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

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  • Description of the processes to identify and assess material impacts, risks and opportunitiesE1.IRO-1
    Description of the processes to identify and assess material impacts, risks and opportunities

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.

Climate change risks and their impact on the business

Properly identifying the risks associated with climate change allows us to take action to increase our resilience to these risks. It also allows us to better take advantage of opportunities and address challenges posed by climate change in order to improve the growth dynamics, financial performance and the reputation of the Group.

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

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.

Transition risks

Transition risks are associated with the transition towards a low-carbon economy, in line with the goals of the Paris Agreement and the strategic direction set by the European Green Deal. Such a transition implies major structural changes in the global economy, entailing many risks, including rapidly emerging losses from so-called stranded assets. The consequences of these processes are complex and multidimensional, making the assessment of transition risks difficult, but extremely important. From the Group’s perspective, these risks can affect the Group both directly and indirectly through their impact on the Group’s customers.

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.

Analysis and assessment of the transmission of climate risks to banking risks

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.

Ryzyko kredytowe (downstream łańcucha wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
Climate risk can negatively affect borrowers and reduce their ability to service their debt.

More frequent and intense weather emergencies and natural disasters may also reduce the value of the loan collateral.

EU or national regulations may reduce the debt servicing capacity of business borrowers operating in certain sectors, primarily in high-carbon sectors such as:

  • energy,
  • fuel sector,
  • transport
We integrate ESG risks into the credit risk assessment and monitoring process, both at the customer level and at the loan portfolio level. The following section describes the changes that are gradually being introduced into the credit process. ESG issues are becoming increasingly important in sector analyses and strategies.

Ryzyko rynkowe (downstream łańcucha wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
Risk of losses arising from changes in the value of the Bank’s assets and liabilities caused by natural disasters and sudden weather events. The cost of CO2 emissions may increase costs for some companies (particularly in carbon-intensive sectors such as energy and fuel). This may lead to a reduction in revenue for these companies and, consequently, a reduction in investment capacity. This, in turn, may reduce the number of new credit applications.

Regulatory pressures may indirectly affect the financial market by reducing investment in selected customer groups.

Due to the current structure of the trading book, the Bank does not identify a quantifiable impact of ESG factors on market risk. This means that there is no material impact of supply, demand or instrument prices on the Bank’s result or on the level of risk incurred.

At the same time, the Bank continuously analyses whether the impact of ESG factors on market risk is becoming material, in particular with regard to potential changes in the structure of the trading book.

Ryzyko płynności (downstream łańcucha wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
Climate change, including natural disasters and sudden weather events, can cause a sudden increase in the need for cash. No significant impact of transition risk was identified. Appropriate procedures have been defined so that ESG risks are included in the annual liquidity adequacy assessment process (ILAAP) in which we estimate net outflows.

Ryzyko operacyjne (operacje własne i upstream łańcucha wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
Sudden weather events may affect the conduct of business in the Bank’s branches (e.g. flooding, lack of power supply). Higher energy costs may increase the burden on the Bank (e.g. increase in the cost of renting space). ESG risks are identified, valued and monitored as part of the risk self-assessment process. They are mandatory risks in this process.

As part of the scenario analyses, a scenario is examined that assumes the materialisation of events whose cause lies in ESG factors.

Under current regulations, the bank’s units are required to report ESG events to the operational event database.

In November 2023, operational risk indicators monitoring ESG risks were included in the reporting.

Ryzyko biznesowe (cały łańcuch wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
No significant impact of physical risk was identified. In the short term, there is an increase in costs associated with the transition to a low-carbon economy. Some of these costs are passed on to consumers, which may reduce their willingness and/or ability to take out consumer loans (e.g. to buy new cars).

Regulations and shifts in customer decisions may create new opportunities to offer products or services. Failure to act appropriately may lead to a loss of customers to competitors.

The impact of transition risks on the Bank’s business operations is analysed on an ongoing basis, and this is reflected in the Bank’s strategic activities and product portfolio.

Ryzyko reputacyjne (cały łańcuch wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
No significant impact of physical risk was identified. Continued financing of sectors negatively perceived by regulators, the market and rating agencies (this is mainly in relation to carbon-intensive sectors) could negatively affect the Bank’s rating.

Possible inadequacies in the management of communications to customers (greenwashing) may negatively affect the Bank’s reputation. Possible collaboration with suppliers with controversial sustainability practices may negatively affect the Bank’s reputation.

We pay particular attention to the transparent communication of sector policies.

We apply reputational risk management policies.

We seek to engage clients in addressing climate change and environmental conditions.

We conduct appropriate analysis in terms of reputational risk and analyse clients’ climate plans.

Ryzyko braku zgodności (compliance, cały łańcuch wartości)
Impact of physical risks Impact of transition risks Risk management approach in the Bank
No significant impact of physical risk was identified. Regulatory pressures are likely to intensify, which may increase in-house and/or consultancy costs as a result of meeting the obligation to comply with new regulations.

In the event of non-compliance with the new regulations, there may be a risk of penalties imposed by market regulators.

We keep our Bank’s regulations under review and fully comply with the requirements set by EU and national regulators.

As an entity of the global Santander Group, we are one of the founding members of the Net Zero Banking Alliance.

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.

Climate opportunities

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.