Our social and environmental risk framework
As we lay out in our Values, we are committed to doing what is right, not only what is legally allowed. Thus, we must consider risks that go beyond the traditional financial risks intrinsic to our business, such as credit and market risk. We evaluate potential environmental and social (ES) risks that could arise from transactions or interactions with our clients.
When assessing environmental and social (ES) risks in certain cases, the answers are clear-cut. For example, Deutsche Bank will not finance pornography or weapons such as cluster munitions or key components thereof. Most ES risk issues, however, are more complex. As a global bank, we serve all sectors of the economy. It is therefore not always feasible to eliminate all environmental and social risks from our business. We avoid business, however, that could have negative impacts on ecosystems and society. If impacts are unavoidable, they should be mitigated as much as possible through implementing the appropriate improvement measures. We have several mechanisms in place to thoroughly consider the possible environmental and social risks arising from transactions or client relationships. Based on these evaluations, we determine the best course of action.
Implementing guidance for environmental and social risks
To support our business units in assessing the environmental and social risks that result from client relationships or transactions, we have implemented the Environmental and Social Risk Framework and continually supplement it with a set of Environmental and Social Impact Assessment Guidelines for critical sectors. These guidelines help business units to identify whether a transaction is likely to trigger environmental and social risks that are either entirely unacceptable or require specific mitigating action. In 2013, the number of transactions reviewed by the team under the ES Risk Framework increased by a further 78% as compared to 2012, reflecting the increased awareness of these risks within the business units.
Identifying risk-prone sectors
Through our ES Risk Framework, we define critical sectors that are especially connected with potential ES risks. When transactions or clients relate to these sectors, internal sustainability experts must be consulted throughout the corresponding due diligence and approval processes. We currently see the following sectors as critical:
- Pulp, paper and forestry
- Chemical industry
- Aerospace and defense
- Metals (e.g. steel) and mining (e.g. copper, coal)
- Oil and gas
- Other activities with high carbon intensity
We continually scan global developments across markets, regions and industries in order to detect arising environmental or social pressure points. We research issues we consider to present potentially significant ES risks as a basis for developing specific guidance for transactions. In 2013, we analyzed the controversially discussed “fracking” technology for extracting shale gas. This led to an enhanced due diligence requirement for any potential transactions in this critical sector. In developing our position on certain environmental and social topics, we refer to recognized standards, principles or guidelines such as the World Bank/IFC Performance Standards and the UN Guiding Principles on Business and Human Rights. We also review existing sectoral standards and industry best practices to help with our decisionmaking on topics such as nuclear power, palm oil or shale gas. As sustainability is a rapidly evolving field, standards may not always be available or adequate to deal with pressing issues such as climate change, in which case we also consult internal and external experts.
How we categorise environmental and social risks in our risk management
Our framework categorizes transaction risk related to the environment or society as high, medium or low:
- High-impact transactions are those that could have significant adverse social or environmental impacts that are diverse, irreversible or unprecedented.
- Medium-impact transactions are those that could cause adverse social or environmental impacts that could be considered proportionate for a transaction of such scale. While potential impacts could be grave, they are few in number, generally site-specific and might be readily mitigated.
- Low-impact transactions are those that have minimal or no impact on the environment and society.
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?
Our understanding and management of ES risks is also greatly informed through our engagement with civil society organizations, industry and academic experts, research institutions, our clients and peers in the financial sector. Conducting wide-ranging dialogue allows us to work with these groups to define or improve standards and voluntary commitments and to discuss ways to apply them in the financial sector. It also supports mutual learning, develops an appreciation of the significance and complexity of the issues, and helps to identify potential solutions. As a result of such dialogue, we can work constructively and communicate openly with our critics, articulating our position on key issues and explaining the limitations inherent to banking products and services.
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.