■ 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.