The Enterprise Risk discipline synthesises the risks of all risk areas and performs analyses to determine at a strategic level which circumstances and developments may potentially influence Triodos Bank’s risk profile. Triodos Bank manages Enterprise Risk by means of specific tasks and related activities: performing strategic risk assessments, defining the risk appetite, assessing capital and liquidity requirements, and monitoring the risk profile through periodic Enterprise Risk Management (ERM) reporting.
Risk mitigation is an essential component of Triodos Bank's mission and business model. In addition, the risk management framework ensures co-workers at all levels have the same risk perspective and that formal structures and policies are addressed in a unified and congruent manner across the bank. Triodos Bank strives for a risk culture that is both robust and embedded. An environment of open communication and effective challenge, in which decision-making processes encourage a broad range of views and a constructive critical attitude such that sound and informed decisions can be made, is important to such a culture. Risk-conscious leadership is key to establishing and enhancing the risk attitude and behaviour. Leading by example and setting the tone at the top are prerequisites for the aspired risk culture.
Triodos Bank's risk appetite process aligns its risk profile with the willingness to take risk in delivering its business objectives. The Risk Appetite Statement is reviewed yearly and is endorsed by the Supervisory Board based on advice from the Audit and Risk Committee. Triodos Bank's risk appetite and the connection with the Strategy and Business objectives is illustrated below:
The risk appetite is based on three objectives that match Triodos Bank’s corporate goals and ensure 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 Group level, are translated into a localised limit structure for each business unit.
The principal objective of the ERM report is to set the actual risk profile of Triodos Bank against its risk appetite, to assess if key risk indicators have been breached and to determine what actions may need to be taken. In addition, the ERM report creates a single point of reference for all risk-related profiles and 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 the Supervisory Board.
Every risk discipline reports monthly 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.
Triodos Bank defines reputational risk as the risk arising from negative perception by customers, counterparties, shareholders or regulators, which can adversely affect the bank’s ability to maintain existing, or establish new, (business) relationships and continued access to sources of funding.
As a values-based bank, Triodos Bank’s reputation is vital to its ability to pursue its mission. As such, Triodos Bank’s reputation is managed in a proactive manner, for the most part by ‘doing things right’ and ‘doing right in line with Triodos Bank’s mission’. Generally, proactively managing its reputation implies for Triodos Bank: (1) attracting and retaining qualified employees that have a strong affinity with Triodos Bank’s mission and values; (2) maintaining a sound risk governance structure, that enables the correct execution and control of bank-related processes; and (3) actively positioning Triodos Bank’s identity, its positive impact (for the longer term) and connection to society.
Model risk refers to the potential for negative consequences arising from the decisions made based on incorrect or misused model outputs and reports. It can result in financial loss, poor decision-making, and damage to the reputation of Triodos Bank.
Strategic risk relates to the risk of inadequate initial strategy selection, execution or modification over time and may impact the realisation of the organisation’s purpose. Strategic Risk Assessments (SRA) are performed at Executive Board level for Triodos Bank as a whole and at business unit level for each business unit.
The SRA contains an assessment of the strategic risk exposures that can ultimately affect shareholder value or the viability of the organisation. The external landscape is changing. In particular, the low interest rate environment, climate change, energy transition, regulatory requirements, the European political landscape and technological developments are examples of relevant developments. Additionally, more sudden and disruptive events may occur such as the COVID-19 pandemic. The challenges that arise from these changes will continuously influence Triodos Bank.
Triodos Bank considers its banking model to have a modest 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 protect and support the realisation of financial and mission-driven objectives. Sensitivities both at Group and local level feed into scenarios, that are used to test Triodos Bank’s capital, liquidity, profitability and operational stability during the year. Triodos Bank has identified the following developments, that drive the strategic risk profile at Group level:
Economic risk: persistent economic pressure as a result of the COVID-19 pandemic, 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 and result in lower interest rates;
Climate risk: likelihoods associated with and responses to the impacts of climate change on the bank's assets and on the bank itself as well as on how societal constraints shape adaptation options;
Political and social risk: political uncertainty in the countries Triodos Bank operates in and at EU level and public discontent which leads to more volatility;
Technological risk: FinTech companies may create new fields of competition and raise customer expectations which could challenge Triodos Bank’s relationship approach.
Regulatory risk: regulations like the Bank Recovery and Resolution Directive (BRRD) and the Capital Requirements Regulation/Capital Requirements Directive (CRR/CRD) are continuously developing and may result in requirements that influence Triodos Bank’s business model.
Climate change and environmental degradation are sources of structural change that affect the quality of life, economic activity as well as the financial system. Climate-related and environmental factors can be divided into two distinct categories.
Physical: The physical environmental factors refer to the financial impact of a changing climate, including more frequent extreme weather events and gradual changes in climate, as well as of environmental degradation (e.g. pollution, biodiversity loss and deforestation). The physical driver is categorised as ‘acute’ when it arises from extreme events (e.g. droughts, floods and storms) or ‘chronic’ when it arises from progressive shifts (e.g. sea-level rises and resource scarcity).
Transitional: The transitional factors refer to the possible financial loss that may result, directly or indirectly, from the process of adjustment towards a lower-carbon and more environmentally sustainable economy (e.g. due to a relatively abrupt adoption of climate and environmental policies, technological progress or changes in market sentiment and preferences).
Given that sustainability considerations are a starting point within the bank's underwriting process, transition risks are minimal in the loan portfolio.
Regarding physical risk, the changes in climate leading to storms, floods and droughts may have an impact on the bank’s asset base. Triodos Bank carries out annual stress tests which take extreme but plausible weather conditions into account.
Ultimately, Triodos Bank is of the opinion that, since climate and environmental related risks certainly are capable of severely affecting quality of life, the financing of unsustainable assets must be drastically decreased and minimised in all sectors of society.
Stress testing is part of Triodos Bank’s risk management practice. It is of critical importance, in establishing a well-balanced forward-looking management view, to incorporate adverse developments and circumstances that the bank might be exposed to. Stress-testing exercises provide valuable insights into the exposure of the portfolio to risk events. Stress-testing for capital at Triodos Bank is conducted at several levels: 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 firm-wide scenario stress-test analysis process may be broken down into a sequence of phases, which translate defined stress scenarios into risk events and indicators that measure their associated risk levels. After 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).
The selected stress-test scenario demonstrates that Triodos Bank is sensitive to a long-lasting, low interest environment. It shows that profitability would be under pressure in the coming years. This risk will be mitigated by focusing on higher yielding lending products, improving our commission income and further shaping our cost base to realise cost efficiencies in our core bank operations. Finally, Triodos Bank is sensitive to scenarios relating to reputational risk. To prevent such an event, it is essential to communicate our mission clearly and to act accordingly.
The Recovery Plan specifies measures that Triodos Bank can take to recover from a severe crisis. The aim of the Recovery Plan is to be prepared for a crisis and to identify and quantify the effectiveness of measures in different stress scenarios.