Definitions and methodology
In establishing the principles and framework for ESG risk management, we are guided by the EBA guidelines EBA/GL/2020/06 of May 2020 on Loan
origination and monitoring. From 30 June 2021, the bank is obliged, among other things, to include an assessment of the ESG exposure of its
clients’ business in its lending process. Guided by these guidelines, we have included environmental, social and governance factors in our credit risk
appetite and incorporated them into our credit assessment processes for corporate clients. We have developed Environmental Risk Heatmaps,
which provide a benchmark for individual corporate client assessments in manual pathways and also allow for sector and/or portfolio approaches
in environmental risk assessment. Heatmaps for retail portfolios allowed for the assessment of environmental risk within a specific product group.
In the introduced standards
on
ESG risk management, we have also taken into account the provisions of the
ECB Guide on climate-related and
environmental risks – Supervisory expectations relating to risk management and disclosure
, November 2020, and
the EBA Report on management
and supervision on ESG risk for credit institutions and investment firms, EBA/REP 2021/18
, July 2021.
With regard to the ECB Guide, we conducted a compliance analysis in 2021, approved by the Credit Policy Committee. in 2022, we continued to
work on fulfilling the recommendations from this document.
We have indicated in the ESG Risk Management Policy the methods, definitions and international standards used. Among other things, there we
defined environmental, social and corporate governance risks, using the provisions of the
EBA Report on management and supervision on ESG risk
for credit institutions and investment firms
, EBA/REP 2021/18, July 2021. There, we also identified the key ESG risk factors and their channels of
transmission to traditional risks.
We continually monitor regulatory risks arising from changes in the legal environment in relation to the financial sector – following the work of
regulators and legislative proposals. We participate in the work of the Polish Bank Association on the interpretation of ESG regulations.
Processes to identify, measure and monitor ESG risk-sensitive activities and
exposures
As we treat ESG risk as an enabler of the core risks (credit, market, liquidity and funding, operational), most of the processes to identify, measure,
monitor these risks have been built into the standard processes for managing these core risks.
The KYC process excludes the risk of establishing a new relationship with a client carrying out environmentally and/or socially harmful activities,
and allows us to identify clients carrying out such activities among existing relationships, with the result that we stop offering them new products
and services. Thus, the KYC process significantly mitigates environmental risks in the short, medium and long term, thereby affecting the level of
credit, liquidity and funding and reputational risks.
As part of our standard corporate client credit risk management processes, we have included the identification, measurement/assessment and
monitoring of individual client ESG risk (assessment in the credit application and the possibility of rating appeals), which affects the level of funding
in manual processes. We have also included a sectoral assessment of environmental risk, which influences the level of financing in automated and
semi-automated processes and provides a benchmark in the individual client’s assessment. The relevant regulations and internal rules are
contained in documents:
Credit Risk Management Policy, Sector Guidelines, Business Banking and Wholesale Banking client environmental risk
heatmaps, ESG Manual, Corporate Client Credit Manual and Strategic
Client Credit Manual.
These
Environmental Risk Heatmaps
are based on an expert assessment of the environmental risk factors of each sector. They therefore provide
both a benchmark for assessing the ESG risks of an individual client, but also allow for portfolio consideration and assessment of these risks, e.g.:
•
by incorporating the Heatmap’s assessment of the sector into the process of determining the overall
classification of the sector, which is translated into the corporate client’s credit limits in the automated and
semi-automated processes,
•
in the internal reporting of the bank’s credit exposure to corporate clients in sectors with a certain level of risk.
Environmental risk heatmaps were drawn up with a medium time horizon of up to 5 years.
For investment projects subject to the
Equator Principles
, we apply this socio-environmental principles standard in the assessment of transactions.
Projects that do not comply with the
Equator Principles
are not financed by the Bank.
For the retail mortgage portfolio and the retail cash loan portfolio, we also produced
Environmental Risk Heatmaps
. For the mortgage portfolio, the
risks identified are related to physical risk factors and the low energy efficiency of the financed property. For the cash loan portfolio, we assessed
the impact of ESG factors as indirect, mainly resulting from the potential destruction of client-owned property, loss/reduction of income due to, for
example, loss of a job in a high-risk environmental sector, or reduction or loss of creditworthiness due to increases in energy prices.
For properties hedging retail and corporate credit exposures, we have provisionally assessed the physical risk as low. In addition, we do not accept
collateral exposed to environmental risks (the relevant provisions are contained in the internal collateral instructions for each segment). In addition,
flood risk for properties taken as collateral is examined in the valuation/valuation review process, e.g. in practice flood risk is part of the risk areas
examined.
In 2022, we carried out for the first time an estimation of the physical climate risk in the bank’s loan portfolio, in accordance with the
EU
Commission Regulation (2022) laying down implementing technical standards with regard to the disclosure of information on environmental, social
and corporate governance risks
.
We have defined a method for estimating/measuring the carbon performance of a portfolio of collateral properties (buildings/housing), including
a portfolio of financed properties, and defined a method for estimating/measuring the
CO
2
performance of a portfolio of financed activities.
In the KYC process for the bank’s largest clients (strategic client segment), the ESG risk assessment at client level and the risk assessment at
transaction level take into account social factors. Social risk factors such as, for example: human rights, labour rights, the impact of the activity on
communities and societies are taken into account. We do not fund clients with an unacceptable level of ESG risk, and for clients with a high level of
ESG risk, we conduct an in-depth assessment. We also have specific policies for the financing of areas with – in our view – high social risks, in line
with the
ESG Manual
(e.g. arms, tobacco, chemicals, industrial processing, animal welfare).
In the credit process for clients in the medium and large business segment, in the standard path of the credit process we assess the client’s
sensitivity to social risk factors and its ability to mitigate these risks. In addition, we have identified and indicated sectors/areas sensitive to social
risk – we require additional information from clients operating in these sectors/areas to assess social risk. We do not finance new clients for whom
social risk has been assessed at an unacceptable level, and we can set corrective actions for clients with credit exposure with a high risk level.
Reporting on the distribution of the portfolio of medium and large companies by level of social risk takes place on a semi-annual basis.
We do not accept collateral with which to bear social risks – the relevant provisions are contained in the internal collateral instructions for each
segment.
We have defined corporate governance risk factors in the
ESG Manual
and take them into account in the ESG risk assessment of the bank’s largest
clients (strategic client segment clients), carried out as part of the KYC process, at the individual client level. Among other things, we analyse issues
such as how the client reports the impact of the E and S factors, having a human rights policy, information on negative NGO/media campaigns or
possible stakeholder protests.
In the manual credit process, credit analysis standards for strategic clients and medium and large companies include the requirement to assess the
client’s sensitivity to corporate governance risk factors (on a best knowledge basis) and to assess its ability to mitigate these risks. For large
companies, the assessment of ESG risks is made on the basis of information contained in published non-financial risk strategies/reports.
As part of our liquidity risk management, we performed a stress test in 2021 with horizons of 5, 10 and 20 years. The test scenarios identified risks,
trends in climate, business, legal and social changes that affect the Bank’s liquidity. The results of the climate liquidity stress test indicate that the
bank will maintain an adequate level of liquidity despite negative factors related to physical or transformation risk. as part of this stress test, we