Chang Hwa Bank|Corporate Social Responsibility-Climate Risks and Opportunities

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Climate Risks and Opportunities

Task Force on Climate-related Financial Disclosures (TCFD)

The Bank follows the TCFD framework to disclose the 11 suggested disclosure items related to the Bank's governance, strategies, risk management, and indicators and goals of the climate risks and opportunities. We entrusted the British Standards Institution (BSI) to conduct third-party verification of TCFD compliance and was rated Level 5+ Excellence. The descriptions are as follows:

(For details, please refer to the "Task Force on Climate-related Financial Disclosures (TCFD) Report" published by the Bank.)
TCFD Report

Climate Governance

The Board of Directors' monitoring of climate related risks and opportunities

The Bank's Board of Directors serves as the highest t governing body for climate issues, guiding, supervising and managing the Bank's exposure to climate risks and to ensure that the Bank's qualitative and quantitative measures align with our risk appetite.
Facing the challenges of climate change, the Board has approved the inclusion of climate risks in the highest level of the Bank's risk management guidelines, completing the scope of risk management. A "Climate Risk Management Policy" has been established to strengthen the management and response to climate risks.

Management’s role in assessing and managing climate-related risks and opportunities.

The TCFD task force was established under the Risk Management Committee to identify and assess climate risks and opportunities. Action plans are developed based on the Bank's climate risk management policy and provisions on climate issues. The task force reports the implementation progress to the Board of Directors, Sustainable Development Committee, and Risk Management Committee on a quarterly basis.
In the year 2022, the Bank reported greenhouse gas and environmental metrics, SBTi progress, and climate risk monitoring to the governance body, undertaking efforts to address climate risks and seize opportunities.

Strategy

The Bank's Climate Strategies

The Bank introduces the TCFD framework, analyzes climate change risks and opportunities, and strengthens climate risk governance. We will continue to respond to the CDP questionnaire to strengthen the Bank's efforts in sustainable development issues, increase our international visibility, and enhance our corporate social responsibility image.
The Bank has signed and became a member of the Equator Principles Association, incorporating ESG metrics as important benchmarks. Environmental and social risk management is internalized in the credit approval process for financing projects, along with the establishment of risk management mechanisms and response processes. The Bank has also developed green financing products that promote both economic development and environmental friendliness, guiding companies in their lowcarbon transition.
According to the types of business risks listed in the Bank's "Detection of Business Risk Management Standards", evaluate the significance and impact of various risks faced by the Bank, and incorporate climate risk factors into risk appetite, strategy and business plan, the impact of climate risks on business risks is detected to enhance the resilience of response strategies.

Identification of short, mid, and long-term climate related risks and opportunities

Every year, the Bank collects climate-related risks and opportunities. The business management units assess the probability of occurrence and impact level for each risk/opportunity, using the multiplication result of these factors as a basis for ranking the significance of risks/opportunities. The top three identified results are further analyzed and evaluated for their impact on the Bank's operations and business, and relevant response measures are formulated to manage climate-related risks and seize climate-related business opportunities.

Impacts of climate related risks and opportunities on operations, strategies, and financial planning

The Bank evaluates the impacts of climate risks and opportunities on various aspects of the company (products and services, financing, investments, and own operations and businesses). The descriptions detail the business activities related to climate issues, the Bank's operational strategies and responses, and the specific impacts of these risks and opportunities on financial planning.

Strategic resilience and climate related scenarios

Transition risks
We calculated carbon fee on the Bank's borrowers on the EPA's control list in three scenarios, at three different time points, assessing their potential indirect financial impact on the Bank. Based on the results of the scenario analysis, we continue to mitigate climate-related transition risks by lowering the limits for carbon-intensive industries and enhancing the management of borrowers' transition plans and decarbonization efforts.
Physical risks
To effectively understand the impact of physical risks on business units and real estate collateral, and enhance the scale of physical risk identification and potential financial impact, the Bank expanded the scope of physical risk analysis in 2022 and evaluated the climate risk values (VaR) for all real estate collateral locations in future designated years, assessing the potential impact on approximately 100,000 real estate collateral items in Taiwan in the event of extreme weather events.

Risk / Opportunity Management

Processes for identifying and assessing climate-related risks
As detailed the organizational structure and responsibilities stipulated in the Bank's "Climate Risk Management Policy," the TCFD task force is responsible for identifying and assessing climate risks and opportunities. Considering the types of climate risks/opportunities*, timeframes, degrees impact, probability, correlations with existing financial risks, and the natures of business activities, a climate risk/opportunity identification process is established to effectively understand the Bank's exposure to climate risks/opportunities. "Mitigation" and "adaptation" actions are then taken proactively. We maintain the momentum in developing green financial products and services while promoting operational decarbonization to ensure the Bank's resilience (adaptability) in facing relevant risks and opportunities.
Note: Climate change risks are primarily classified into two categories: "physical risks," which are related to climate change, and "transition risks," which are related to low-carbon economy. Physical risks are divided according to climate patterns into immediate extreme weather events or long-term changes in climate patterns; whereas transition risks are divided according to different influencing factors into several risk factors, including policy and regulatory risk, technological innovation risk, change in market structure, and reputational risk. Processes for identifying and assessing climate-related risks

Collection of climate-related issues
The Bank's TCFD Task Force regularly collects and studies international climate-related research reports, domestic and foreign government climate regulations, and refers to domestic and foreign financial institutions' climate-related risk and opportunity assessment reports as the basis for a database of climate-related issues.
Identify climate-related risks and opportunities that influence business strategies and goals
We interview each business unit; discuss the impact of climate-related issues on the Bank one by one depending on the nature of their business. Outside perspectives are incorporated into internal issues that align with the characteristics of the financial industry with the help of external consultants and readjust the content of each issue to be more aligned with the Bank's business development strategy.

Assessing the degrees of impact of climate-related risks and opportunities
Each unit evaluates the degree of impact, probability of occurrence, potential timing of occurrence, and time range of impacts of each risk and opportunity depending on business characteristics to draw up a climate risk and opportunity matrix.
Assessing the materiality of risks and opportunities
The climate risk or opportunity index was calculated based on the two dimensions of "degree of impact" and "probability of occurrence," with the cost-effectiveness and data availability considered, and then the climate risks and opportunities sorted for materiality accordingly.
Formulate appropriate countermeasures
The impact pathways, impact time and geographical scope, impact value chain location, and financial impacts were evaluated for the identified major climate risks and opportunities; existing countermeasures and implementation performance were compiled to formulate future mitigation and adaptation climate actions. Continue to develop green financial products and service projects, implement low-carbon operations, and grasp climate opportunities and business opportunities through carbon reduction and digital finance innovation.
Integrate climate risk and opportunity identification process
The TCFD Task Force regularly identifies climate risks and opportunities each year, performs qualitative/quantitative analysis of climate risks and opportunities and develops response strategies for various risks and opportunities based on the assessment results. It also carries out monthly monitoring and reporting tasks, reporting to the Risk Management Committee and the Board of Directors.

Management procedures and actions for climate-related risks/opportunities

In response to the potential impacts of natural disasters, carbon emissions regulations or other risk events, the Bank bolsters maintenance and management measures to mitigate losses caused by flooding at branches. We also adjust industry limits highly affected by climate and conducts climate risk monitoring for borrowers on the EPA's control list and the Bank's carbon-intensive industry list. Additionally, we review borrowers' participation in international initiative organizations and request greenhouse gas emissions information to track their reduction efforts.

We actively develop green financial products such as green loans, green bonds, and green-themed funds to seize climate-related opportunities and business prospects, and leverage financial influence. Committed to digital finance innovation and promoting "Bank4.0" online services, integrating social media to provide clients with safe and convenient financial services, expand clientele, and reduce emissions in operations.

Integration of the overall risk management system

To align with international standards and strengthen the Bank's climate risk management and response, we adhere to international regulations such as the United Nations Framework Convention on Climate Change, its agreements, and TCFD. Climate risks are incorporated into the Bank's highest level of internal risk management guidelines. We expanded the scope and definition of overall risk, establishing risk management mechanisms at the three lines of defense. Climate risks and potential losses are identified and measured annually, and included in the risk management report submitted to the Board of Directors for comprehensive management.

Metrics and Targets

The National Development Council of Taiwan issued the "Taiwan 2050 Net Zero Emissions Pathway and Strategy Overview" in 2022, drawing Taiwan's blueprint for net-zero emissions by 2050. The Bank will actively support national policies and direct funds towards green and sustainable industries to construct a comprehensive green finance system.

Metrics and targets for the assessment of climate risks and opportunities
Greenhouse gas emission is one of the Bank's management metrics. We have set a midterm target of carbon reduction by 42% by 2030 compared to 2020, equivalent to 4.2% annually. In addition, recognizing the importance of resource utilization and management, short-term targets have been set to reduce water and electricity consumption by 3% by 2023, and long-term targets aim for a 10% reduction by 2030, compared to 2020. We will also review the annual amount of green procurement and the purchase of renewable energy certificates. In creating a sustainable environment, the Bank implements various energy conservation and carbon reduction actions, and adopts international sustainability standards to meet greenhouse gas reduction targets.
Targets for the management of climate risks and opportunities
The Bank has signed the SBTi commitment in 2022, pledging to restrict temperature rise within 1.5°C by 2030 with Category 1 and Category 2 emissions and restrict temperature rise below 2°C with investment and financing portfolio's carbon emissions. We are committed to aligning our business development strategy with the goals of the Paris Agreement. By setting short, medium, and long-term targets, the Bank demonstrates its management performance in addressing climate change and drives the transition to a low-carbon economy. We will gradually develop reduction targets for our operations and investment/ financing activities.
Goal implementation

Category 1(Scope 1) and Category 2(Scope 2)
The Bank followed the SBTi in its aim to reduce carbon emissions by 42% by 2030 compared to the base year of 2020. The carbon emissions in the base year 2020 were 17,158.302 tons CO2e. In 2021, the carbon emissions were 16,361.208 tons CO2e, down approximately 4.65% compared to the base year. The carbon emissions in 2022 were 16,093.745 tons CO2e, reflecting a reduction of approximately 6.2% compared to the base year.

Scope 3*: Investment and financing portfolio emissions
2021:
The Bank conducted its first carbon emissions inventory of the investment and financing portfolio using the methodology developed by the Partnership for Carbon Accounting Financials (PCAF), calculating carbon emissions from "listed stocks and bonds," "loans for large enterprises," "commercial real estate," and "project financing." The Bank actively seeks opportunities to reduce greenhouse gas emissions within these scopes.
2022
In addition to the existing calculation of carbon emissions of the investment and financing portfolio from "listed stocks and bonds," "loans for large enterprise," "commercial real estate," and "project financing," the Bank has adopted PCAF's new methodology to include the inventory of assets such as "unlisted stocks," "mortgage" and "vehicle loans," aiming to gradually complete the scope of financial carbon emissions.
► Calculation of 2022's investment and financing portfolio:

Total emissions: 1,433,353 tons of CO2e
The top three industries in terms of absolute carbon emissions are "raw materials," "industrial services," and "non-core consumer services," accounting for 27.6%, 13.9%, and 10.1% of the total emissions, respectively.
Based on the analysis of carbon footprints (allocated carbon emissions per NT$1 million) of our investment and financing portfolio, the top three industries with the highest carbon footprints are "non-core consumer services," "oil and gas," and "raw materials," with carbon footprints of 12.03, 9.90, and 9.16 tons CO2e per NT$1 million, respectively. The remaining industries generate carbon footprints below 4 tons CO2e per NT$1 million.
Discrepancy analysis over the past two years Discrepancy analysis by asset over the past two years focuses on the "listed stocks and bonds," "loans for large enterprise," and "commercial real estate". The absolute carbon emissions in these categories for 2022 amounted to 1,305,031 tons CO2e, up 26.5% compared to 1,031,326 tons CO2e of 2021. However, the carbon footprint decreased from 3.0 in 2021 to 2.79 tons CO2e per NT$1 million.
Note: Investment and financing emissions fall under Scope 3 (other indirect emissions) according to the ISO 14064- 1:2006, or Category 5 (indirect greenhouse gas emissions from downstream stages related to products manufactured by the organization) in ISO 14064-1:2018. The terminology used here follows ISO 14064-1:2006.

Climate Related Risks

Identified climate-related risks

After collecting 10 climate-related risk issues in 2022, consisting of 4 physical risks and 6 transition risks, we assessed their impacts on the Bank's operations. The descriptions are as follows:

Ranking of the Climate Related Risks

For the aforementioned 10 climate-related risks, a risk matrix was created based on "probability" and "degree of impact." The top three risk events and their corresponding control measures are listed according to the severity of the risks.

Climate Risks and Corresponding Financial Impacts

Climate Related Opportunities

Identified climate related opportunities

A total of 8 climate-related opportunities were collected in 2022, including climate opportunity types recommended by TCFD, such as resource efficiency, energy sources, products and services, markets, and resilience, which were taken as factors. Further analysis of the top three opportunities are described as follows:

Ranking of the Climate Related Opportunities

For the aforementioned eight climate-related opportunities, an opportunity matrix was produced based on "probability" and "degree of impact," ranked by materiality, and further analyzing the top three opportunities in terms of their impact on business, strategies, and finances.