Chang Hwa Bank|Corporate Social Responsibility-Responsible Financing

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Sector Activities

The Bank operates in the segments listed below.

2022
Segments (Consolidated financial report)	NTD (thousand)	%
Commercial Banking-corporate (including Project finance) and Investment Banking	16,337,986,696	47.86%
Commercial Banking-consumer	2,783,348,638	8.15%
Others	15,017,254,150	43.99%
Net Revenue &Gains	34,138,589,484	100.00%

Due Diligence in Credit Application

Adhering to the concept of responsible finance to implement the goal of sustainable development, Chang Hwa Bank promotes green finance, energy transformation and sustainable development through credit extension activities. In addition to following the general credit extension process to handle loan business, the Bank added ESG financing principles to the credit process procedures of corporate / personal financial. During credit application, it is also necessary to understand whether the borrower is involved in negative ESG news and whether the use of funds is related to green finance. Complemented by "Green Enterprise Project Loan" and "Sustainability Linked Loans", environmental and social risk management is internalized in the credit review process, and relevant control mechanisms were established to encourage and guide customers to strengthen ESG and reduce the operational risks caused by climate change. Efforts were made to implement environmental protection and social care and establish a more comprehensive and complete risk management mechanism.

The Bank's Credit Extension Process
Corporate Loan

Prior Review

Since August 2017, the Bank has expanded the scope of environmental and social risk review for credit extension cases from enterprise credit extension cases that was traditionally applicable for credit facilities above US$10 million (inclusive) or the equivalent in New Taiwan dollars to all enterprise credit extension cases. When accepting credit extension cases from enterprise customers, the Bank needs to check the competent authority's website to see if the applicant enterprise has any records of violating human rights, labor rights, environmental protection, or food safety regulations.
In principle, considering that virtual currencies may entail risks of money laundering and funding terrorist, the Bank does not accept the establishment or adding of new business relationship between virtual currency platform operators and the Bank, and due diligence for customers in high-risk industries is more intense.
In addition to the above information, the Bank also needs to review whether the borrower has any other negative ESG news and understand whether the borrower's funds are related to green finance. The Bank would use “Green Enterprise Project Loan” and "Sustainability Linked Loans" in a timely manner to encourage and guide corporate customers to strengthen ESG.
In order to reinforce the ESG risk assessment of credit customers. In March 2022, the Bank added the disclosure of credit customer's ESG information related to “Green credit” and "Sustainability Linked Loans" in the credit extension system, and incorporated credit review factors to fulfill the Bank's corporate social responsibility.

Post-Loan Management

In order to effectively control the credit risk, the Bank shall conduct reviews and assessments in accordance with the "Operation Standards for Enterprise Credit Extension Warning System" after the loan is approved to understand whether the credit customer is embroiled in negative news and adjust the credit conditions if necessary, according to the severity of the situation.
In order to understand whether the credit customer has properly utilized the loan as per original loan application plan and effectively fulfilled the contractual provisions and other agreed terms, the Bank has established the "Standards for Review Work" to track whether the borrower's fund usage meets the regulations. An “action plan” should be drawn up for regular follow-up management if any of the cases may have detrimental effects on the Bank's debt position.

ESG Review and Implementation Status
In 2022, the Bank has a total of 24,684 corporate credit application cases, of which 2,210 were granted conditional approvals (loan reduction, with attached conditions) and 207 cases were not approved (suspended, withdrawn). Among them, for credit customers which were involved in negative ESG risks, 275 were conditionally approved cases, accounting for 12.44% of all conditionally approvals, and 14 were unapproved cases, accounting for 6.76% of all unapproved cases. The following table shows the Bank's status from three major aspects of E, S and G, and statistics of approved vs not approved loan cases:
Actual Case

○○ Opto-Electronics Co., Ltd.：The credit enterprise customer mainly manufactures and engages in research and development of flat panel display panels of various sizes. It intended to apply for a loan from the Bank for operating and material procurement funds. However, in the past year, the credit customer was prosecuted by the competent authorities for violating the rules of occupational safety and health facilities and the Occupational Safety and Health Act, etc., and violated ESG grounds. In consideration that the borrower has have actively improved, the Bank will grant the loan after a comprehensive assessment.

Sustainability Linked Loans Project and Performance
In response to the development trend of international green finance and to encourage enterprises to increase financing for green and sustainable development, the Bank launched the Sustainability Linked Loans Project in mid-February 2022. If a listed, OTC, emerging or publicly company betters their performance in any of the indicators of control of greenhouse gas emissions, carbon reduction effect, power management, energy consumption and reduction of waste volume and information are available publicly, the loan interest can be reduced accordingly. This is designed to encourage enterprises to pursue operational growth while taking into account the promotion of environmental, social and corporate governance concepts. As of the end of December 2022, the processing situation is as follows:
Sustainability Linked Loans Project:

The number of accounts: 39
Total credit limit: NT$34.135 billion

Enterprise Credit Engagement Information

As of the end of December 2022, the Bank has a total of 99 credit related engagement cases, mainly regarding credit customers involved in Sustainability Linked Loans and joint loan cases. The industries they operate are predominantly in the electronics and technology industries. Engagement revolved mainly around environmental issues such as carbon reduction and energy management. The Bank will continue to track their follow up actions on related issues and work with the customers to achieve sustainable development. The status is as follows:

Ratio of engagement issues

Climate Risk Assessments
As climate change is a major emerging global risk, as a financial institution, the Bank plays a key role as a capital intermediary and promoter. In order to further guide the flow of funds to sustainability-related projects, on top of planning and setting Scope 3 medium and long-term carbon reduction targets in line with the national 2050 net-zero emission pathway, since February 2023, the Bank also subjects new credit applications to additional consideration if the credit customer belong to the latest annual list of emission source manufacturers that should be verified and recorded for greenhouse gas emissions released by the Environmental Protection Administration of the Executive Yuan or industries with high carbon emissions as defined by the Bank, the climate risk assessments shall be conducted to monitor their climate risks. If the credit customer is a listed (OTC)/ emerging company and has not participated in any initiative organization and has not submitted emission information, the Bank shall engage the credit customer to require them to disclose carbon emissions and reduction information in the future, and encourage them to participate in the initiative organization to guide the low-carbon transformation of the enterprise and strive to achieve a balance between economic growth, environmental sustainability, and social development.

Personal Loan

In principle, personal loan use should not be undertaken if it falls under the following circumstances:

The borrowing is used to finance illegal or unethical purposes (e.g., sex industry, opening casinos, underground banks, etc.).
Engage in short-term profit-making speculative activities (e.g., gambling, stock speculation, arbitrage, etc.).
Engage in financing business activities.

To strengthen the risk assessment of ESG for individual credit customers, the bank needs to understand whether the borrower's fund usage is related to green finance when applying for credit. In March 2022, the Bank added the disclosure of credit customer's ESG information related to “Green credit” and "Sustainability Linked Loans" in the credit extension system, and incorporated credit review factors to fulfill the Bank's corporate social responsibility.

Equator Principles (EPs)

Policy and Commitment

In response to the global trend of sustainable operation, the Bank effectively leverages the financial influence of the financial industry and implemented the environmental and social risk review and management of large-scale project financing. On Earth Day, April 22, 2022, the Bank signed and joined the Equator Principles (EPs) Association, becoming an Equator Principles Financial Institutions (EPFIs) member, and by the end of 2022, a new “Equator Principles Credit Extension Operating Regulations” was established and will be effective from February 1, 2023.

EP Project Evaluation Team

The Credit Management Division formed the "EP Project Evaluation Team" for effective implementation of the Equator Principles. Be responsible review and confirm applicability check of EPs and the result of risk categorization for credit projects, complete the “Environmental and Social Risk Checklist for Equator Principles Project” and environmental and social risk review, handle the annual review of credit projects applying the EPs.

Equator Principles (EP) Initiative Assessment Taskforce

The Equator Principles (EP) initiative assessment taskforce is formed by the Credit Management Division of the Bank, which is responsible for reviewing the EP applicability assessment and risk classification results of credit cases, completing the “Equator Principles Credit Extension Environmental and Social Risk Checklist” and environmental and social risk review and processing, and compiling subsequent annual review operations of Equator Principles cases.

Credit Extension Process for Cases Governed by the Equator Principles

The Bank has conclusively introduced the Equator Principles and norms in all aspects of the credit extension process of domestic and overseas branches, with the business units and Credit Management Division carrying out processes such as case applicability judgment, case risk classification, environmental and social risk assessment and review, submission and signing of contracts, and post-loan management.

Case Applicability Judgment and Risk Classification
When lodging a loan application, the applicability judgment and risk classification shall be carried out in accordance with the Equator Principles, and the case shall be classified into three grades of A, B and C, based on potential environmental and social risks.
Request for Information
Based on the risk grading of the case, request relevant documents from the customer regarding the Equator Principles and fill in preliminary opinions.

Environmental and Social Risk Assessment and Review
When a case is confirmed to comply with the Equator Principles, the reviewer shall consider the evaluation opinions of the aforementioned information and take into account the environmental and social risks of the case, for reference in the approval or rejection of credit extension. For category A cases and category B cases with specific risks, the Bank will make an agreement with customers that, there should be an independent third party consultant to issue opinions on environmental and social management assessment documents submitted by customers, ensuring that the cases are in line with the Equator Principles.
Submission and Signing
After the case is reviewed and approved, the business unit will attach Equator Principles commitment clauses to the contract based on the risk classification and review results and sign the Bank's standard commitment clause contract with the customer that meets the requirements of Equator Principles.
Post-Loan Management
For category A and B cases, an annual review of the Equator Principles is conducted at least once a year to ensure that customers are managed in accordance with contractual commitments.

Equator Principles Education and Training

In order to strengthen the relevant personnel's understanding of the Equator Principles, the implementation process and the impact of the introduction of the Equator Principles on the existing structure, the Bank hired professional consultants to conduct 9 educational training sessions for taskforce members in 2022 and produced online teaching materials to address education and training needs.

Annual report on Equator Principles case data*

After the official signing of the Equator Principles by the Bank in April 2022, as of the end of 2022, the Bank has conducted trial review and approval on a total of 6 financing cases in accordance with the Equator Principles. To date, 5 cases have been drawn down while the remaining 1 case is still in progress. One of the cases was located in Australia, while the rest were in Taiwan, and the nature of the industry was mainly power supply.

*In accordance with the Equator Principles, the Bank shall publicly disclose the current status of the management of credit cases applying the Equator Principles in 2024.
The project financing cases for trial Equator Principles review in 2022 are as follows: