46.7. Climate risk

In a broader context, matters related to the ESG Strategy of the Bank, including climate-related issues and actions taken in this regard by the Group, have been outlined in the ‘Statement on the Non-Financial Information of the Bank Pekao S.A. Capital Group for the year 2023’. Furthermore, the definition of ESG risk within the Bank and comprehensive information on ESG risk management is provided in the ‘Disclosures on capital adequacy of the Bank Pekao S.A. Capital Group as at 31 December, 2023’.

ESG risk is considered a cross-cutting risk impacting various major risk types, such as credit, market, and operational risks. ESG risk has been recognized as significant in the Bank and Group’s operations, and general principles governing its management are derived from the document ‘Risk management strategy and principles for internal capital estimation’. A strategic limit for ESG risk has been established at the Group and Bank levels, specifying the minimum commitment to internally defined green exposures above 3.2% of the financial portfolio. Additionally, in alignment with the Bank’s ESG Strategy, the level of high-emission financing in the Bank’s financial portfolio is monitored, reaching 1.04% by the end of 2023, which is slightly above the target set in the ESG Strategy at a maximum level of 1.0%. Economic capital for ESG risk is indirectly considered within the economic capital for major risk types (i.e., credit, market, operational). The Group acknowledges that climate risk will be a significant factor for certain industries, prompting actions to identify relevant data and establish comprehensive risk management for physical and transition risks. In 2023, efforts were made to calculate the carbon footprint for the financing of all business entities and retail mortgage products.

In the realm of risk management, the Group undertakes tasks to ensure compliance with the following external regulations:

1. Commission Implementing Regulation (EU) 2022/2453 of November 30, 2022, amending the implementing technical standards laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of information of environmental, social, and corporate governance risks under Article 449a of Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013, on prudential requirements for credit institutions and investment firms, amending Regulation (EU) No 648/2012,
2. Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18, 2020, on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088, along with delegated regulations.

The assessment of ESG risk, including climate risk, constitutes an integral component of the credit transactions evaluation with economic entities. Alongside the assessment of creditworthiness and credit risk strictly speaking, the Group meticulously evaluates transaction-specific risks, including legal, reputational, political, ESG, including climate and environmental risks, money laundering and terrorist financing risks, and conflicts of interest risks. The ESG risk analysis aims to:

• Avoid financing activities listed in the Environmental and Social Exclusion List,
• Identify the type of ESG risk pertinent to a client’s activity and the transaction financed by the Bank,
• Evaluate the client’s ability to undertake actions to mitigate existing ESG risks,
• Assess potential exposure of the Bank to risks and obligations arising from ESG issues.

The ESG Board, established by the Bank’s Management Resolution in 2020, serves as an advisory body to the Bank’s Management, supporting decisions on ESG matters and engagement in projects related to social responsibility and sustainable development. In 2023, the Bank introduced a new organizational structure for managing the ESG area, consolidating most competencies in a dedicated unit within the Risk Management Division. Additionally, in the Group operates the Sustainable Finance Committee, ensuring financial compliance with qualification criteria defined in the Sustainable Finance Framework for green eurobond issuances under the Medium-Term Euro Note (EMTN) issuance program.