66. ESG risk management

The ESG risk (environmental, social and corporate governance) has been defined by the Group as a risk of negative financial consequences to the Group resulting from the current or future impact of ESG risk factors on customers and counterparties or the Group’s balance sheet items. ESG risks include environmental, social and corporate governance risks.

The objective of ESG risk management is to support the sustainable development and long-term value creation of the Group in line with the Bank’s Strategy by managing the impact of ESG factors in an integrated way.

The Group manages ESG risk as part of its management of other risks as, due to the nature of ESG risk, it is not a separate risk but a cross-cutting risk affecting the Bank’s individual risks, in particular credit risk. Management of the individual risks is the responsibility of the organizational units nominated by the Bank’s Management Board. The committees functioning in the Bank within the scope of their tasks and competences take decisions, issue recommendations and opinions on activities related to ESG risk. The Bank applies the principle of “double materiality” by taking into account the following perspective

• the impact of ESG factors on the Group’s operations, financial results and development;
• and the impact of the Group’s activities on society and the environment.

Financial, capital and strategic plans are reviewed and evaluated in terms of the level of risk generated and compliance with sustainable development taking into account ESG risks in the short, medium and long term.

The Group implements a plan to integrate ESG risks into the Group’s risk management system and, in accordance with the plan, defines ESG risk management processes in a comprehensive manner incorporating them into the existing risk management framework. The integration consists of adapting the existing methods of identification, measurement and control of individual risks, taking into account the cause and effect relationships between these risks and ESG factors.

One component of environmental risk management is a strategic ESG risk tolerance limit. A measure of tolerance for this risk is the ratio of the value of loans for customers in high-emission industries and the Bank’s total assets. In 2023, the share of loans to customers in carbon-intensive industries was 0.19% (with a Bank tolerance limit of ≤1.6%) compared to 0.38% at the end of 2022 (with a Bank tolerance limit of ≤0.8%). This limit is monitored on a quarterly basis and reported to the Bank’s Management Board. The Group decided to increase its financing in the district heating sector and to selectively finance energy security transactions (coal purchases) on a transitional basis, in view of the war in Ukraine and the increase in energy commodity prices and the need to secure coal supplies from alternative sources other than Russia, thus pursuing its social responsibility dimension.

The Group has developed principles for the classification of sustainability financing in the Bank Group, which define the manner in which products such as loans, advances and leasing products, among others, are linked to sustainability objectives. The principles define a product with a positive impact on the environment. This product is designed to finance investments that contribute to environmental objectives and have a measurable positive impact on the environment. These investments may relate to, among other things: improving energy efficiency, reducing greenhouse gas emissions or preventing waste generation. The objects of financing for a product with a positive environmental impact may include:

• renewable energy sources,
• clean transport,
• low-energy buildings,
• solutions that reduce the carbon footprint of a product or organisation or improve the energy efficiency of existing buildings.

In the Risk Management Area, the Group performs tasks to ensure compliance with the following external regulations:

In 2023, the Bank’s Group is for the first time required to report a key performance indicator, the Green Asset Ratio (GAR), which measures the percentage of the Bank Group’s assets that finance taxonomy-compliant (environmentally sustainable) business activities relative to the Bank Group’s total assets.

The criteria for an economic activity to be considered sustainable (taxonomy-aligned) are as follows:

1. contributes substantially to one or more of the six environmental objectives;
2. does not significantly harm any other environmental objectives;
3. is carried out in compliance with the minimum safeguards laid down in Article 18 of the Taxonomy Regulation;
4. meets the technical screening criteria described in the delegated regulations of the EU Taxonomy Regulation, i.e:
   1. Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives;
   2. Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities.

Technical screening criteria determine whether a Group-financed investment or business activity makes a significant contribution to one or more of the six environmental objectives and does not cause serious harm to any of the other environmental objectives. The technical screening criteria therefore set out the minimum requirements that the financed investment/business activity should meet in order to be considered environmentally sustainable. A tool to support the assessment of the fulfilment of the technical criteria of the EU Taxonomy are the taxonomy questionnaires developed based on the above-mentioned delegated regulations of the EU Taxonomy and implemented at the Bank’s Group. The taxonomy questionnaires are an integral part of the process of identifying/classifying sustainable assets. The data obtained with the taxonomy questionnaires form the basis for calculating the total green asset ratio (GAR).

Detailed information on the taxonomy disclosure is provided in the Statement on non-financial information, which is a part of the Report on activities of the PKO Bank Polski Group.

The Bank’s Group is required to provide information on environmental, social and corporate governance risks. The Bank’s Group analyses its loan portfolio with regard to the exposure of the Group’s exposures to the transition risk associated with the transition to a low-carbon and climate-resilient economy and to the impact of prolonged and violent physical phenomena associated with climate change.

The Group is currently working on determining the emission intensity of the banking portfolio. To this end, the Group has adopted the PCAF methodology, a single global standard for counting and reporting GHG emissions to ensure transparency and accountability. The PCAF methodology enables the quantification of GHG emissions associated with, among other factors, corporate loans, securities and mortgages.

As part of good market practice and increasing regulatory requirements, the Group has developed methodologies and tools for conducting climate stress tests, which represent an innovative approach in the banking industry for assessing corporate credit risk. The methodology is based on a modification of customers’ financial statements and takes into account environmental factors such as greenhouse gas (GHG) prices, capital expenditure, energy intensity of buildings and drought risk. The use of scenarios with time horizons of 1 year, 3 years and 30 years enables a thorough analysis of both short-term and long-term risks.

As part of these tasks, the Group is working to expand its IT systems for collecting, aggregating and managing sustainability data.

In terms of insurance business, the Group’s insurance companies manage ESG risks as part of their management of other types of risk as, due to its nature, the ESG risk is not a separate type of risk, but rather a cross-cutting one that affects the companies. In 2022, the Group’s insurance companies have adapted their internal regulations on ESG to the new legal requirements, in particular with respect to Commission Delegated Regulation (EU) 2021/1257 amending Delegated Regulations (EU) 2017/2358 and (EU) 2017/2359 as regards the integration of sustainability factors, risks and preferences into the product oversight and governance requirements for insurance undertakings and insurance distributors and into the rules on conduct of business and investment advice for insurance-based investment products and Commission Delegated Regulation (EU) 2021/1256 of 21 April 2021 amending Delegated Regulation (EU) 2015/35 as regards the integration of sustainability risks in the governance of insurance and reinsurance undertakings (Implementing Regulation for Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009). In 2023, the Group’s insurance companies operated in accordance with internal regulations adapted to the applicable legal requirements on ESG.