Our social and environmental risk framework
Our framework on environmental and social risks is a key element of reputational risk management. It sets out how to deal with risks that are related to ESG issues. It covers transaction risks as well as risks arising from our business partners or from business practices that may have a negative impact on public trust in the bank.
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.
Deutsche Bank in the public eye: current topics
- Cluster munitions: We implemented a Group Policy on Cluster Munitions in 2012. It stipulates how we deal with companies that manufacture or distribute cluster munitions. We base our definition of cluster munitions on the Oslo Convention on Cluster Munitions.
- Agricultural commodities: Dealing with agricultural commodities has been the subject of controversial discussions for some time now. After evaluating numerous studies on the matter, Deutsche Bank’s Management Board has decided to continue to offer financial instruments based on agricultural staples.
- Nuclear power: Despite ongoing scepticism among the general public, nuclear power will continue to be an important low-carbon transitional energy source. Therefore, we will continue to support transactions in the civilian nuclear sector. However, we are applying even stricter criteria and have already implemented an internal guideline.
- Palm oil: Forecasts predict that global production of palm oil will have doubled by the year 2030 in comparison with the year 2000 and will even have tripled by 2050. The reasons for this are primarily changed eating habits and the use of palm oil as bio-fuel. The growth of the palm oil industry contributes towards economic development in Asian countries. However, it also leads to ecological and social challenges. For example, in some cases entire forests are illegally clearcut and habitats destroyed to create new palm oil plantations. People are relocated, endangered animal and plant species are at risk of extinction and emissions of greenhouse gases increase. Against this background, we introduced a guideline for transactions in the palm oil sector in 2012. One fundamental criterion of our guideline is substantiation of a certification plan for plantations or mills which fulfils the criteria of the Roundtable on Sustainable Palm Oil (RSPO). If clients so desire, we support them during the RSPO certification process. The RSPO was founded in 2004 in order to promote sustainable cultivation methods for palm oil; it is supported by international consumer goods manufacturers and financial institutes. In addition to this, we work together with other banks through the Banking Environment Initiative to promote the efforts of the consumer goods industry to avoid deforestation. The initiative is also aimed at other agricultural commodities such as wood, soybeans, and beef the production of which is responsible for about 50% of global deforestation.
Even beyond our guidelines and standards, we seek active dialog with clients to promote better mutual understanding and transparency regarding critical issues in the medium to long term.
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?
Environmental and social risk framework
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.