.
Carbon asset risk
Research by the International Energy Agency, the Intergovernmental Panel on Climate Change, and the Carbon Tracker Initiative suggests that, in order to avoid the worst effects of climate change, a significant portion of the world’s fossil fuel resources needs to remain in the ground. These unused fuel reserves are often referred to as stranded assets and, in the context of a carbon budget, they result in carbon asset risk (CAR).
This research has fueled a wider debate about whether or not the financial sector is integrating adequately policy, economic, and social risks into evaluations of the financial risk of carbon assets in the transition to a low-carbon economy.
In response, the World Resources Institute and the UN Environment Program’s Finance Initiative launched a process to develop guidance to help financial institutions and investors better identify, assess, and manage carbon asset risk. This guidance is being developed through the Greenhouse Gas Protocol’s multi-stakeholder process, which includes representatives from banks, investors, academics, consultants and environmental advocacy organizations. In recognition of Deutsche Bank’s ESG approach, our Group Sustainability Officer was invited to join the Advisory Committee.
The guide, expected to be released in 2015, defines CAR as the potential for a capital originator or provider to experience financial loss due to unmanaged operator carbon risk. It covers the key elements that must be addressed when assessing carbon asset risk in making new investments or lending decisions, and managing existing portfolios.
Transactions assessed with the ES Risk Framework
Increased awareness of ES risk among employees has led to a continuous rise in the number of transactions referred to the Group Sustainability team.
The ES Risk Framework makes it possible to reach a decision at the business level in most cases, avoiding the need to escalate to the risk committees except in particularly complex cases. In 2014, 13 of the 1,250 assessed transactions were escalated to regional and divisional Reputational Risk Committees for a decision involving environmental and social risks, and two were escalated to the Group Reputational Risk Committee.
Transactions escalated to Reputational Risk Committees |
|||
Number of transactions |
2014 |
2013 |
2012 |
To regional and divisional Reputational Risk Committees |
|
|
|
Total |
170 |
98 |
95 |
Those with ES issues |
13 |
7 |
15 |
To GRRC |
|
|
|
Total |
13 |
8 |
7 |
Those with ES issues |
2 |
0 |
1 |
Total number |
183 |
106 |
102 |
Thereof with environmental and social issues |
15 |
7 |
16 |
Increasing awareness and understanding
Training is a powerful tool to help businesses apply these guidelines and strengthen our ES risk management process. We developed a training covering ES risk, which adds to initiatives such as Sustainability Days, Earth Week and presentations at business events to further increase awareness of ES issues across Deutsche Bank.
The training began in 2014 in Germany and will be rolled out globally in 2015. It contains five major elements:
- Discussion of sustainability trends
- The importance of sustainability, underlining that it is taken seriously across sectors and clients
- Introduction to sustainability at Deutsche Bank, with a focus on risk management
- Discussion of the governance framework for managing environmental and social risks
- Case studies to demonstrate practical application of our ES Risk Framework and specific guidelines
ES risk case study: Coal-fired power plant
Background
A Caribbean government asked Deutsche Bank to structure financing for a coal-fired power plant. We support the development of renewable energy and the transition to a low-carbon energy landscape. However, we believe that coal power will remain indispensable in most economies during this transition even though it is the most carbon-intensive energy source.
ES risk evaluation
We evaluated the proposal, applying specific guidance developed for financing new coal-fired plants. The main criteria are:
- The country’s current electricity generation mix and energy situation, focusing on the total installed capacity for each fuel type and existing shortages in energy supply
- The government’s electricity generation objectives
- The country’s CO2 emissions in comparison to similar countries
- The availability of alternative fuels
- The choice of technology for the proposed project
- The emissions performance of the proposed design
- Other environmental and social considerations, including the need for resettlement and other impacts on communities
Following the evaluation, we held intensive discussions with the project owner to clarify various questions with the support of independent experts. This process included a visit to the proposed site.
Findings and actions
Our analysis concluded that, although wind and hydro projects are being developed, for the time being, coal remains the only fuel available to this country to its unsatisfied demand in base-load energy generation. However, the technology proposed for the project appeared to be less efficient and would create higher emissions than other technologies currently available, such as supercritical pressure boilers. Discussions between Deutsche Bank, the project developer and independent technical experts reached the following conclusions:
- The optimum unit size in this project is in the range of 330–350 MW, lower than the 400 MW capacity of a supercritical boiler
- The project developer will guarantee that efficiency and emission levels for the project will meet the critical range and for certain values even the supercritical range based on International Finance Corporation standards for thermal power plants
- The project would incorporate the best available pollution abatement techniques for this type of plant
- The plant design will comply with the World Bank screening criteria for coal financing.
As the coal quality specified in the design is a prerequisite for meeting the design emission levels, the scope of the independent review will include an evaluation of the coal supply available. This is important to demonstrate that the appropriate coal is available at the calculated costs to meet the required CO2 performance.
We also considered other factors such as the availability of technical knowledge and the country’s capacity to operate and maintain the plant.
Decision and follow-up
Based on this analysis and discussion, we made a positive decision on this project, subject to an agreed-upon commitment to address any potential breach of the guaranteed emissions.
Respecting human rights
We are committed to respecting human rights, in accordance with our values and beliefs (see Deutsche Bank’s Values and Beliefs) and as a signatory to the UN Global Compact. Our policies and guidelines reflect our commitment to the UN Guiding Principles on Business and Human Rights.
The UN Guiding Principles emphasize that governments are primarily responsible for the human rights of their citizens. However, we as a bank may be exposed to potential or alleged violations committed by certain of our clients, in relation to issues such as land and labor rights, or health and safety. Therefore, before we agree to finance a particular business we review if clients’ actions and decisions have the potential to violate human rights and we take appropriate action to manage potential risks.
We hold ourselves to the UN Guiding Principles on Business and Human Rights
Integrating the “Protect, Respect and Remedy” framework from the UN Guiding Principles in all aspects of our business is complex. It requires a comprehensive approach to identify and manage potential impacts and related risks. We have integrated human rights considerations in the due diligence processes required by our ES Risk Framework. Our sector-specific guidelines and policies explain potential risk areas and how to respond to them.
We aim to improve our understanding of human rights issues continually. For example, we are involved in the discussions of the Thun Group business, an informal group of banks with the goal to gain a better understanding of the Guiding Principles and of the ways they can be applied in the banking business.
Any grievances, including those concerning human rights, are initially dealt with by the business divisions through, for example, their complaints management processes. Deutsche Bank’s Complaints Management policy, which was implemented in 2008, requires the business divisions to establish their own divisional policies and procedures to handle complaints. Clients and the public can make complaints through all of Deutsche Bank’s dedicated channels. This includes branches, telephone, the website, social media and letters to any office of Deutsche Bank.
Our position on sensitive topics
| Our position on sensitive topics db.com/cr/positions | ||
Topic |
|
Our position |
Agricultural commodities |
|
Numerous studies have found no convincing evidence that financial activities have led to higher prices or increased volatility. We believe financial products are essential for markets to be efficient and we support increased transparency and appropriate legislation. |
Cluster munitions |
|
We have not provided direct funding for cluster munitions since 2009. Since 2011, we no longer do business with conglomerates involved with these weapons or components of these weapons banned under the Oslo Convention. We have exited some business and will not extend any existing contracts. If we are in any doubt about involvement, we require written confirmation that the client has had no involvement in cluster munitions before beginning or continuing the business relationship. |
Coal |
|
Coal power is still necessary to close the energy gap until renewable sources have grown sufficiently. In doing business with the coal industry, we expect companies to use the latest technologies to limit environmental impacts, meet sustainability criteria such as the IFC performance standard, and implement certification such as ISO 14001. |
Human rights |
|
We are signatories to the UN Global Compact, which explicitly requires respect for human rights. Our policies and guidelines reflect our commitment to the UN Guiding Principles on Business and Human Rights. We have integrated human rights considerations into the due diligence processes required by our ES Risk Framework. Our sector-specific guidelines explain potential issues and how to respond to them. |
Hydropower |
|
Our ES Risk Framework requires an evaluation of the social and environmental impact of all projects and we require appropriate sustainability standards for any project we consider financing. |
Monocultural farming and palm oil |
|
We recognize the risks, but also the contribution of palm oil production to the economic development in some countries and its importance for many products. As a minimum, clients must provide a plantation or mill certification plan in accordance with the criteria imposed by the Roundtable on Sustainable Palm Oil (RSPO). |
Nuclear power |
|
We view nuclear power as an important low-carbon energy source in the transition to a more sustainable energy mix. We therefore support finance for civil nuclear power, subject to specific country and project criteria such as compliance with international treaties and agreements and adherence to health, safety, environmental and social standards. |
World Heritage Sites |
|
We will only support activities in or near World Heritage Sites if the government and UNESCO agree that the planned activities do not place the value of the site at risk. |
Sustainable fishery
About one billion people, mostly in developing countries, rely on fish as their primary source of animal protein and approximately 10 % of the world’s population relies on fishing and aquaculture for their livelihood.
Sustainable fishing maintains fish stocks responsibly with a view to ensuring the effective conservation, management and development of living aquatic resources. Several issues undermine this goal.
Over-exploitation of important fish stocks, known as overfishing, is one of the major challenges. Illegal, unregulated, and unreported fishing affects between 11 and 26 million tons of seafood each year, resulting in global economic losses estimated at US$ 50 billion
annually. Another serious concern in the fishing industry is the protection of workers. Working conditions on fishing vessels are among the worst in the world, with crew members facing violence, low or withheld pay, and, in extreme cases, imprisonment aboard the ship.
Developing guidance
Several guidelines, such as the UN Food and Agriculture Organizations’s Code of Conduct for responsible fishery, have been developed to promote sustainable fishing, but many obstacles remain.
In this context, we decided to develop guidance on fisheries for our business units. We will consult with relevant experts in developing our guidance.