Deutsche Bank – Responsibility

Risk management: controlling environmental and social risks

We identify, measure, monitor, and control business and reputational risks as part of our group-wide risk management. Clear internal processes support decision-making at all levels within the Bank, both in lending and product evaluation. Risks are part of our business. Dealing with them responsibly means carefully weighing the anticipated added value against possible hazards and simultaneously considering the concerns of our various stakeholders. Stringent risk management with precisely defined processes and a strict system of internal controls help us manage risks.

Deutsche Bank introduced a group-wide program for managing reputational risks in 2005. The program provides guidelines on the identification, escalation and resolution of reputational risks that might arise from the business activities of the Bank. The program is continually revised.

Protecting the reputation of the Bank is the duty of every employee as a matter of principle. From the organizational perspective, our business divisions bear the main responsibility for dealing with reputational risks. They are supported by control teams from our Legal, Compliance and Group Sustainability departments. Participation of Group Sustainability ensures that environmental, social and governance risks (ESG) are taken into account.

Eskalation-von-Reputationsrisiken-L-EN.png

Every month, Deutsche Bank´s senior management receives a report profiling of the reputational risks that the Bank is dealing with. The report highlights the main sources and drivers of reputational risks and analyzes coverage in the media. In addition, a quarterly report detailing issues involving increased reputational risks is sent to the business divisions and the Group Reputational Risk Committee (GRRC), our highest-level decision-making body for reputational risks. The GRRC includes two members of the Executive Management Board; it reports directly to the Risk Executive Committee, the uppermost risk committee of Deutsche Bank. The GRRC gives a final assessment of whether and under what conditions products are introduced, client relationships are initiated, or transactions are executed.

Strict guidelines for loans

Strict guidelines for loans

Our credit guidelines constitute an important element of our management of reputational risks. They apply not only to financial risks but also include clear requirements on issues such as arms, pornography, betting and gambling, environmental protection and embargoes. Business transactions that involve one or several of these aspects require a special evaluation by senior management. Every year the Group Reputational Risk Committee and the Group Credit Policy Committee review the credit guidelines and consider whether they remain in line with the relevant standards of the Bank.

Managing environmental and social risks

Our risk management in this area is based on our guideline for activities in sectors that are exposed to significant environmental or social risks. Such as production of raw materials, nuclear power, agriculture and forestry. We rolled out the framework across the bank in 2012, including training for staff in Asia and Latin America. We will continue to extend the training measures to include additional business divisions, infrastructure functions and regions. Between January and December 2012, the number of transactions that were escalated to our sustainability team for review and assessment increased by 480% year-on-year. We regularly review the sectors covered by our environmental and social risk framework and extend coverage, if necessary.

Environmental and social risk framework

Reviewed-transaction-persector-EN.png

In categorizing risks according to this system, we use a checklist of potential effects on the environment and society for orientation purposes:

  • What is the assessment of the baseline environment and social conditions?
  • Are there alternatives that are environmentally and socially preferable?
  • To what extent could the health, safety and human rights of the local population be affected?
  • What consequences for conservation of bio-diversity, endangered species and eco-systems might be expected?
  • What socio-economic impacts might be expected?
  • How could potential soil pollution be prevented and waste minimized?
  • How could potential water and air pollution be prevented or controlled?
  • To what extent would efficient production, delivery and use of energy be guaranteed?

Case examples of successful risk management

Our business decisions are based on extensive research and careful evaluation. The following case studies illustrate this process and the underlying considerations of the decision that was ultimately made.

Unsere Geschäftsentscheidungen basieren auf umfangreichen Prüfungen und genauer Abwägung. Die hier folgenden Fallbeispiele verdeutlichen diesen Prozess und die hinter der schließlich getroffenen Entscheidung stehenden Überlegungen.

In fall 2012, we were asked to participate in a supply chain financing of goods for the construction of a hydro power plant in Asia.

As a renewable energy source, hydro power does not directly contribute to climate change. However, individual projects might be associated with adverse impacts on local communities, including resettlement, construction in sensitive or protected areas, and degradation of water quality. We therefore review these opportunities in accordance with the Social and Environmental Risk Management Framework.

We check the background of the project as well as that of the developers and financial institutions directly involved in such projects. We pay special attention to the availability and participation of multinational or bilateral financial institutions, which require projects to adhere to international environmental and social standards.

We consider the project’s impact on the environment and local communities. This includes reviewing any environmental impact assessment and resettlement plans (if applicable), evaluating the project’s rationale, and determining whether the standards being applied meet international standards such as IFC Guidelines.

For this specific supply chain financing request we were not able to access relevant project material. The project would have involved resettlement, but a resettlement plan was not provided. Moreover, we did not have an opportunity to discuss the project’s current status and controversial issues with the project developers. As a result, we decided not to provide financing to the supplier.

In early 2012, Deutsche Bank was invited to provide payment-related services to a client building a new nuclear power plant. In such cases we apply specific country and safety-related review criteria, even though our role would have been limited to cash management services rather than financing the assets.

The client company has a lot of experience in the industry and is domiciled in a European country that is a signatory to all the important international conventions on nuclear safety and non-proliferation. This meets our basic requirements, but the review also focused on the country where the plant is supposed to operate.

We concluded that the project location was in a country that neither signed nor ratified two major international conventions. It also had no operating nuclear power reactors, and so lacked experience as well as essential health and safety regulations. In addition, the risk of seismic hazard is classified as being high to very high in the region. Therefore from the safety perspective there would be an increased exposure to seismic risk.

As there was a significant reputational risk for Deutsche Bank, the involvement was ultimately presented to the Group Reputational Risk Committee for review. Analysis of all the factors led to a decision to decline the opportunity for providing payment services to the client.

Deutsche Bank was asked to participate in financing a coal-fired power plant in a developing country in Asia. This country’s government aims to stimulate economic growth and enhance living standards with minimal negative environmental impacts.

The government ratified the Kyoto Protocol and included the development of renewable energy for electricity production in its National Power Development Plan. However, the high national demand for electricity cannot yet be met by renewables alone.

We support renewable energy and new technologies. Nevertheless, it is our view that the global economy cannot yet function solely on renewable energy and will keep utilizing conventional energy sources to cover its growing energy demand. For this reason we consider financing coal power plants to provide a diversified range of energy sources that countries need during the transition period.

As a matter of principle, transactions related to coal, including coal mining and coal fired power plants (CFPP), are reviewed under our environmental and social reputational risk framework.When considering finance for a coal power plant, we pay special attention to ensuring that the most modern and efficient technology is used. We further review to what extent the technology applied may contribute to an overall average reduction in carbon intensity in the country.

The proposed CFPP would not employ the best available technology according to EU standards. The power plant was designed to use sub-critical technology, meaning that in terms of power production the plant is less efficient compared to more modern power plants.

As a developing country, the project hosting country lacks the financial means to acquire the best available technology. Investment in sub-critical power plants is, in general, 30 percent less expensive. However, in a discussion with technical experts we learned that the CFPP could be retrofitted with improved technology at a later point in time.

After reviewing all the facts, we escalated the case to a reputational risk committee for a final decision. The bank decided to withdraw from providing finance to this project because of our commitment to a well-balanced energy policy and best-available technology for transactions related to coal.

Nevertheless, we recognize the pressing need for energy in this developing country and have been providing financing for a wind farm in that same Asian economy via one of the Deutsche Bank funds dedicated to promoting the energy sector and energy efficiency in developing countries.

 

Risk management through clear specifications for new products

Kontrolle von Umwelt- und Sozialrisiken

One important tool for our risk management is the New Product Approval (NPA) system. It stipulates how new business ideas and products – as well as changes in the ongoing business of the Bank – must be examined and approved.

With the aid of the NPA, we conduct risk analyses and ensure that intended innovations and changes are in line with our standards. The objective is to ensure that our monitoring and risk management processes remain operational and effective. The NPA process helps us:

  • identify, assess and avoid or limit operational risks
  • identify and assess possible market, credit and liquidity risks
  • identify and assess possible regulatory, legal and reputational risks
  • identify and assess possible accounting, valuation and tax risks
  • monitor compliance with existing policies as well as determine whether new policies and processes are required.

Risk management of reputational risks

Stringent regulatory requirements and more demanding expectations from investors and other interest groups are increase the risks to the Bank’s reputation. Our Reputational Risk Management program policy sets out the processes for the internal management of reputational risks.

Deutsche Bank already introduced a group-wide program for managing reputational risks (Reputational Risk Management, RRM) in 2005. The program provides guidelines on the identification, escalation and resolution of reputational risks that might arise from the business activities of the Bank. The program is continually revised.

Protecting the reputation of the Bank is the duty of every employee as a matter of principle. From the organizational perspective, our business divisions bear the main responsibility for dealing with reputational risks. They are supported by control teams from our Legal, Compliance and Group Sustainability departments. Participation of (Group Sustainability) ensures that environmental, social and governance risks (ESG) are taken into account.

Contact

Do you have questions about our management of environmental and social risks? Please send your e-mail to:

mailbox.sustainability@db.com

Downloads

Corporate Responsibility: Report 2012

Further information

Identifying, aggregating, controlling and mitigating risks is the responsibility of the “Risk” division of Deutsche Bank.

Deutsche Bank Risk

You might be interested in