Description of the processes to identify and assess climate-related material impacts, risks and opportunities (E1.IRO‑1)

The materiality of the Group’s impact on climate has been assessed in accordance with the methodology discussed in the previous subsection. As part of the materiality assessment process, the Group considered its energy consumption from own operations (see disclosures in subsection E1-5), as well as its greenhouse gas (GHG) emissions across the value chain – a review of the Group’s activities to identify sources of GHG emissions across its entire value chain was conducted in line with the methodological assumptions outlined in the GHG Protocol (see disclosures in subsection E1-6). Through these analyses and in line with the characteristics specific to the banking sector, no significant climate-related impacts were identified within the upstream segment of the Group’s value chain. However, as is typical for financial institutions and considering the structural aspects of the Group’s portfolios, significant climate-related impacts were identified in connection with GHG emissions financed by the Group, which represent downstream value chain impacts. Financial institutions’ own operations are not characterized by high emissions, as they primarily involve office-based activities. Nevertheless, the Group acknowledges the importance of responsible energy management, which translates into Scope 1 and Scope 2 GHG emissions, and has also deemed its impact in this area as material. The analysis also considered the strategic plans and objectives of the Group, which are discussed in more detail in subsection E1-4. A complete list of the Group’s identified material climate-related impacts can be found in the previous subsection.

In line with available regulatory guidance, we identify and analyse climate change risks under two categories: physical and transition risks. Based on market practice, available literature and the results of our double materiality assessment, we assume that climate change risks are of key importance in the financial industry for the entities financed by a given institution through their impact on the profitability of exposures to these entities and on the institution’s reputation arising from business relationships with financed entities. Compared to the financial risks potentially arising from the impact of climate change risks on the financial instruments portfolio, the potential financial risks associated with the impact of climate change on the Group’s own operations and suppliers are negligible.

Physical risks arise from the increasing severity and frequency of extreme weather events, such as severe storms or flooding (acute physical risks). In many sectors, these can cause direct damage to assets and disruption to infrastructure. These risks can also affect companies indirectly, by necessitating a change in their business profile, increasing costs (e.g. insurance) or even preventing them from conducting business.

The second group of physical risks are those associated with gradual and prolonged changes in climate patterns over the medium to long term, particularly as a result of increases in average temperatures (chronic physical risks). In this category, the agricultural sector has a particular risk exposure, due to an increase in the risk of land erosion, which has an impact on the quality and quantity of the crops. In the medium and long term, the deteriorating hydrological situation in Poland and the threat of drought are also risk factors. Lack of adequate water retention systems and water shortages can have a number of negative effects. They may affect various sectors of the economy, including, among others, the energy sector (e.g. thermal power plants using river water in cooling systems may have to reduce energy production during periods of drought). Deterioration of hydrological conditions may also mean an increase in fire risk and potential losses in, among others, timber production.

One category of transition risks is regulatory risks. These are related to the amendment of regulations to combat climate change and promote adaptation to it. New, stricter regulations that will force climate-friendly solutions may translate into higher operating costs for some companies. Sectors dependent on coal and other fossil fuels, on which the Polish energy mix is predominantly based, are particularly vulnerable to these risks. Regulatory risks arise from the rising cost of CO2 emissions, stricter reporting and data collection requirements and even regulatory changes restricting the operation of some particularly highemission entities. A risk not yet so widespread in Poland, but already noticeable in Western European countries, are lawsuits brought, for example, by NGOs. These are aimed at holding companies legally responsible for contributing to climate change or fighting greenwashing practices. The risk of litigation applies largely to companies operating in the most polluting and carbon-intensive sectors.

Technological risks are another group, as decarbonisation and the transformation of the economy will require support in the form of technological innovation. For many companies and industries, profound technological change may mean the loss of asset and infrastructure value, as well as the need to invest in R&D and the implementation of new technologies.

The transformation and structural changes of the economy are also associated with market risks. Changes in the demand and supply of raw materials and commodities will affect their prices and, as a result, the production costs of companies. Consumer choices and the broad macroeconomic environment, including the level of competitiveness of the economy or the level of interest rates, will also be subject to change.

The last group of transition risks are reputational risks. These relate to increased consumer awareness and unethical or unconscious greenwashing actions by companies.

Climate risks, and ESG risks more broadly, have not been singled out as a separate category of risks relevant to our Group. The approach taken is to analyse and assess the transmission of climate risks into traditional financial risk categories, in line with currently available supervisory and regulatory guidance.

The results of the analysis we carried out for the Bank are shown in the table below.

Group companies are developing their approach to managing climate risks in line with their regulatory schedules. In particular, at Santander Consumer Bank, as an independent banking institution, an analysis of the materiality of the impact of ESG risk factors, with a particular focus on climate risks on traditional financial risks, was conducted in 2024. Based on the analysis, Santander Consumer Bank will carry out further activities to develop its approach to managing climate risks in its current processes. Meanwhile, in the subsidiaries Santander Leasing and Santander Factoring, the Bank’s subsidiaries, best practices derived from the banking approach are being implemented, taking into account the specific nature of these activities.

We also considered the risks associated with climate change when preparing the financial statements in accordance with International Financial Reporting Standards – detailed information can be found in the ”Climate-related risk” chapter of the financial report. Based on our analysis, we found no material impact of environmental issues on the financial statements as a whole.

More details regarding the process of identifying and assessing the materiality of climate risks can be found in the SBM-3 disclosures in the section of the report titled ”Qualitative and quantitative analysis of the resilience of the strategy and business model to climate risks supporting the overall resilience assessment of the Group’s strategy and business model”, which describes the results of scenario analyses for the credit portfolio (downstream in the value chain), including the application of the so-called high-emission scenario. The scenario analyses were based on the scenarios defined by the Network for Greening the Financial System (NGFS) that were up-to-date at the time of their execution. As indicated at the beginning of this section, based on its expert knowledge, the Group has not identified any material physical climate-related risks concerning its own operations and the upstream part of the value chain.

The opportunities facing our Group relate in particular to the development of the renewable energy sources (RES) market and the possibility of investing in projects and companies related to this sector, as well as the possibility of engaging in the financing of transport electrification projects, including the adoption of electric and low-emission cars and low-emission public transport. Another growing area includes projects focused on the construction and redevelopment of energy-efficient buildings, as well as investments in circular economy processes. The possibility to participate in the financing of clients’ transformation projects is also an opportunity. New business opportunities identified in the longer term will be related to cooperation with companies operating in the area of the transformation of the Polish energy sector, the development of advisory services for selecting low-emission and optimisation solutions for the agricultural sector, and the expansion of financial services in this area.