Strategic Risks are those that potentially have the most impact on an organisation’s ability to execute its strategies and achieve its business objectives. Therefore, Strategic Risk Assessments are performed at Executive Board level for Triodos Bank as a whole and at business unit level for each business unit periodically.
The external landscape changes, in particular the low interest rate environment, climate change, energy transition, regulatory requirements, the European political landscape and technological developments. The challenges that arise from these changes will continue to influence Triodos Bank.
Triodos Bank considers its banking model to have a moderate risk profile. While on the one hand the bank's mission is to support the real economy and society with basic and straightforward banking products, the risk appetite reflects the recognition that the relatively fast-changing external environment requires us to adapt.
Strategic risks need to be carefully managed to realise integrated financial and mission-driven objectives. Corporate and local risk sensitivities are used to determine scenarios that are used to test Triodos Bank’s capital, liquidity, profitability and operational stability during the year. Triodos Bank has identified the following strategic risks to be taken into account at corporate level:
- Political and social risk: political uncertainty in the countries we operate in and at EU level and public discontent which lead to more volatility;
- Economic risk: increasing volatility as a result of political uncertainty, decreasing business confidence which leads to lower investment levels, intervention of central banks to stimulate economic growth which may continue longer than expected with lower interest rates as a result;
- Technological risk: FinTechs create new fields of competition and raise customer expectations which challenge our relationship approach. Increasing cybercrime will force the organisation to spend more effort on safeguarding systems;
- Legal risk: regulations like BRRD and CRR/CRD are still under development and can result in requirements that influence Triodos Bank’s business model.
Mitigating strategies are discussed and tailored to fit the situation at hand. Over the past years, two of the mentioned risks are most impactful and are expected to continue in the foreseeable future. These are the continuing low interest rate environment and the regulatory requirements. The first has led to a decreased margin and consequently lower profitability than foreseen. The second one has led to the need for additional co-workers, system adaptation and processes in order to implement new regulatory requirements.
Climate risk contains two important elements:
- the risk that is related to the transition of “old” sources of energy to sustainable sources (transition risk), which can result in so called stranded assets. As an example: power plants using coal must be closed earlier than the precalculated end date,
- the risk that is related to the changes of the climate itself causing physical damage (physical risk). E.g. extreme
weather conditions and the rise of sea level.
Given that sustainability considerations are a starting point within our lending processes, transition risks are
minimal in our loan portfolio. Our lending is already contributing to a low-carbon future.
Regarding physical risk, the changes in climate leading to storms, floods and droughts may have an impact on our assets. We have not identified assets we consider to be especially vulnerable to these physical risks. In the longer term, impact on weather conditions (such as wind and solar resources) may affect renewable energy generation. However, there are no reliable predictions for this happening, and it is unlikely to affect our portfolio assets within the duration of our current portfolio.
Nevertheless, Triodos Bank carries out annual stress tests which take extreme but plausible situations into account. As part of determining the scenarios, Triodos evaluates whether extreme weather situations could impact the bank’s resilience with a time horizon of three years.
Currently, we find that it is very unlikely to have material impact on this time horizon.
Finally, we are of the opinion that, since these risks certainly are capable of severely affecting society as a whole, on the longer term we must as a society and sector drastically decrease and minimise the financing of unsustainable assets.
A risk appetite process is implemented across Triodos Bank to align its risk profile with the willingness to take risk in delivering its business objectives. The Risk Appetite Statement reflects the actual implementation of the Risk Appetite Framework. It is updated yearly and is approved by the Supervisory Board upon advice by the Audit and Risk Committee. The concept of risk appetite and the link to the Strategy and Business objectives is illustrated below:
The risk appetite is based on three objectives that fit with Triodos Bank’s corporate goals and guarantee a sustainable banking model.
These objectives are to: (1) protect identity and reputation, (2) maintain sound balance sheet relations and (3) ensure stable profits.
Triodos Bank uses a set of indicators and limits to measure and assess the level of risk appetite and risk profile of the organisation. The risk limits, determined at corporate level, are translated into a localised limit structure for each banking entity.
Stress testing is part of Triodos Bank’s risk management. It is of critical importance in establishing a well-balanced forward-looking management view that incorporates adverse developments and circumstances that the bank might be exposed to. Stress testing exercises also provide valuable insights in the exposure of the portfolio towards risk events. Stress testing for capital at Triodos Bank is conducted at group-wide, at risk domain and at sector level. In addition, sensitivity tests are also carried out as part of the annual business banking sector analyses.
The process of firm-wide scenario stress test analysis may be broken down into a sequence of phases, where the defined stress scenarios are translated into risk events and indicators to measure the risk levels. After the determination of the impact and the aggregation of the results the outcome is reported and discussed. Scenarios that are assessed are of a varied nature, including macro-economic stress and idiosyncratic stress (e.g. operational and reputational stress).
Given the selected scenarios, Triodos Bank is sensitive to a long lasting, low interest environment scenario. It shows that profitability would be under pressure in the coming years. This risk will be mitigated by a focus on cost efficiency, pricing and by diversification of income. Finally, Triodos Bank is sensitive to scenarios relating to reputation risk. To prevent such an event, it is essential to communicate clearly about the mission and to act accordingly.
The Recovery Plan specifies measures Triodos Bank can take in order to survive a severe crisis. The aim of a recovery plan is to be prepared for a crisis and therefore to lower the probability of the organisation defaulting. It also aims to identify and quantify the effectiveness of measures in different scenarios.
Enterprise risk reporting
The principal objective of the Enterprise Risk Management (ERM) report is to set the actual risk profile of Triodos Bank against its risk appetite, assess if key risk indicators have been breached and what actions may need to be taken. In addition the ERM report creates a single point of reference for all risk related activities within Triodos Bank. The ERM report provides insights into specific risk themes and provides an integrated picture of risk at corporate level. This report is discussed in the Enterprise Risk Committee and shared with the Audit and Risk Committee and Supervisory Board.
Every risk discipline reports on a monthly basis or on a quarterly basis. These reports are discussed in corresponding committees and measures are taken whenever needed. On a quarterly basis, they are integrated in the ERM Report which provides insights into the Triodos Bank risk profile in relation to its risk appetite.