Risk Management

■ Climate Change Management Procedures





E.SUN conducts climate change scenario (stress) tests to identify climate risks and opportunities, assess the potential financial impact of climate risks, and assist strategic planning and risk management, using a combination of short-term and long-term methodologies to meet different management needs.

Description of climate change scenarios

Item Scenario 1 Net Zero 2050 Scenario 2 Late Policy Action
Description of scenario
  • The world actively engages in low carbon transition to achieve net-zero emissions by 2050
  • GHG emission reduction policies are only taken after 2030, which may cause higher physical risk

Transition risks

  • Carbon-related fees/taxes are the main risk factor; companies would be requested to pay for emissions exceeding the goal on the carbon reduction path
  • Carbon price: NGFS Net Zero 2050(world)
  • Carbon reduction path: Annual reduction must reach 4.2% each year compared with the baseline year (SBT1.5)
  • Carbon price: NGFS Delayed Transition (world)
  • Carbon reduction path: Annual reduction must reach 3.3% each year starting after 2030 compared with the baseline year
Physical risks
  • IPCC AR6 SSP1-1.9
  • IPCC AR6 SSP5-8.5
Note: Carbon price assumptions based on NGFS Scenario Explorer hosted by IIASA release 2.2 REMIND-MAgPIE 2.1-4.2 and then adjusted for inflation

■ Risk factors and methodology


Scope Risk factor Financial impact

Corporate banking lending (physical risks are limited to Taiwan)

Transition risks: Carbon price

  • Payment of carbon-related fees causes the deterioration in the company's financial position
  • Summarizes the financial impact of the abovementioned risk factors, uses a model to calculate the impact on PD, and calculates the expected loss
  • Most considerable expected loss ratio is about 4 BPs

Physical risks

Suspension due to rainstorm

  • The expected number of days exceeding the statutory number of disaster prevention leave days in each administrative district is used to calculate the percentage of decline in revenue caused by the suspension.

Flood repair costs

  • Calculate the hazard of rainfall exceeding 650 mm within 24 hours in each administrative district
  • Compare the flood potential map to determine the vulnerability
  • Estimate the cost of repair for losses caused by floods by industry

 

Water shortage

  • The hazard drought in each county/city (determined based on alert level)
  • Estimate the additional cost of water withdrawal by county/city and industry
Real estate collateral for the consumer banking loan (physical risks are limited to Taiwan) Physical risks – Reduction in the value of collateral due to caused by torrential rain
  • The hazard of rainfall exceeding 650 mm within 24 hours in each administrative district
  • Use the collateral flood loss model to analyze the reduction in value caused by flood
  • With consideration of the expected loss of collateral value, the model is used to calculate the impact on LGD and further calculate the expected loss
  • Under the SSP5-8.5 scenario in 2050, 9,172 real estate guarantee cases are located in highrisk areas (The impairment of real estate value is above 40%), and the balance of affected collateral cases is NT$31.6 billion, accounting for 0.98% of E.SUN's total assets.

Bond and Equity Investments

Transition risks: Carbon price

  • Payment of carbon-related fees by the target company causes an increase in cost, and the loss ratio is set based on deterioration in the company's financial position

 
  • The expected loss is calculated based on changes in the target's loss ratio or international credit rating
  • Most considerable expected loss ratio is about 25 BPs

Transition risks: Country and industry transition risks

 
  • With consideration of the transition risks of the target's country and industry, historical data and judgment of internal experts are considered to evaluate changes in international credit rating in the scenario
Note: BP is 0.01%. Expected loss is the increased loss compared to the base scenario (current end 2021).
 

■ Evaluation of calculation results

    An assessment of our portfolio, which includes Corporate banking lending, Real estate collateral for the consumer banking loan, and investment positions, reveals that the most considerable losses occur in scenario 1 of 2050, with the number of losses increasing NT$ 1.494 billion ( about 7 BPs).
  • Based on our estimates, transition risk outweighs the physical risk. Expected losses are mainly derived from our investments and financing in carbon intensive industries.
  • Regarding scenario 1, where expected losses are relatively high, we have considered our policy to phase out coal-related industries by 2035 and our strategy of engaging with our customers to help them through the transition. By simulating our hypothetical future portfolio (total asset value unchanged, but lower proportion of loans and investments into high carbon-emitting industries), our calculations show that these management measures can reduce maximum expected losses by 69% in 2050, making our portfolio more resilient.




Service Scope Management process
Low carbon transition Reducing the GHG emissions generated by own operations, investment, and financing.
  • nventorying scope 1 and scope 2 emissions, and planing reduction measures (e.g. installation of solar panels or use of renewable energy)
  • Adopting the PCAF methodology to inventory the carbon generated by financing activities
  • Setting goals in accordance with SBTi and submitting commitments

Investment

Stock & Bond Investments

  • Fulfilling our responsibilities as an asset owner or administrator; making investment decisions based on the targets' corporate social responsibility performance
  • Avoiding dealing with enterprises that directly or indirectly impact the environment and society, e.g., those engaging in establishing a coal mining or a coal-fired power generation project
  • Encourage or assist companies to pay attention to ESG issues and launch ESG actions through discussions

Lending

Corporate loans

  • Promoting green lending; supporting capital expenditures for renewable energy projects, green buildings, and circular equipment to the effect of energy-saving and carbon-reduction; assisting enterprises in transition to cope with climate risks
  • Linking lending criteria to sustainability indicator or an enterprise's overall performance in terms of the environment, society, and corporate governance, to encourage enterprises to invest in this regard
  • Reviewing and controlling the companies of a specific scale in accordance with the Equator Principles
  • ncorporating the consideration of ESG in the credit lending criteria to avoid funding carbon-intensive items such as project financing for coal- fired power generation projects
Secured mortgage loans
  • Periodically and annually assessing and monitoring the risk of real estate value impairment that may be caused by climate change so as to continuously improve the database, analysis method, and scenario test for physical risks
  • Added the flood risk factors – hazard and vulnerability to the standard for dividing collateral into areas. A credit limit and maximum loan-to-value ratio are set for each site to control the risk of collateral value loss
  • Periodically carried out interim management of cases with high flood risk. When collateral severely loses value, we further examine repayment by the customer, arrange a visit by personnel, and evaluate limiting the incremental loan ratio
  • Disclosing information such as the soil liquefaction potential areas in the valuation report to serve as a reference for credit extension decision- making
Own operations Disaster response and information services
  • Formulating the "Emergency Response and Crisis Management Procedures" following the "Disaster Emergency Response Manual Template for Financial Institutions" of the competent authority to ensure operational continuity and organizational resilience
  • Stipulating on the "Information Service System Continuity Procedures," a recovery of the information service system from electricity supply disruption or regional floods
  • By collaborating with external expert on introducing the AR6 scenario data, domestic disaster potentials analysis data to assess the risks for our business locations (from 2030 to the end of this century), we plan the adaptation measures for 100% existing locations and provide reference for location selection in the future. We set a target that the percentage of high risk operations of total operations should reduce to below 2% in 2025, and for existing high risk locations, we will prepare waterproof gate when facing extremely heavy rain, in the hope to adapt risks through long- term planning.
  • Import sustainable procurement standards to manage suppliers (details in 4.10.2 Supplier Management)

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