Climate Change

■ Climate Change Governance Organizational Structure

E.SUN's subsidiaries first inventory the possible impacts of various climate change risks and conduct matrix analysis, including risks and opportunities arising from the company's operating activities due to direct or indirect physical impacts caused by extreme weather events, transformational impacts due to regulations, technologies or market demand, and other cultural and social impacts. Risk management strategy plans are established based on the analysis results that serve as the basis of actions taken to respond to climate change, and management costs and financial impact are estimated based on such plans. Data collected in the process described above are used in systematic assessments of the association between climate change and finance in order to reduce risks and exploit opportunities.

■ Climate opportunities

(1) How many business opportunities are derived from climate change?

Taiwan's vision for its power generation structure

According to the government's energy transition vision, by 2025, the proportion of low-carbon natural gas will increase to 50%, the proportion of renewable energy power generation will increase to 20%, and the proportion of coal-fired power generation will be reduced to less than 30%, thus attaining the goal of a nuclear-free homeland with nuclear power generation accounting for 0%. In 2019, total energy consumption in Taiwan was 148 million kilograms of oil equivalent, and total electricity consumption in the same year was 265.5 billion kilowatt-hours.

(2) Market demand for renewable energy increases

Market demand for renewable energy increases and market participants are more willing to invest in green industries. In this scenario, financial institutions can seize the opportunity to expand their business scope. (For relevant actions, please refer to Chapter 4, Sustainable Finance)

Response action

The No. 1 Brand in Green Bonds

Bond issuance

Issued 3 tranches of NTD green bonds and 1 tranche of USD green bonds, with a total amount of NT$7.7 billion in circulation at the end of 2020, the highest amount issued among domestic banks

Green bonds underwriting	Goal
Served as the underwriter for 7 green bond issues with a total amount of over NT$7.1 billion	Increase the amount of green bond underwriting at a growth rate of 30% over the next 3-5 years
Invested in expert underwriting human resources	Cost is estimated at NT$6.35 million per year

Green loans

We established solar and offshore wind power teams to provide financial services at every stage of renewable energy project financings and to support industries, including green electricity and those related to environmental protection.

Preparation period	Establishment period	Operating period
Developers: Capital account opening, financing quota and criteria planning, issuance of bank performance bond	Developers: Project financing. Contractors: Supply chain financing services such as purchase financing, equipment financing, or accounts receivable financing	New investors: Debt issuance and securitization service introduction

(3) Digital transformation, promoting paperless processes

Response action

Total annual reduction of 79.8 million sheets

1,435 sessions on the e-Learning platform with about 268,727 participants	Reduced 1.075 million sheets of paper	Reduced 8.6 metric tons of CO2 equivalents
E.SUN enforces paperless processes in the office, electronic payroll, and electronic training materials; the total number of documents sent and received was 16,498.	Reduced 160,000 sheets of paper and 16,000 kraft paper bags	Reduced 3.4 metric tons of CO2 equivalents
Credit cardholders are encouraged to opt for electronic statements; 1.64 million cardholders have applied for the service	Reduced 78.72 million sheets	Reduced 630 metric tons of CO2 equivalents
Total	Reduced 79.8 million sheets	Reduced 642 metric tons of CO2 equivalents

■ Climate Change Management Procedures

■ Integrate management mechanisms for climate change and financial stress scenarios

Both the financial environment and climate change are complex events in a non- linear and dynamic environment. Through scenario analysis, climate change risks are combined with traditional financial stress scenarios to make risk measurement more comprehensive. When establishing the scenario, in addition to utilizing traditional economic recession caused by financial crises or risk events as the main scenario, the potential impact of climate change is also considered. For example, the physical risks caused by common natural disasters (typhoons and flooding, etc.) in Taiwan, or the transition risks of power supply issues arising from transition into green energy, may have an impact on macroeconomics. The relevant impacts are adjusted to include the increase in stress on GDP, unemployment rate and other general economic indicators under stressful scenarios. The calculation results of stress test loss and capital adequacy ratio are comprehensively evaluated and the control indicators are set. The above-mentioned mechanism will be reviewed and revised annually, and submitted to the board of directors for approval.

■ IIndustry-specific climate risk identification and management

E.SUN Bank referenced external research reports and ranked industries based on their climate risk level and E.SUN Bank's credit exposure concentration to establish E.SUN's industry-specific climate risk matrix. The industries that are the most sensitive to and highly impacted by climate change were determined to be the petrochemical industry, metal products manufacturing industry, and transportation industry. Subsequently, to effectively control the climate risks that may arise from the loan business, E.SUN will strengthen the review of the climate change adaptation capabilities of customers belonging to the aforementioned industries during the credit check and review process. Main analysis results are shown in the chart below:industry. Main analysis results are shown in the chart below:

■ Transition risk impact assessment

Goals established in response to the Paris Agreement, which calls for "limiting the average of global warming by 2100 to well below 2, preferably to 1.5 degrees Celsius," regulators in various countries have gradually strengthened their carbon reduction efforts in high-carbon industries. Companies who don't make necessary moves to transform in time will earn less profit due to extra cost, which will result in loss for the financial industry in terms of its loans and investment. This year, E.SUN continued to deepen its cooperation with external consultants, setting its SBT of limiting global warming to well below 2°C and the even more stringent SBT of 1.5°C as the transformation risk assessment scenarios for loans and investments. The bank also considering the future revenue forecasts of various industries and different climate scenarios as well as parameters such as carbon emission prediction and international carbon taxes/fees to establish a scenario-based analysis model. We investigated the investment and financing positions of high- carbon industries (steel, cement, paper making, chemicals, petrochemical, plastics, ocean freight, air freight, and semiconductors) to which we have granted loans and used the scenario-based analysis model to quantify the financial impact sustained by E.SUN due to climate risks borne by the investment and financing targets of the aforementioned high- carbon industries under different climate scenarios and time scales. The results of transformation risk scenario analysis are as follows:

Physical Climate Risk Adaption

E.SUN incorporates climate change risks into the lending process for mortgage business. For each mortgage application, in addition to considering factors such as the population, land price, and house value of the area where the collateral is located, flooding risk of the area is subsequently included to comprehensively evaluate the loan ratio and approval authority. Regarding existing loan cases, E.SUN will regularly monitor the exposure level in high-risk areas. When the overall collateral exposure reaches mid-level alert, the bank will review the price fluctuations of high-risk collaterals and re-evaluate prices, and activate regional total amount control in high-risk areas. When risk exposure reaches high-level alert, purchase of relevant disaster insurance will be assessed to shift risks and strengthen credit protection.

■ Physical risk impact assessment

(1) RCP8.5 Scenario

As climate change exacerbates and the intensity and frequency of extreme rainfall in Taiwan increases, the value of E.SUN's real estate collateral and proprietary buildings may be reduced or lost due to extreme weather events, resulting in damage to the bank's claims. In order to actively identify and control the risks of climate change, based on the RCP8.5 flood disaster risk data provided on the Disaster Management Information Platform of the Ministry of Science and Technology (MOST), E.SUN compared the locations of collaterals provided by customers and E.SUN's proprietary buildings with the high-risk areas that are prone to flooding or low-lying terrain, calculated the impacted amount, and formulated corresponding control measures. According to calculations, under the RCP8.5 scenario, 7,683 real estate guarantee cases are located in high-risk areas, and the balance of affected collateral cases is NT$34.1 billion, accounting for 1.15% of E.SUN's total assets. In addition, it is estimated that loss due to impact on proprietary buildings is about NT$1.3 billion, accounting for 0.04% of the bank's total assets.

(2) RCP4.5 Scenario

Frequency and intensity of flood and drought may increase and cause water shortage from unstable distribution of precipitation, and impact the productivity of company.

■ 2019 E.SUN's carbon emissions structure

To tackle the immense challenge of attaining the goal of net zero carbon, E.SUN started with an understanding of the current carbon emissions status, from the carbon emissions of its own operations to the carbon emissions derived during business operations, and then set reduction targets in order of sequence after performing a thorough inventory. In 2020, through analyzing data from CDP and the 2019 ESG reports of businesses we invested in and customers we granted loans for, we were able to calculate E.SUN's 2019 carbon emission structure. The year-round carbon emissions due to business operation was around 950,000 tons. 2.64% were direct emissions and electricity for operations from us, and more than 96.27% were from businesses we invested in and customers we granted loans for. Therefore, E.SUN incorporated climate change and greenhouse gas emission factors into the investment and financing business process, including prudently assessing high-carbon emissions industries, and continuing to establish clear indicators to encourage internal personnel to engage corporate customers or investees that actively seek to achieve carbon emissions targets, thus exerting the bank's influence and contributing to Taiwan's transformation into a low-carbon country.

How does E.SUN inventory investment and financing targets?

Using "The Global GHG Accounting and Reporting Standard for the Financial Industry" guidance tool issued by the "Partnership for Carbon Accounting Financials" (PCAF), E.SUN first conducted an inventory of high-carbon industries and projects. For instance, where the carbon emissions arising from business operations of a customer is 1 million tons, and loans and investments provided by E.SUN account for 1% of said company's assets, then E.SUN will recognize 10,000 tons of carbon emissions in ESUN's scope 3 emissions.

■ Science Based Reduction initiative (SBTi) setting

The Science Based Reduction initiative (SBTi) is an international initiative jointly launched by the Carbon Disclosure Project (CDP), the World Resources Institute (WRI), the World Wide Fund for Nature (WWF) and the United Nations Global Compact (UNGC). For companies that set carbon reduction targets based on climate science, SBTi provides a reduction target that helps these companies actually avoid the impact of climate change while also ensuring that the reduction targets pledged and set are consistent in time and extent with the target set in the "Paris Climate Agreement," which is to limit global warming to no more than 2°C or even below 1.5°C. Working with the SBTi, E.SUN identified its own carbon reduction path through the establishment of targets. This signifies E.SUN's commitment to protecting the environment as a corporate citizen.

(1) SBTs set up by financial institutions

Banks should set targets for limiting global warming to no more than 2°C or less in the following three aspects.

Scope 1: Direct greenhouse (GHG) emissions that occur due to the manufacturing process or from the facilities of an organization
Scope 2: Indirect GHG emissions associated with the purchase and use of electricity, steam or heat;
Scope 3: Adopt SBTi's Financial Sector Science Based Targets Guidance Pilot Version 1.1 to establish carbon reduction goals for important financial assets
(Scope 3, FI-C15 Investment).

(2) Establishment and submission of Science Based Reduction targets

E.SUN has submitted its target to SBTi (Science Based Target initiative) in 2020, and thus become the first financial institutions in 2021 to set goals on carbon reduction based on 1.5°C . Our plan is as follows: