ESG and reputational risk management

ESG and reputational risk management

The principles of the BayernLB Group's Reputational Risk Strategy

The BayernLB Group's reputational risk strategy sets out the strategic framework for reputational risk management with corresponding targets and measures. Among other things, they also reflect our fundamental ethical values and the BayernLB Group's sustainability-oriented corporate governance. These guidelines also flank the BayernLB Group's current sustainability guidelines.

By defining a clear position and specific guidelines, the key objective of these guidelines is to establish an operational framework for all of BayernLB's business activities, in particular the assessment of business relationships or business transactions. This serves to manage and, where meaningful, minimise the resulting basic potential for reputational risk.

This framework is derived from the objectives stated above and reflects the BayernLB Group's risk appetite. The intention is to avoid significant reputational risks as a matter of principle and to minimise any financial losses that may arise as a result.

Reputation protection – a holistic approach

The Sustainability Executive Unit is responsible for central management of reputational risks, the basis of which is specified in the Group Reputational Risk Guidelines. Since there is ever greater interconnectivity between reputational risks and sustainability/environmental issues, these topics are also becoming increasingly intertwined in terms of processes.

As such, the Sustainability Executive Unit assesses issues relating to reputational, environmental and social risks from a single source and with a single voice.

The corresponding standards and guidelines of the BayernLB Group are divided into three categories:

  • Overarching ESG standards that apply to all business activities within the BayernLB Group
  • External standards that must be observed when carrying out the respective business activities concerned
  • Internal policies for especially sensitive sectors and topics that go beyond the standards of the World Bank; the policy guidelines relate to both earmarked individual transactions (financing) and corporate banking. Certain subsidiaries, such as DKB and BayernInvest, have prioritised specific content and/or established specific financing guidelines.

These guidelines ensure that BayernLB takes sufficient account of material non-financial aspects in its banking products and services. Most of the responsibility for reviewing existing and formulating new policies has been assigned to the Sustainability Executive Unit, with Group Compliance playing a supporting role (currently: “offshore”). All of BayernLB’s policies are approved by the Board of Management and apply throughout the Group. The respective specialist divisions and subsidiaries are responsible for implementing the guidelines and policies. If it is unclear whether a transaction falls within the scope of the policies, the Sustainability Executive Unit will provide an opinion at the request of the person responsible.

Generally binding restrictions and exclusion criteria

Appropriate account must be taken of any reputational risks that may exist in any of the BayernLB Group's business activities. The respective codes of conduct applicable in the Group and the values and principles they convey form the general overarching framework conditions and minimum standards.

Unless more restrictive guidelines have been defined for individual aspects, the general guidelines constitute the minimum requirements.

General guidelines as minimum requirements:

  • Compliance with applicable international, supranational and national law
    • United Nations (e.g. UN resolutions/embargoes/sanctions)
    • European Union (e.g. EU regulations)
    • Federal Republic of Germany (e.g. laws, provisions of case law and regulatory requirements)
    • Other countries affected by the respective issue (e.g. US federal laws such as Dodd-Frank Act, Volcker Rule)
  • Compliance with relevant international environmental, ethical and social standards, e.g. UN Global Compact, UN Declaration of Human Rights, environmental and social standards of the World Bank.

Dealing with sustainability risks

Taking the same view as the banking supervisory authorities, we do not manage ESG risks as a distinct risk type, instead we regard them as a risk driver for the already familiar risk types (credit risk, market risk, liquidity risk, etc.).

In the next few years, we will further expand our holistic approach to identifying and managing ESG risks.

To achieve this goal, BayernLB will constantly develop the methods, procedures, support tools and processes required, obtain the requisite data of sound quality and continue to build up ESG know-how along the entire value chain and along the three lines of defence model.

We include both the operating model (inward-looking) and the business model (outward-looking) in this. We therefore examine the operating model for any ESG risks and refine it if required. When it comes to our business, we will make the ESG impact and the ESG risks at the sector, country, sub-portfolio and existing individual customer level even more transparent and will develop relevant key risk indicators.

We enter into new business (new customers/new transactions) after carefully weighing the risk and profitability, taking account of the established exclusion criteria and the various policies. ESG impact/risk considerations will also feature more strongly in future decisions with regard to the planned portfolio restructuring.