Managing Risk

Doing business responsibly requires us to manage risk effectively. We need to make the right decisions and do the right things for our customers, our shareholders and the Group. 

We have a Group Risk Management Framework in place to steer the way we identify, prioritise, manage and mitigate the risks we face. It ensures we tackle risk in a consistent way, with robust internal controls, and that every colleague understands their personal and collective risk-related responsibilities. The Framework meets all external and internal governance requirements and is owned by our Risk Chief Risk Officer.

You can read more about the structure and the components of the Risk Management Framework in our 2015 Annual Report and Accounts.

Our Risk Division provides oversight and independent challenge of the effectiveness of risk management in the Group. It also reviews, challenges and reports on the Group’s risk profile to ensure that our risk mitigation activities are appropriate. The process for identifying, measuring and controlling risk identification, measurement and control is integrated into our overall framework for risk governance. The process is forward-looking to ensure that we become aware of emerging risks; it also assesses the effectiveness of our controls in providing acceptable risk levels. We supplement our periodic risk reporting by escalating material risk events and producing ad hoc reports on risk. 

Risk as a strategic differentiator

Our Group strategy and risk appetite were developed together to ensure they inform each other. We believe effective risk management can be a strategic differentiator, in particular through: 

  • Our conservative and prudent approach to risk – present in all parts of our business and driven from the top.
  • Sustainable growth – embedding a risk culture that ensures proactive support and constructive challenge in support of sustainable growth.
  • Our strong control framework – covering every business across the Group ensuring that the business units operate within approved parameters.
  • Effective risk analysis, management and reporting – continuous assessment, measurement and reporting of the key risks to our business against risk appetite.
  • Business focus and accountability – effective risk management is a key focus and is included in key performance measures against which colleagues and business units are assessed. Business units in the first line are accountable for risk but with oversight from a strong and independent Risk Division.

Policy and guidance

The Group Policy Framework supports consistent behaviours and decision-making about risk across the Group. It helps everyone understand their individual and functional Policy responsibilities because it clearly articulates and communicates rules, boundaries and risk appetite measures, which can be controlled, enforced and monitored. The Framework has four components – Group Principles, Group Policies, Group Procedures and Business Processes – all of which are aligned to the Risk Management Framework and reviewed at least annually.

The Risk Management Framework outlines the formal structure for the flow and escalation of risk information and reporting from business areas and the Risk Division to the Group Executive Committee (GEC) and Board. It also defines how strategic direction and guidance is cascaded down from GEC and Board.

Within the Group authority and accountability for decision-making is delegated to individuals.  Committees may be established to support those individuals in exercising their authority, but committees do not hold any authority in their own right – their role is to bring together the relevant individuals to provide collective oversight and support the decision-making process.

The Risk Committees are integral to implementing the Risk Management Framework across the Group.  The Group’s approach to internal governance ensures that there is appropriate risk representation on key committees and discussion of risk management when these committees meet. 

Our Codes of Responsibility set out the ways we aspire to do business as a Group and as individuals. They apply to all colleagues and are consistent with our Group Values - putting customers first, keeping it simple, and making a difference together. They give colleagues a framework by which they can judge the appropriateness of their actions against our Values and behaviours. Ultimately, they help every colleague do the right thing at work every day, and help us become the best bank for customers.

Social, ethical and environmental risk

Certain sectors present inherent social, ethical and environmental risks. Our policies and procedures support colleagues working in our relationship management and risks teams to understand how to approach, assess and manage these risks. For social, ethical and environmental risk management, our Code of Business Responsibility states clearly that we do not finance any activities prohibited by international conventions supported by the UK government. For example, the UK government has ratified the Oslo Convention on Cluster Munitions and the Ottawa Treaty on Anti-Personnel Landmines. Consequently, we will not enter into, or will exit from, credit or investment relationships with businesses believed to be in breach of these conventions. For credit activities, a robust internal policy and risk assessment process applies to all military goods and services transactions. For investment activities, the exclusion of cluster bomb and landmine companies applies to both our own investment assets, and to those we manage on behalf of our customers in funds where we determine the fund investment policies.

Responsible Investment

Following the sale of Scottish Widows Investment Partnership in March 2014, Aberdeen Asset Management (AAM) now runs the Group’s Asset Management business, and manages the majority of the mandated funds on behalf our customers.  Scottish Widows continues to manage the Group’s life, pensions and investments business.

The management of risk for investment funds offered to customers by Scottish Widows is effected through a robust and comprehensive end to end governance and oversight reporting process.  This covers the ongoing engagement process with underlying fund managers, monitoring of mandate adherence and onward reporting through Investment Committees and Boards.  AAM regard Environmental, Social and Governance (ESG) risk assessment as a core element of responsible investing.

Like Lloyds Banking Group, Aberdeen Asset Management, is a signatory of the Stewardship Code and the UN Principles of Responsible Investment.  At the end of September 2015 they had £135 billion worth of our investment assets under management.

Environmental risk

Colleagues use our Environmental Risk Screening Tool as the primary mechanism to assess environmental risk. They’re supported by our Regulation and Governance Risk team and benefit directly from the advice provided by a panel of independent environmental consultants in developing mitigation strategies. Our Regulation and Governance Risk team works very closely with our customer-facing colleagues to increase awareness of environmental risk. The team provides sector-specific environmental briefings to flag key issues to colleagues along with environmental legislative briefings to support our business customers. It also manages our membership of the Equator Principles, which provide a framework for determining, assessing and managing environmental and social risk in project finance transactions.

Equator Principles

Lloyds Banking Group is a signatory to the Equator Principles, which provide a framework for determining, assessing and managing environmental and social risk in project finance transactions. In June 2013, we adopted the most recent version available – Equator Principles III – to ensure that the projects we finance and advise on are developed in a socially responsible way and reflect sound environmental management practices. We recognise the importance of climate change, biodiversity and human rights. We believe that, wherever possible, we should avoid the negative impacts on ecosystems, communities and the environment. Where these impacts are unavoidable, they must be appropriately minimised, mitigated or offset. Project finance often funds the development and construction of major infrastructure and industrial projects. We have a robust approach to the assessment, monitoring and reporting of such Equator Principle transactions.

Equator Principles data table (2015)

Equator Principles data table (2014)