GOV-5 – Risk management and internal controls over sustainability reporting

Sustainability-related risks form an integral part of Rentenbank’s existing risk management framework. They are not managed as a separate risk category but are understood as risk drivers affecting Rentenbank’s established risk categories. Accordingly, ESG aspects are fully integrated into the organisation-wide management, control and monitoring processes.

Sustainability-related risk drivers are identified, analysed and assessed as part of the annual risk inventory. Potential environmental, social and governance risks are systematically analysed to determine the extent to which they may affect Rentenbank’s material risk categories. Particular attention is paid to credit risk, market risk, liquidity risk, operational risk and strategic risk. The assessment takes into account, among other things, the likelihood of occurrence, potential financial impact, relevant time horizons and the respective transmission channels.

Rentenbank’s risk profile is fundamentally shaped by its business model. Rentenbank grants promotional loans through the on-lending principle. From a risk perspective, the direct focus is therefore not on the ultimate borrowers but on the lending institutions, which are Rentenbank’s direct contractual counterparties. Sustainability-related risks therefore primarily have an indirect effect and become relevant in particular through the creditworthiness, risk-bearing capacity and business models of the banks involved, as well as through sectoral and macroeconomic developments.

Climate-related risks play a particular role within the ESG risk assessment. Rentenbank distinguishes between physical risks and transition risks that may arise in connection with the transition to a low-carbon economy. To assess possible long-term effects, scenario analyses are carried out on the basis of recognised external reference scenarios, in particular using the scenarios developed by the Network for Greening the Financial System (NGFS). These analyses are used to assess different temperature pathways, policy measures and transition dynamics, as well as their potential effects on Rentenbank’s risk situation over the long term. In addition, developments in the carbon price are used as supplementary risk indicators in order to identify potential transition risks at an early stage.

The findings from the ESG and climate risk analysis are incorporated into Rentenbank’s existing management tools. As a result of its promotional mandate, Rentenbank has sector concentration risk vis-à-vis the banking sector. From an ESG risk perspective, this risk is taken into account by incorporating qualitative ESG factors into the credit rating of banks. The incorporation of quantitative factors should also be examined for smaller institutions, provided that the relevant data are available.

Internal controls over sustainability reporting are integrated into Rentenbank’s existing internal control system. Responsibilities, processes and controls for the collection, processing and reporting of sustainability-related information are clearly defined and embedded in the line organisation. Coordinated processes ensure consistency between sustainability reporting, risk reporting and financial reporting.