Environmental, social and ethical risks need to be managed carefully in today's financial world. Rüdiger Senft, Head of Corporate Responsibility at Commerzbank explains more about the organisation's approach to reputational risk management.
Sustainability issues – and reputational risk management – are important and they will continue to gain more importance in Commerzbank’s business in the future. The Bank has a responsibility to take into account social, environmental and ethical considerations as part of its work in Germany and abroad given its size and reach. Founded by Hanseatic merchants in 1870, the Bank serves about 60,000 corporate clients today. It is active in almost 50 countries, financing around 30% of Germany’s foreign trade. As a listed business we also have a responsibility to our shareholders to maintain a good reputation founded on solid ethical principles.
To help ensure that Commerzbank makes sustainable and ethical decisions, the Bank has its own Reputational Risk Management department, which examines and assesses potential environmental, social or ethical risks arising from products, transactions and business relations. The way the department deals with potential reputational risks is an important part of the Bank’s overall risk strategy.
In 2006, Commerzbank joined the UN Global Compact, which is a voluntary pact among companies under which participating enterprises must demonstrate commitment to its ten guiding principles, covering areas such as human rights, fair labour conditions, environmental protection and anti-corruption measures. Commerzbank issues annual reports on the progress made in integrating the objectives of the Compact into the processes and structures of the Bank, and we are continuously developing associated activities.
Since 2008, Commerzbank has been continually identifying sensitive topic areas that possibly pose environmental or social risks to the Bank including coal, oil and gas, armaments, palm oil or mining. Working closely with Commerzbank’s sales units, part of the role of the Reputational Risk Management department is to identify and address risks that may arise from transactions or business relationships falling into these topic areas. Around 6,000 transactions and business relationships are assessed every year.
Once a transaction or a business relationship is recognised as potentially posing an environmental, social or ethical risk, it is thoroughly investigated and undergoes a process of differentiated and qualitative assessment. To do this, the department uses a comprehensive set of ESG (environmental, social, governance) data.
In order to enhance the transparency for its stakeholders, the Bank published its “Policy framework for handling environmental and social risks in its core business” in early 2018. The framework, which is binding for all staff, explains which processes, requirements and guidelines concerning the sensitive topic areas are to be followed. It also lists exclusionary criteria detailing which transactions or business relationships the Bank does not support.
For example, Commerzbank completely excludes project finance in connection with fracking and drilling for oil in the Arctic. Furthermore, Commerzbank does not finance transactions or business relationships with companies with dealings in palm oil that are not members of the Roundtable on Sustainable Palm Oil (RSPO). The whole policy framework is subject to continual review so that, where necessary, changes can be implemented.
Commerzbank’s binding reputational risk management policy on coal-related business is another example of the Bank’s sustainability approach. Adopted by the Board of Managing Directors in 2016, the policy covers the main elements of the process chain, from coal extraction to coal-fired power generation. In line with the policy, the Bank neither finances new coal-fired power plants, new coal mines nor any mining projects involving mountaintop removal. In addition, companies which employ this method are not able to maintain or establish a business relationship with Commerzbank.
Regarding utility companies, the Bank set up performance benchmarks that serve as critical thresholds to assess the usage of unsustainable energy sources. In Germany, utility companies which produce more than 30% of their overall energy performance from coal are not considered as potential new clients. Internationally, a benchmark of 50% has been defined.
Commerzbank aims to be a strategic partner for its clients and to accompany them in the modernisation of their mix of energy technologies. This is why existing clients whose production is above the respective thresholds are supported by Commerzbank to achieve the critical value through the implementation of renewable energy facilities or efficiency increasing methods.
The Bank is one of the leading financiers of renewable energies with a loan volume of around €4.5 billion in project financing and around €0.7 billion in corporate financing. It has financed ca. 15% of the wind capacity in Germany to date.
Acting responsibly as a bank may, at times, mean renouncing certain transactions which may have proved profitable. However, reputational risk management also allows banks to prevent damage to themselves, to the environment, and to society. Moreover, an approach focusing on sustainability offers new business opportunities, as demonstrated by the profitability of the renewable energy sector, which in turn benefit society and the environment in a win-win-situation.
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