Integrating ESG into the organization’s risk management system

The bank has a risk management system developed and implemented by the Management Board, covering the bank’s functions and organizational units. It is based on three independent and complementary levels (lines of defence). The risk management system functioning in the bank in particular:

• takes into account the nature of the bank’s risk exposure;
• covers all relevant risks (environmental, social and governance risks), including their adequacy and effectiveness and the interdependencies of the various types of risk;
• enables the bank to make effective decisions regarding the implementation of the bank’s management strategy.

As part of this system, we define and address risks related to social and environmental issues, including climate. We are aware of the growing importance of the approach based on integrating climate risks into the basic processes of enterprise risk management, as recommended by the European Central Bank, the United Nations Principles for Responsible Investment and the TCFD guidelines, among others. The same approach is taken by the Banco Santander Group. Currently at the Bank, environmental risks are reported internally on an ad-hoc basis, according to current business needs.

The bank’s key bodies are involved in managing and overseeing sustainability topics (see Role of the Management Board and Supervisory Board). We also put in place a system of sustainability incentives for Management Board and Supervisory Board members (see Remuneration Policies for Management Board and Supervisory Board Members). We take into account various socio-environmental risks in the course of decision-making in the Corporate and Investment Banking (SCIB) segment. In the Risk Management Division, we have established a special position of Environmental & Social Risk Manager (ESRM). His tasks include:

• individually assessing various social and environmental risks,
• making recommendations (positive/ conditionally positive/negative) regarding clients or transactions in the SCIB (Corporate and Investment Banking) segment. Credit partners are required to verify that a socio-environmental risk analysis has been conducted and that the required ESRM recommendation is included in the credit application.

The need to integrate ESG factors in decision-making is outlined in the Sustainability Policy. The Social, Environmental and Climate Change Risk Management Policy regulates this matter in more detail. It defines the criteria for identifying, assessing, monitoring and managing social-environmental risks, and details our standards for investing in and working with clients operating in industries which have an impact on climate change, such as:

In the Social, Environmental and Climate Change Risk Management Policy, we identify areas of business that we will not support with our financial services and products. These include projects located in areas protected by the Ramsar Convention, UNESCO World Heritage sites, projects located within the northern Arctic Circle, and the mining, processing and marketing of asbestos.

In 2022, we made the following amendments to our Social, Environmental and Climate Change Risk Management Policy:

• we added a statement outlining our roadmap for achieving carbon neutrality by 2050,
• we supplemented the information on the exclusion related to Ramsar and World Heritage areas, the scope of coal power and infrastructure associated with coal mining, and the exceptional treatment of new customers with coal-fired power plants or coal mines,
• we added exclusions related to new clients and direct financing of greenfield projects – oil upstream clients (oil exploration and production),

As of 2021, the Environmental and Social Risk Analysis Procedure for business and corporate banking customers has been in effect at our bank. It is based on a special algorithm that allows the initial selection of̨ environmental and social risks. Clients therefore receive information on their risk level in the form of „environmental flags.”

We also take ESG criteria into account when making investment decisions. Santander Bank Polska S.A. – with particular emphasis on Santander TFI – strictly adheres to the Policy for Responsible and Sustainable Investment and the Policy. Santander TFI also has Policies for Engagement in Listed Companies and Application of Corporate Governance Measures. We are convinced that integrating environmental, social and governance aspects into investments allows us to improve risk management and create added value – both for clients and society as a whole. By considering both financial and non-financial factors, we can get a more complete picture of the assets we manage and make more balanced investment decisions. We can also influence counterparties in this way through specific transmission channels, for example, reducing the risk of insolvency.

Investments in assets are preceded by a detailed assessment according to ESG criteria, which is used to identify issuers that are well prepared for future challenges – those with policies and management systems that can have a significant positive impact on society and the environment. The ESG assessment includes, among other things:

• proprietary methodology for assessing issuers’ attitudes toward environmental and social factors. We use information provided by external data providers for this purpose. The methodology is based on market reference data and international guidelines and standards. Its result is an assessment of individual issuers.
• exclusions based on the nature of the issuers’ operations

The basis for evaluating companies in terms of ESG is the concept of dual materiality. We take into account the impact of ESG criteria on investments, as well as the impact of investments on sustainability factors. The assessment includes general analysis criteria – common to all sectors – and specific criteria depending on the sector and type of business. We expect issuers to prepare and submit ESG reports. We also disclose our information in this regard.

We invest in the clients we work with. We want to understand issuers’ business models and the risks and opportunities associated with them. In doing so, we leverage our commitment and promote a responsible approach to environmental, social and governance issues.

Climate risk management is part of the bank’s overall risk management process. In accordance with TCFD’s recommendations, the results of the analysis of physical and transformational climate risks were included in the bank’s typical risk taxonomy used. The results of the analysis are shown in the table below. In 2022, we added supply chain risks to the list.

In 2022, we assessed the sensitivity of the sectors in our portfolio to climate risk. We performed the analysis in three time perspectives – short, medium and long. We assessed physical and transformational risk on a scale of 1 to 5 (where 1 is the lowest level of risk and 5 is the highest). The table below presents the results of this analysis, along with a presentation of the materiality of each sector in the bank’s portfolio. Our assessment of the sectors has not changed between the date of the analysis and the date of publication of this report, so the results are consistent with the 2021 ESG report.

RF – physical risk

RT – transformational risk

Analiza ryzyk w podziale na sektory

Sector exposed to risk	2025		2030				2050				Current sector share in the category
			Scenario 2°C		Scenario 4°C		Scenario 2°C		Scenario 4°C		SCIB*	Corporates*	SME*
	RF	RT	RF	RT	RF	RT	RF	RT	RF	RT
Oil & gas sector	Ryzyko na poziomie 1	Ryzyko na poziomie 4	Ryzyko na poziomie 2	Ryzyko na poziomie 5	Ryzyko na poziomie 2	Ryzyko na poziomie 5	+tak	–nie	+tak	–nie	3.70%	0.56%	0.03%
Energy sector	Ryzyko na poziomie 2	Ryzyko na poziomie 5	Ryzyko na poziomie 3	Ryzyko na poziomie 5	Ryzyko na poziomie 3	Ryzyko na poziomie 5	+tak	–nie	+tak	–nie	24.12%	0.58%	0.24%
Energy production from renewable sources							+tak	–nie	+tak	–nie	6.00%	0%	0%
Metals and mining sector	Ryzyko na poziomie 1	Ryzyko na poziomie 3	Ryzyko na poziomie 1	Ryzyko na poziomie 4	Ryzyko na poziomie 1	Ryzyko na poziomie 4	+tak	+tak	+tak	+tak	12.38%	1.59%	0.42%
Soft commodities sector	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 4	Ryzyko na poziomie 3	Ryzyko na poziomie 4	Ryzyko na poziomie 2	+tak	–nie	+tak	–nie	0.00%	0.05%	0.60%
Automotive sector	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 3	+tak	+tak	+tak	–nie	1.59%	2.96%	0.26%
Real estate sector	Ryzyko na poziomie 1	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 2	–nie	+tak	+tak	–nie	9.08%	32.59%	15.73%
Materials and chemicals	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 3	+tak	+tak	+tak	+tak	4.19%	6.77%	3.99%
Packaging manufacture	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 2	–nie	+tak	–nie	+tak	0.00%	2.12%	0.74%
Furniture industry	Ryzyko na poziomie 2	Ryzyko na poziomie 1	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 1	–nie	–nie	+tak	+tak	0.15%	1.85%	1.51%
Food industry	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 2	+tak	+tak	+tak	+tak	3.80%	9.39%	1.92%
Agri sector	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 4	Ryzyko na poziomie 3	Ryzyko na poziomie 4	Ryzyko na poziomie 3	+tak	+tak	+tak	+tak	0.19%	1.22%	26.45%
Public sector	Ryzyko na poziomie 1	Ryzyko na poziomie 2	Ryzyko na poziomie 1	Ryzyko na poziomie 3	Ryzyko na poziomie 1	Ryzyko na poziomie 2	+tak	+tak	+tak	+tak	0.00%	3.34%	0.01%
Transport and logistics	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 3	+tak	+tak	+tak	+tak	0.02%	7.82%	15.50%
Cosmetics sector	Ryzyko na poziomie 1	Ryzyko na poziomie 1	Ryzyko na poziomie 1	Ryzyko na poziomie 2	Ryzyko na poziomie 1	Ryzyko na poziomie 2	+tak	+tak	+tak	+tak	0.26%	0.21%	0.04%
E-commerce	Ryzyko na poziomie 1	Ryzyko na poziomie 1	Ryzyko na poziomie 1	Ryzyko na poziomie 1	Ryzyko na poziomie 1	Ryzyko na poziomie 1	–nie	+tak	–nie	+tak	0.00%	0.37%	1.67%
Trade	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 2	+tak	+tak	+tak	+tak	24.62%	21.26%	26.58%
Tourism	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 2	Ryzyko na poziomie 2	+tak	+tak	+tak	+tak	1.42%	4.39%	1.95%
Waste management	Ryzyko na poziomie 1	Ryzyko na poziomie 2	Ryzyko na poziomie 1	Ryzyko na poziomie 3	Ryzyko na poziomie 1	Ryzyko na poziomie 2	–nie	+tak	–nie	+tak	0.20%	0.97%	0.67%
Financial sector	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 2	Ryzyko na poziomie 3	Ryzyko na poziomie 3	Ryzyko na poziomie 3	+tak	+tak	+tak	+tak	8.27%	1.95%	1.69%
TOTAL											100%	100%	100%

* Portfolio structure at the end of 2022
* SCIB – Santander Corporate & Investment Banking)
* Corporates – Business and Corporate Banking
* MŚP – SME – Small and Medium Size Enterprises

We have updated the method for calculating exposure to sectors – compared to our previous TCFD report we have expanded the scope of credit exposure calculation, especially from SCIB perspective. For the first time, we have included renewable energy generation as a separate sector. The increase within the energy portfolio is attributable precisely to the higher exposure to renewables. In addition, movements in the levels of exposure to individual sectors are due to fluctuations and changes occurring in our portfolio.

In the medium term, we expect physical risk to increase for sectors currently assessed as low-risk or very low risk. In the short term, the agri and soft commodities sectors are most exposed (to a medium degree). Looking ahead to 2030, we also expect an increase in risk in the energy sector from a rating of 2 (low risk) to 3 (medium risk), due to an increase in the likelihood of prolonged drought, reduced energy production and intensification of extreme weather events.

One of these sectors, the energy sector, has a major share in our Corporate and Investment Banking (SCIB) portfolio, namely 24.12%.

As in the previous reporting period, we assume that transformational risk (especially regulatory risk) will increase significantly, in the medium to long term, in the 2°C scenario, due to the expected tightening of green transition regulations. Such an increase can be expected in the food industry, transportation and logistics, trade, tourism, agri and financial sectors, among others. For our bank, the trade sector is particularly important, as it accounts for 24.6% of the SCIB portfolio, 21.26% of the Business and Corporate Banking (BCB) portfolio and 26.58% of the SME portfolio. We assume that in the delayed mitigation scenario (4°C), climate policies will be tightened more slowly due to less effective cooperation of the international community. Therefore, as in the previous report, we have assumed that transformational risks in sectors such as automotive and finance will increase in the 2°C scenario, while remaining unchanged in the 4°C scenario.

We have calculated our climate risk exposure to answer the question what part of our portfolio in a given segment (Corporate and Investment Banking – SCIB, Business and Corporate Banking -Corporates, Small and Medium Size Enterpises – SME) will be accounted for the sectors from particular risk categories. The charts below show the growth in physical risk exposure assuming the same portfolio structure (at the end of 2022):

In the short term, all areas will be predominated by sectors rated as exposed to „very low risk” and „low risk” (e.g. in the SCIB area, these two categories account for almost 100%). In the medium term, we expect an increase in exposure in the 2°C scenario, mainly due to a rise in physical risk ratings in the energy, RES, food, transportation, logistics, materials and chemicals sectors. On the other hand, in the 4°C scenario, the increase in exposure in the medium term will be related to a rise in the rating of the financial sector.

We then conducted a similar analysis for transformation risk. The charts below show the increase in transformation risk exposure also assuming the same portfolio structure (at the end of 2022):

The increase in exposure in the medium term in the 2°C scenario is driven by a rating upgrade in most of the sectors analysed. While only 24% of the Corporate and Investment Banking portfolio received a rating of 5 (very high risk) in the 2025 outlook, in the medium term it is already 28% (in both scenarios). Therefore, this means a significant increase in risk in this category.

In the Business and Corporate Banking portfolio, the real estate, transport and logistics, trade, commodities and chemicals account for a significant share (above 5%). At the same time, these are the sectors in which transformation risk is increasing in the medium term in the 2°C scenario from a rating of 2 (low risk) to 3 (medium risk).

In the SME portfolio, the agri sector exposed to high transformation risk prevails. In addition, a significant share goes to the trade, real estate and transport and logistics sectors which are rated 3 in the 2030 outlook, in the 2°C scenario. Hence, as much as 96% of the SME segment is marked as „medium risk.” In the 4°C scenario, regulatory risk is expected to grow at a slower rate, so the rating relative to the 2°C scenario remains lower. This is especially true for the real estate, food, trade and tourism sectors, all of which are rated 2.

We are aware that many of the investments required for the transition to a low-carbon economy present new opportunities for us to offer support to current and future customers with appropriate financing mechanisms. We want to develop new products and services, including advisory services to customers, while building a brand of a trusted partner.