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#02 Risk management

Being aware of ESG (environmental, social and governance) risks is becoming more and more important for corporate risk management.

Climate risks play a growing role in risk management

In June 2017, the Task Force on Climate-related Financial Disclosures (TCFD), an expert group set up by the G20, called on companies to increase the focus put on climate risks in their business and reporting. The TFCD recommends that organisations identify and disclose their ESG risks and present them – ideally in quantified form – in their financial reporting. Specifically, it calls on organisations to be transparent about climate-related opportunities and risks and the latters' current and potential impacts on their business strategy and financial planning. In addition, it says that organisations should disclose the metrics and targets used to identify, assess and manage relevant climate-related risks.

Although this recommendation is not currently binding it is highly probable that the European Commission will adopt it and include a requirement for preparers to disclose climate risks in its CSR Directive. This would result in additional reporting requirements for organisations.

Aareal Bank is already making extensive preparations to meet these enhanced disclosure obligations. For example, we used our 2018 Group-wide risk inventory to gain a structured overview of the Group's risks, including its ESG risks. Among other things, these include potential breaches of anti-corruption and compliance requirements, the departure of talented staff, information security and data protection for our digital solutions, and losses in property values due to extreme weather events or contamination.

We also looked at how to evaluate these ESG risks, but have come to the conclusion that it is extremely difficult to arrive at a meaningful assessment at present. For example, in many cases there are no examples of best practice available at present that could assist with risk assessment. We are actively seeking opportunities for collaboration with other organisations, associations and industry bodies in this area in order to find solutions regardless of this. We are also contributing to industry bodies and working groups aiming to assess ESG risks and to incorporate quantitative information on these in financial reporting.

What we are working on

  • Developing and implementing a business process management structure including a tools-based process map

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