FINANCIAL INSTITUTIONS

ISSUER COMMENT Deutsche AG 21 May 2021 DB’s accelerated adoption of environmental, social and governance criteria is credit positive

On 20 May, AG (DB, A3 review for upgrade/A3 review for upgrade, ba1 review RATINGS for upgrade1) hosted its first ever Sustainability Deep Dive, announcing plans to facilitate DEUTSCHE BANK AG LT Senior Unsecured A3 €200 billion of green finance and investment activities by 2023 to support ’s Debt Rating and the European Union’s goal to achieve carbon neutrality by 2050. The bank’s plan, Outlook Rating(s) Under Review moved forward by two years from its initial 2025 endpoint, will help foster environmental LT Junior Senior Baa3 Unsecured Debt Rating sustainability in DB’s lending and investment portfolios and enables deeper rooting of its Baseline Credit ba1 sustainability ambition in divisional targets, risk management, policies and practices as well Assessment (BCA) as through its corporate culture and client relationships.

Source: Moodys.com DB’s enhanced focus on sustainability and full compliance with quickly evolving environmental, social and governance (ESG) and climate risk standards is credit positive because it will accelerate organizational changes that will better position the group to Contacts manage and mitigate future crystallization of key environmental risks such as carbon Michael Rohr +49.69.70730.901 transition and physical climate risks. The efforts will also help soften the effects tighter bank- Senior Vice President focused climate regulation could potentially have on DB’s business model over time. [email protected] For the first time, DB published annual sustainable finance targets for each business Yana Ruvinskaya +33.1.53.30.33.93 Associate Analyst division. Of the €200 billion target volume, €105 billion is planned to come from the [email protected] Investment Bank, €86 billion from the and €30 billion from the Corporate Peter E. Nerby, CFA +1.212.553.3782 Bank. Volume growth will be fostered by a combination of dedicated ESG advisory concepts, Senior Vice President increased client dialogue and the offering of more ESG-related products. [email protected] Comprehensive performance management and precise climate risk assessment will Laurie Mayers +44.20.7772.5582 Associate Managing Director be key to success. DB has established a dedicated Sustainability Committee, steered by the [email protected] group's CEO, to coordinate strategy, plans and systems for the group and its subsidiaries. DB Ana Arsov +1.212.553.3763 has also started embedding climate risks into its existing frameworks. This group-wide oversight MD-Financial Institutions structure will allow DB’s board and senior management to better understand and assess the [email protected] financial risks from climate change that affect the group, allowing it to address and embed these risks within the group's overall business strategy and risk appetite.

Responding to regulatory initiatives and accelerating its commitment on climate action. The bank’s accelerated sustainability focus will help it respond to the proposed stronger disclosure and supervision framework as stipulated by the European (ECB) and European Banking Authority (EBA) aimed at promoting the needed transparency in financial markets on ’ exposures and embedding into the banks’ management more systematic and formal considerations with regard to the management of ESG risks. MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Detailed considerations DB's volume targets are within reach In Q1 2021, DB helped facilitate €25 billion in sustainable financing and investment after €46 billion for the whole of 2020. In addition, it has issued its second green bond and its inaugural diversity and inclusion bond, together raising more than €1.5 billion and increasing awareness for new products in capital markets.

The announced plans also signal an acceleration of lending and investment portfolio changes by incorporating additional ESG criteria that go beyond classic loan portfolio monitoring and shifts. DB will, for example, exit thermal coal mining by year-end 2025 and also not lend against companies involved in arctic oil and gas exploration activities, deforestation or child labour. If successfully implemented, this will be mildly positive for DB’s asset quality because it will reiterate the group’s commitment to gradually steer its lending and investment exposures away from clients and enterprises within highly energy consumptive or highly environmentally pollutive sectors.

We expect the shift to reduce DB’s asset impairment risks and improve their asset quality because the German government’s as well as the EU’s decarbonisation plan could strain the economic value of enterprises not in line with the governments’ carbon emission goals. At the same time, there remains a considerable amount of uncertainty with regard to the definition of what classifies as sustainable finance. In addition, the performance of ESG loans and bonds can only be measured against a small volume issued to date and only against a limited track record, making risk and spread assessments for ESG-focused capital market products difficult.

As part of its Sustainable Finance Taxonomy2, we expect the group to gradually enhance its ability to classify clients and projects to better assess and price related risks by being able to better incorporate an assumption of potential losses and risks from climate change. As a result, DB’s improved, more holistic approach to manage its related risk exposures will reduce potential volatilities for its financial performance.

Comprehensive performance management and precise climate risk assessment will be key to success DB has set up various policies promoting a better oversight structure focused on sustainability. In addition to the CEO-steered Sustainability Committee, a Sustainability Council will support best practice setting and cross-divisional activities to prepare the former committee’s decision-making process. The committees will together help oversee progress and risks associated with the expanding green finance and investment activities through DB's newly established sustainability framework.

DB has also started embedding climate risks into its existing frameworks as stipulated by its fossil fuel policy and management of high- risk sectors. It has also enhanced reporting on loan portfolio carbon intensity on its entire €440 billion loan book and aims to provide the CO2 footprint of its lending activities to the outside world by 2022.

This closer scrutiny of climate risk will push the group to better evaluate and monitor climate-related threats and mitigate potential adverse financial effects of climate change on the group’s credit profile.

Responding to regulatory initiatives and accelerating its commitment on climate action DB’s approach could also be beneficial for future stress tests carried out by the ECB and EBA3, as it helps DB gather and understand the data and develop the tools it needs to manage climate risks, prompting it to take a more long-term strategic view over risks related to climate change which may only materialise over very long time frames.

With today’s programme, coupled with DB’s Green Financing and Sustainable Finance Frameworks already set out in September 2020, DB has also set itself important milestones that will accelerate its commitment to support climate action. On 30 June 2020, 16 German banks, including DB and other financial institutions signed a collective commitment to foster environmental sustainability in their lending and investment portfolios. The self-imposed commitment will help urge German banks to reassess lending and investment criteria under the auspices of sustainable finance, which will help them reach climate targets and help them navigate through the evolving landscape of sustainability risks. The plan is further aligned and responds to initiatives set out by the United Nations, the ECB as well as the EBA.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

2 21 May 2021 Deutsche Bank AG: DB’s accelerated adoption of environmental, social and governance criteria is credit positive MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Related research Credit Opinion

» Deutsche Bank AG

Sector In-Depth Reports

» Green Deal poses risks for energy-intensive sectors and opportunities for companies best able to adapt

» ESG Focus Q1 2021

» Climate change to force further business model transformation for banks

» Financial Institutions — Europe: EBA's ESG risk disclosure standards will increase transparency, aid banks' sustainability management practices

» Banking – Europe: Tightened ECB supervision of environmental risks will enhance banks’ risk management

Issuer Comments and In-Depth Reports

» Q1 2021: Continued progress in DB's transformation is credit positive

» Franchise stability and continued cost control will help support DB's credit profile

» BNP Paribas, Deutsche Bank, HSBC Holdings and : Tech investment and expansion outside core euro area markets will drive increased returns from corporate banking

» Restructuring progress supports DB's asset performance

» Continued strong execution and client retention will help support DB's credit profile

» Discontinuation of merger talks with resets the focus to standalone execution and strategic options

» Deutsche Bank AG and Commerzbank AG: Merger talks have no immediate rating implications

Last Rating Action

» Moody's places Deutsche Bank AG's ratings on review for upgrade

Rating Methodologies

» Banks methodology

» Cross-Sector Rating Methodology: General Principles for Assessing Environmental, Social and Governance Risks

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

3 21 May 2021 Deutsche Bank AG: DB’s accelerated adoption of environmental, social and governance criteria is credit positive MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Endnotes 1 The ratings shown in this report are DB’s deposit rating/senior unsecured debt rating, outlook and Baseline Credit Assessment. 2 Please see Deutsche Bank's Sustainable Finance homepage for more information. 3 In line with the requirements in the Capital Requirements Regulation, the EBA’s draft ITS proposes comparable quantitative disclosures on climate change related transition and physical risks, including information on exposures to carbon-related assets and assets subject to chronic and acute climate change events. They also include quantitative disclosures on banks’ mitigating actions supporting their counterparties in the transition to a carbon neutral economy and in adapting to climate change. We consider it is just a first step towards providing full transparency into European banks' ESG-related management practices and exposures.

4 21 May 2021 Deutsche Bank AG: DB’s accelerated adoption of environmental, social and governance criteria is credit positive MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

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