Climate-related risks can be distinguished in particular between transition risks arising from the transition to a climate-neutral economy and physical risks resulting from acute and chronic climate impacts.
A differentiated assessment of these risk categories enables potential impacts on business activities, assets and risk profiles to be analysed systematically and appropriately incorporated into management and decision-making processes.
Physical risks describe financial impacts resulting from climate change and changes in nature. They arise either from acute events such as floods or storms or from long-term developments such as rising temperatures, sea-level rise, biodiversity loss or resource scarcity. The consequences may occur directly, for example in the form of property damage or productivity losses, 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 environmental policy requirements, technological change or changing market and customer preferences. These risks are identified and assessed as part of climate stress testing, the risk inventory and CO₂e accounting.
NORD/LB's CO₂ calculation follows recognised international standards and uses sector-specific physical metrics to provide a robust representation of technological efficiency and transition pathways. The resulting CO₂ metrics are incorporated into both internal and external reporting and form an important basis for assessing transition risks, sector-specific decarbonisation pathways and NORD/LB's long-term sustainability strategy.
As part of the risk inventory, NORD/LB analyses ESG risks amoung others and on a data-driven basis.The aim is to identify and assess at an early stage the potential impacts of these risks on the financing portfolio, collateral and NORD/LB's own locations.
The assessment of transition climate risks combines quantitative analyses with qualitative, expert-based assessments of material risk drivers. The assessment takes into account, among other factors, sector-specific CO₂e intensities per euro of revenue or suitable physical emission intensities of borrowers and compares them with external transition pathways, in particular scenarios developed by the International Energy Agency (IEA) for achieving the 1.5°C target.
Physical climate- and nature-related risks are analysed quantitatively and by specific risk driver as part of the risk inventory. NORD/LB uses external climate risk data, for example from Munich Re, to assess relevant hazards such as storms, floods or temperature-related risks. The analysis focuses on the financing portfolio, including the locations of collateral, and is conducted at address-data or geolocation level where data of sufficient quality is available.
For risk drivers for which sufficient data is available, medium- and long-term climate scenarios are additionally considered, taking into account the IPCC's RCPs and SSPs. NORD/LB's own locations are also quantitatively assessed as part of the risk inventory with regard to their exposure to physical climate- and nature-related risks.
Through climate stress testing, NORD/LB analyses the potential impacts of physical and transition climate- and nature-related risks on its business model and risk positions. The analyses are aligned with regulatory requirements and supervisory expectations, particularly those of the ECB, and build on the results of the risk inventory.
The analysis examines how identified climate risks may affect credit quality, assets and the Bank's risk-bearing capacity under different assumptions. Both short-term developments and medium- and long-term scenarios are taken into account.
For its scenario analyses, NORD/LB uses scientifically recognised climate scenarios, including those developed by the Network for Greening the Financial System (NGFS). This allows different development pathways to be considered, ranging from an orderly transition to scenarios with high emissions and increasing physical risks.
The results of the climate stress test are integrated into the risk inventory, incorporated into strategic planning and risk management, and reported to the supervisory authorities.
In the credit process, NORD/LB considers ESG risks as part of its risk assessment. ESG scoring models are used for this purpose; they systematically capture ESG-specific risk drivers and consolidate them into an overall ESG assessment.
The ESG scores support a structured ESG risk assessment at individual client level and complement the established risk classification procedures. NORD/LB's Transformation Guidelines additionally provide an overarching framework for new business activities. They set out minimum standards, general business exclusion criteria as well as sector-specific requirements and sector principles.
Where ESG scores are elevated, in-depth analyses are carried out. The identified ESG risks, their potential impact on the borrower's risk profile and possible risk-mitigation measures are assessed and taken into account in the credit decision-making process. In addition, the ESG score is embedded in NORD/LB's financing principles.
NORD/LB follows a risk-based approach to addressing ESG risks in its credit process. Transactions in identified high-risk sectors are subject to additional analysis and review requirements, while certain business activities are subject to defined exclusion criteria. To improve its data basis, NORD/LB uses sector-specific customer questionnaires and ESG scoring methodologies, among other tools. ESG risks are also integrated into NORD/LB’s risk strategy and risk management framework.
Relevant ESG metrics are reported regularly as part of internal sustainability management reporting.
To assess biodiversity-related risks and impacts, NORD/LB uses selected metrics that provide transparency on the credit portfolio's exposure to relevant sectors. Using ENCORE data, this includes reporting exposure to sectors that have impacts on the main drivers of biodiversity loss. In addition, exposure to sectors with material dependencies on biodiversity and ecosystem services is analysed.
