Transition risks are primarily driven by the policy, technology, and market changes needed to facilitate the transition to a low-carbon economy. These factors have the potential to increase credit, market, and reputational risks for Deutsche Bank in terms of:
- policy actions to constrain activities that contribute to climate change (e.g. carbon pricing, shifting energy use toward lower-emission sources, promoting more sustainable land use practices), which may lead to certain sectors becoming uncompetitive and create stranded assets as “traditional” business models become obsolete;
- innovations required to support the transition to a lower-carbon economy, which will lead to “winners” and “losers” across the most impacted sectors;
- market pricing and volatility of commodities, products, and services, which may be influenced by supply / demand shifts in response to the changing policy landscape; and
- failure to adapt to climate risks, which may drive reputational and / or litigation risks from governments and / or shareholders
There is still a fairly high degree of uncertainty around key parameters of transition risks, for example, society’s willingness and ability to reduce carbon emissions and the timing and severity of policy action, in particular. Increasing visibility—both in terms of progress made towards a lower-carbon economy and of remaining gaps in relation to policy targets—will help us to further develop our approach to managing climate-related transition risks and to review our asset allocation and risk appetite.
Credit and Market Risk Management
As part of how we assess emerging risks, we have identified the industries and sub-sectors that will likely be most affected by climate-related transition risks, namely:
- Oil & gas may face a gradual decline in crude oil consumption in the medium to long term
- Utilities will likely continue the transition to renewable power generation
- Metals & mining may need to wind down coal mining activities and reduce their carbon footprint in steel production
- Automotive will need to reduce fleet/fuel consumption and promote electrification, requiring substantial investment
- Transportation may need to adjust technology and replace less effective assets
The bank sets dedicated risk strategies and concentration risk thresholds at industry-portfolio level covering both credit and market risk exposures. A component of the strategy setting process is an internal assessment of industry risk profile and outlook, which incorporates environmental and climate-change-related transition risks. We closely monitor our portfolio in industries or industry sub-sectors, assessed as having a high-risk profile.
The industry risk profile and outlook is also considered as part of how we assess Counterparty Probability of Default (CPD), which plays a key role in counterparty risk appetite decisions.
Moreover, innovation and changes to the regulatory environment may have a profound impact on commodity prices and volatility in the medium to long term. We regularly stress our trading portfolios under a range of severe scenarios—whereby commodity price shocks are included in the macroeconomic stress scenarios—to ensure that downside risks are manageable. In fact, we are not materially exposed to commodity price fluctuations via our trading book exposures.
Reputational Risk Management
Increased stakeholders’ concerns or negative stakeholder feedback in relation to the social or environmental impact of our activities – including our impact on climate protection – may negatively impact our reputation.
Our ES Policy Framework is integrated into Deutsche Bank’s and provides consistent standards for the identification, assessment, and management of reputational risks. These include processes for governance, referrals, and decision-making, to mitigate reputational risks from new transactions that Deutsche Bank may enter into.