Studying at Cambridge.
Environmental Risk Management – A Real World Perspective
The GFSG asked the Cambridge Centre for Sustainable Finance for a global stocktake of the tools and techniques that financial institutions are developing to analyse environmental risks. For example, a Chinese commercial bank has conducted stress testing on the impact of air quality regulations on the credit risk of its heavy polluting clients, finding significant deteriorations.
Elsewhere, UK-based insurers have quantified how extreme weather events can drive food price spikes and hit stock markets around the world. The need to make good quality, relevant data available is well understood. Knowing how to process that data by connecting scenario analysis to financial impacts, however, requires multi-disciplinary expertise that is not often found within a single institution.
- Environmental and Social Risk for Financial Institutions;
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Governments and regulators need to help build capacity in local markets, plug knowledge gaps, improve data and level the playing field. The long-term vision of this work is to enable a revolution in how governments, financial regulators, financial institutions and other experts work together to ensure that environmental risks are integrated into mainstream financial decision-making.
The result would be a financial system where business strategies, cost of capital calculations and drives for innovative solutions take the environmental risks to which economies and societies are already exposed fully into account. Environmental risk analysis by financial institutions: a review of global practice. The work benefited from invaluable contributions from G20 Green Finance Study Group delegates, members of finance sector business platforms that CISL convenes in the global insurance ClimateWise , banking Banking Environment Initiative and investment Investment Leaders Group industries and a wide range of other industry and academic experts.
They are too many to name, but the authors are indebted to them all. We are grateful to UNEP for financial support for this work. 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. 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. In categorizing risks according to this system, we use a checklist of potential effects on the environment and society for orientation purposes:. In fall , we were asked to participate in a supply chain financing of goods for the construction of a hydro power plant in Asia. 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 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.
Environmental Risk Management and Corporate Lending - 1st Edition
The project would have involved resettlement, but a resettlement plan was not provided. As a result, we decided not to provide financing to the supplier. In early , Deutsche Bank was invited to provide payment-related services to a client building a new nuclear power plant.
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- Environmental risk analysis by financial institutions – a review of global practice.
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. This meets our basic requirements, but the review also focused on the country where the plant is supposed to operate. 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. Public concerns about nuclear power increased considerably after the nuclear incident in Fukushima, Japan, in March As a result, many countries reviewed existing nuclear power programs and Germany decided to phase out its nuclear power plants by Deutsche Bank was asked to participate in financing a coal-fired power plant in a developing country in Asia. Our comprehensive ESRM Policy, a robust policy framework and internal process to review a broad range of transactions we finance, helps our bankers advise clients, and promote responsible ways of doing business.
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