Sustainability on the agenda: Deutsche Bank 28 April 2022 368
Henrike Pfannenberg, Head of ESG and Impact Transparency at the German bank, describes the sweeping climate initiatives underway at the bank, all centered around a common and comprehensive approach.
What priority steps have you taken to manage climate risk effectively?
Deutsche Bank already has well-developed and proven capabilities right across the risk management spectrum. We are committed to leveraging these capabilities to support the bank’s sustainability agenda. In practice, that means developing the tools and methodologies needed to integrate sustainability and climate risks, specifically into our risk management framework.
We have incorporated climate and wider ESG risks into our Group Risk Appetite statement. We operate within a framework for concentration risk within given industries or countries. We have incorporated climate risk into this process including analysis of financed emissions and carbon intensity. And we’re strengthening and extending due diligence for carbon-intensive clients.
In respect to risk identification, we use several tools: Our sustainable finance framework, which broadly supports the EU taxonomy, and our climate risk taxonomy which includes all assets, not just green assets.
We currently monitor and measure climate risk in our loan book on several dimensions. First, the carbon intensity of our portfolio. We have run these numbers and continue to refine our approach. Data and methodologies differ between banks, so meaningful comparisons are difficult as of today. We are working with the industry to establish common approaches. Second, the absolute emissions we finance through our lending activities. Third, top-down scenario analysis. This assesses the resilience of certain key sectors under a range of temperature and policy scenarios.
To assess pathway alignment, we are running a pilot exercise based on PACTA methodology. These approaches will enable us to publicly disclose, at the end of next year, our current portfolio emissions, intensity and Paris aligned targets for key sectors.
We are committed to shaping and influencing common approaches. We engage actively with industry collaborative bodies as a founder member of the Net Zero Banking Alliance, as well as through our engagement with PCAF, SBTI and PACTA.
We use scenarios in the Bank to identify sectors and clients vulnerable to transition risks. For this objective, the methodology that we developed in-house is aligned with our methodology for measuring and monitoring our portfolio’s carbon emissions and carbon intensity. The scenarios are based on different assumptions regarding, among others, carbon costs/taxes, transition costs, and effects from potential demand contraction, particularly in in energy sectors. This enables us to estimate the scenarios’ impact on our operating margins in all sectors relative to historic data and to identify the sectors that are most sensitive to these scenarios.
In addition to this, the bank is getting ready to participate to the ECB’s 2022 climate risk stress test. In preparation for the exercise, our stress test methodology workstream is developing methodologies for assessing portfolio impacts under the NGFS’s scenarios selected by the ECB, including transition risk for credit (long and short term), market risk (short term only), physical risk (for credit risk only), and nonfinancial risk. When the ECB’s stress test is completed, we aim to incorporate our findings into the bank’s group-wide stress testing framework.
We are pleased to see that the EU is working on a coherent and consistent ecosystem by aiming to align different disclosure frameworks (the EU taxonomy, Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD) which will provide the data on companies’ activities we need to assess their sustainability.
We need to see a level of transparency, consistency and granularity in ESG disclosures to enable us to leverage sound conclusions for our sustainable finance solutions as well as to make robust risk management decisions.
Even though taxonomy disclosure requirements begin in 2022/2023 it becomes apparent that we need a “phase-in” period during which regulators/investors/public will accept a more hands-on approach, meaning disclosures will only improve gradually over years as going through the stock of existing assets is particularly burdensome for banks.
Today, in the financing of fossil fuel activity, Deutsche Bank is only a fraction of our leading peers. Our total activity is around one-fifth of the banks which are most active in fossil fuel financing, and we rank well outside the top-20 on this measure.
We have steadily reduced our risk appetite to key carbon-intensive corporates in recent years. Since 2016 we have reduced our balance sheet lending to these carbon intensive sectors by nearly a fifth. Total lending to these sectors now accounts for only 6% of our loan book.
Since 2020, we have completely discontinued direct financing of new oil and gas projects in the Arctic, and oil sand projects anywhere. By 2020, our residual exposure to thermal coal mining, had declined to around 300 million euros - a tiny fraction of our overall loan book of around 440 billion euros. We committed to exiting the financing of thermal coal mining by the end of 2025.
What are the biggest risks and challenges facing your organization in managing climate change?
The challenges start with data and methodologies – these are the foundation for us to be able to assess climate risks, and set confident portfolio reduction targets. We need to see a level of transparency, consistency and granularity in disclosures to enable us to draw sound conclusions and make robust risk management decisions.
The data challenges make it harder to develop the scenario analysis, stress testing, and other methodologies for assessing the alignment of pathways to the Paris agreement. That said, we cannot and will not wait for perfect data. We’re advancing our methodologies and analysis with the data that’s available today.
What do you consider to be the major opportunities?
We can leverage strong risk management as an enabler, to guide both our portfolios and also our clients towards meeting their goals on carbon emissions. We can protect Deutsche Bank’s own capital and balance sheet, ensuring capacity to support clients with their transition plans to lower carbon business models.
How do you see regulatory challenges evolving over the next 18-24 months, especially around scenario planning and reporting?
In the very short term, we expect a very busy first half of 2022, with the participation in the climate risk stress test and the Thematic Review of banks’ climate-related and environmental risk management practices, which will be conducted in tandem with the ECB. Furthermore, there is a chance that Deutsche Bank will also be selected to participate in the additional assessment which the ECB is planning for a smaller sample of banks to assess climate-related risks in commercial real estate portfolios, as part of the ECB’s broader Commercial Real Estate Targeted Review. In the following months, we expect new regulation to emerge in particular in the APAC and Americas region.
Would you say you have a green portfolio? Can you give examples of specific areas where you have developed green products and services (e.g. bonds, SLLs, mortgages, ESG investment options)?
The industry has become more granular in line with emerging reporting and metrics standards. Already last year, we committed to publish the carbon footprint of our loan portfolio by the end of 2022. Moreover, we will not only publish our Green Asset Ratio as required by the European Banking Authority but we will also set and announce a specific Green Asset Ratio target by mid-2022.
Next to our engagement in the Net-Zero Banking Alliance, we are entering a new era in our client relationships. We have started or will start profound transition dialogues with clients that are facing headwinds over environmental, social and governance issues by the end of 2021.
We committed to align our business even more strictly to environmental, social and governance (ESG) criteria and are setting ambitious targets for them. It aims to facilitate over 200 billion euros in sustainable finance and investments by the end of 2023, two years earlier than originally planned.
Of the target volume of at least 200 billion euros by 2023, 86 billion euros is planned to come from the Private Bank, 30 billion euros from the Corporate Bank and 105 billion euros from the Investment Bank.
As part of our broader sustainability strategy Deutsche Bank AG has established a Green Financing Framework. Our goal is to ensure that our clients have access to financing that helps them to pursue the necessary transition to an environmentally sustainable future and our commitment and beliefs have been further reinforced with this Framework.
In 2021 Deutsche Bank became a seasoned issuer in the sustainable bond space, issuing multiple green bonds and transforming the U.S. market with its innovative diversity & inclusion bond.
We raised 200 million US dollars through the bank’s first green Formosa Bond, which will help fund renewable energy projects and energy efficiency improvements. Our Corporate Bank has expanded its ESG product suite and is now able to offer a sustainable alternative for its complete product range. In addition, it has set and progressed on its goal to develop a strategic ESG dialogue with ~2,000 multinational clients
Our Private Bank has integrated ESG into its core investment processes and deepened and broadened its ESG product offering with structured products, ESG lending solutions, green deposits and a digital carbon footprint calculator in our retail banking mobile app. The Private Bank Germany introduced Blue Economy funds to build resilience in regions most vulnerable to ocean risk. Deutsche Bank launched new Ocean Resilience Philanthropy Fund, a new global philanthropic fund dedicated to ocean conservation and coastal resilience.
How much progress are you making in terms of Scope 1, 2 and 3 GHG emissions? What are the main barriers, especially around Scope 3?
We have not just been operating carbon-neutral since 2012 but have also reduced our carbon emissions by 41% percent since then. We committed to exclusively use electricity from renewable energy sources by 2025. By last year, 80% of our electricity consumption was already sourced from renewable energy, saving an average of 244,000 tons of CO2 emissions per year since 2012.
We have decided to significantly reduce air travel within Germany, using the train instead. We signed the German Financial Sector’s Collective Commitment to Climate Action, pledging to align our credit portfolios with the Paris Agreement’s targets. This includes a commitment to introduce methods of measuring the carbon intensity of our credit portfolio by the end of 2022 and then developing and disclosing plans to adjust it in accordance with national and international climate targets, especially the Paris Agreement target.
We also joined the Net Zero Banking Alliance as a founding member committing to align the operational and attributable emissions from their portfolios with pathways to net-zero by 2050 or sooner.
What is your policy towards certain sectors (e.g. coal mining, Arctic oil and gas, oil sands etc.)? Have you discontinued business with any clients?
While there might be public pressure to stop a client relationship entirely, we will first and foremost try to support our clients in accelerating their sustainability transition and are convinced that this is the right thing to do. Nevertheless, we follow a restrictive policy with regards to certain sectors.
In 2020 we tightened our coal mining and coal power sectoral guidelines as well as established a dedicated oil & gas guideline. Under the revised coal mining and coal power guideline we set a target to end financing of thermal coal mining by 2025 at the latest. This commitment covers direct lending as well as capital market transactions. In addition, we committed to conducting a review of our coal power portfolio and restricting financing to energy companies that are more than 50 % dependent on coal (measured either by their installed generating capacity or their annual output), if they don’t present credible decarbonization plans.
Under the oil and gas guideline, we will no longer finance:
- oil and gas projects that use hydraulic fracturing in countries with scarce water supplies
- new oil and gas projects in the Arctic region and
- new oil sand projects (involving exploration, production, transport or processing)
How are your customers’ expectations changing and how are you responding?
Across all our customer groups we see increasing interest and demand for sustainable products. We are producing the assets in-house that our clients demand - from originating and structuring, to designing and finally distributing them. We are ideally positioned on both sides of the balance sheet.
In 2021, Deutsche Bank has partnered with clients globally in supporting them with their ESG bond transactions and has so far helped to raise more than €168 bn funding in various instruments
In 2021, Deutsche Bank supported the advancement of the sustainability-linked bond market, which represents one of the fastest growing segments in the ESG space. With Deutsche Bank acting as Joint Structuring Advisor and Bookrunner, EnBW successfully launched two subordinated bonds with an issue size of €500mn each, with one of the issues in the form of a green bond.
Deutsche Bank expanded its ESG footprint in the financial institution sector, leading high-profile issuances across the globe. Deutsche Bank co-led BPCE SFH’s €1.5bn Green Building covered bond transaction. FIC’s Global Financing & Credit Trading division in 2021 expanded upon its market leading position in lending and securitization across renewable infrastructure, social, and green real estate.
How are you using technology to enable you to execute on your ESG goals?
We support the launch of ‘ESG Book’, a central source for accessible and digital corporate sustainability information with the aim of shaping the future of ESG data.
Our ESG book makes sustainability data more widely available and comparable for all stakeholders, enables companies to be custodians of their own data through a digital platform, provides framework-neutral ESG information in real-time, and promotes transparency.
 This interview took place in December 2021.
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