ESG Risk Management

 

 

At NORD/LB, we see ESG risks in the field of environmental, social and governance as an integral part of our sustainable corporate management. They can have a significant financial impact, influence business models and significantly shape the long-term resilience of our bank.
 

In this context, we systematically integrate ESG risks into our risk management in order to identify potential impacts at an early stage, evaluate them in a comprehensible manner and incorporate them appropriately into our decision-making and management processes.

 

Climate-related risks can be distinguished in particular into transitory risks resulting from the transition to a climate-neutral economy and physical risks resulting from acute and chronic climate impacts.

A differentiated view of these risk categories makes it possible to systematically analyse potential impacts on business activities, assets and risk profiles and to integrate them appropriately into management and decision-making processes.

Physical risks describe financial impacts resulting from climate change and changes in nature. They are caused either by acute events such as floods or storms or by long-term developments such as rising temperatures, sea level rise, loss of biodiversity or resource scarcity. The consequences can occur directly, for example in the form of property damage or loss of productivity, or indirectly, for example through disruptions to supply chains.
 

Transition risks arise from the shift towards a lower carbon and more environmentally sustainable economy. For NORD/LB, this may result in financial risks, for example due to new climate and environment related policy requirements, technological change, or evolving market and customer preferences. The identification and assessment of these risks are conducted within the framework of climate stress tests, the risk inventory and CO₂e accounting.

NORD/LB's CO₂ calculation follows recognised international standards and uses sector-specific physical metrics to robustly map technological efficiency and transition paths. The CO₂ key figures determined are incorporated into both internal and external reporting and form an essential basis for the assessment of transition risks, sectoral decarbonisation paths and NORD/LB's long-term sustainability strategy.

We analyse ESG risks in the risk inventory

As part of the risk inventory, NORD/LB analyses ESG risks systematically and data-based.. The aim is to identify and assess the potential impact of these risks on the financing portfolio, collateral and on the company's own locations at an early stage.

Analysis of transitory risks

The assessment of transitory climate risks combines quantitative analyses with expert-based assessments of key risk drivers. Among other things, sector-specific CO₂e intensities of borrowers are used for assessment and compared with external transition paths, in particular the scenarios of the International Energy Agency (IEA) for achieving the 1.5°C target. In addition, indicative ESG indicators, such as resource consumption or waste generation, are included in the assessment. In addition to overall assessments, individual risk drivers as well as probability of occurrence and potential severity are also taken into account.

Analysis of physical climate and natural risks

Physical risks are analysed quantitatively and driver-specific as part of the risk inventory. In doing so, NORD/LB uses external climate risk data to assess relevant hazards such as storms, floods or temperature-related risks. The analysis is carried out with a focus on the financing portfolio, including collateral, and is based on address- and geolocation-specific data. In addition, medium and long-term climate scenarios based on internationally recognised IPCC scenario logics are taken into account – where available. NORD/LB's own locations are also included in these analyses.

We implement ESG risks into the climate stress test

With the climate stress test, NORD/LB examines the resilience of its business model to physical and transitory climate and natural risks. The analyses are based on the regulatory requirements of the ECB and other supervisory authorities and are based on the results of the risk inventory.

It examines how identified climate risks affect the bank's creditworthiness, assets and risk-bearing capacity under various assumptions. Both short-term developments and medium and long-term scenarios are taken into account.

For the scenario analyses, NORD/LB uses scientifically recognised climate scenarios, including those from the Network for Greening the Financial System (NGFS). In this way, different developments can be compared – from an orderly transition to scenarios with high emissions and significantly increasing physical risks.

The results of the climate stress test are integrated into the risk inventory, strategic planning and risk management and reported to the supervisory authority.

We analyse ESG risks in the credit process

In the credit process, NORD/LB takes ESG risks into account as an integral part of the risk assessment. The basis for this is ESG scores, which are structured at the level of ESG subscores and enable a differentiated assessment of key ESG risk drivers.

The transformation guidelines initially form an holistic approach for the lending business. They define exclusion criteria and sector principles and set binding minimum standards for sustainable and ethical business practices.

The ESG scoring models are designed for each segment and are continuously developed in close cooperation with the rating provider RSU and other Landesbanks. In this way, NORD/LB ensures a consistent, reliable and market-compliant assessment of ESG risks in the lending business.

In the credit process, increased ESG risk drivers lead to a mandatory in-depth analysis. Causes, relevant risk drivers and suitable risk mitigation measures are assessed and taken into account in the credit approval. Customer dialogue – especially in CO₂-intensive industries – is a central element in order to appropriately classify business models, resilience and transition capability. High ESG risk drivers significantly limit the financing eligibility of an exposure within the framework of the financing principles.

ESG risks are integrated into NORD/LB’s Group-wide risk management framework. Material ESG risks are identified, assessed and monitored as part of established risk management processes. Where defined thresholds are exceeded or relevant findings are identified, defined escalation procedures ensure that the respective matters are addressed and, where necessary, reported up to the Managing Board and the Supervisory Board. Regular reporting supports the timely identification of any need for action, the implementation of appropriate management and mitigation measures, and the continuous monitoring of ESG-related risks.

Our key figures in the context of biodiversity

For the assessment, NORD/LB uses selected key figures that create transparency about exposure to biodiversity-relevant sectors. On the one hand, the effects on the main drivers of biodiversity loss are measured, as well as the exposure to sectors that have significant dependencies on biodiversity and ecosystem services.

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