Climate Change : Taiwan Business Bank

Environment

Climate Change

TCFD Reports Climate Governance Framework TCFD Climate Risks and Opportunities Carbon Asset Risk Exposure Scenario Analysis Carbon Emissions of the investment and financing portfolio by asset Investment and Lending Portfolios Targets

Climate change risk is an important risk that businesses cannot afford to ignore. By publishing the TCFD report, TBB expects to facilitate understanding of the environmental, social, and governance importance of climate risk and call attention to the urgency of climate action.

In response to the risks and opportunities arising from extreme weathers, natural disasters, energy crises, and low carbon economy transition, TBB started following the FSB TCFD recommendations and the FSC Guidelines for Domestic Banks' Climate Risk Financial Disclosure to implement climate-related risk and opportunity management. March towards the Paris Agreement and the target of keeping the temperature increase to within 1.5°C above pre-industrial levels. Implement Science Based Targets (SBTs) with Net Zero by 2050 as the vision. Set practical net zero targets and work actively to reduce own carbon emissions and modify asset allocation in investing/financing activities. Exercise influence as a financial institution to increase climate resilience and join the effort to create a net zero future.

TBB_2023TCFD

TBB_2022TCFD

Climate Governance Framework

TBB's climate governance framework is illustrated below.

TCFD

This report is prepared in accordance with the Guidelines for Domestic Banks' Climate Risk Financial Disclosure released by the Financial Supervisory Commission ("FSC") and the Task Force on Climate-Related Financial Disclosures ("TCFD") created by the Financial Stability Board ("FSB"). It is also based on the Best Practices in Climate Risk Management by Domestic Banks published by the Bankers Association of The Republic of China as well as the four pillars, governance, strategy, risk management, and metrics and targets.

Aspects	Details
Governance	TBB expects to establish the Climate Risk Management Guidelines in 2023. The guidelines will define explicitly the roles and responsibilities of the board of directors, executive management, functional committees, and management departments. Climate-related risks and opportunities are considered in business development and risk management in a top-down manner while climate-related risks and opportunities are identified, assessed, and managed properly at all levels in a bottom-up manner. The board of directors of TBB is the highest level of governance for climate issues at TBB. The Sustainable Development Committee at the same level as the board of directors serves to actually oversees climate governance. The committee consists of the chairman, the president and three independent directors of TBB. The chairman of TBB acts as the chairman of the committee to supervise and verify regularly the sustainability strategies and results on major issues (including climate change) and to make decisions as needed. Regarding TBB's climate-related actions, three executive functional committees, the Risk Management Committee, the Business Management Committee, and the Environmental Sustainability Committee, coordinate execution of TBB's climate targets and monitor the progress of the performing units and management departments. Furthermore, the committees devise climate-related strategies and policies and report results regularly to the board of directors. TBB combines internal and external resources and technologies through internal and external training, collaboration with external consultants, and communication with other financial institutions. TBB strives to build up climate change knowledge throughout the bank and raise awareness of climate issues along the entire value chain. The mechanisms for compiling TBB's risk data and reporting internal risk data are the basis for climate governance and risk management. TBB has created a complete set of climate data and reporting mechanism. They are provided explicitly in internal operating procedures in order to help the board of directors and executive management obtain complete and correct information that provides an important basis for decision making and external communication.
Strategy	TBB has created the TBB Impact Pathway for Climate Change Risks and Opportunities based on the BCBS financial risks from climate risk drivers in order to monitor the transmission channels of climate-related risks and opportunities to TBB's risks and businesses. As the world moves towards net zero, carbon intensive industries will face the first wave of transition related policies and regulations as well as more severe challenges in fund utilization and market competition. TBB classifies printing and dyeing, leather manufacturing, paper manufacturing, oil and refinery, basic chemical materials manufacturing, manmade fibers, cement, steel, metal processing semiconductors and optoelectronic, power supply, and marine/air transport industries as high pollution/energy intensive industries. In the interest of avoiding more severe climate disasters, reducing GHG emissions, and keeping global temperatures within an adequate range, the 2050 net zero initiative has become the world's common goal. Building on Taiwan's Pathway to Net-Zero Emissions in 2050, TBB follows the action requirements provided explicitly on the MOF ESG Initiative Platform for State-owned Financial Institutions and sets carbon reduction targets and transition strategies. In addition, the Bank has completed signing up for the SBTi. To effectively monitor the risk and financial impacts of climate change, TBB follows the TCFD recommended disclosure framework for financial institutions and progresses from qualitative to quantitative analysis. Given identification of material climate risks, TBB, based on its financial structure, business correlation, and data availability, gives priority to offices, real estate collaterals, and lending transactions, and assess the potential impacts and challenges of climate change on business strategies by scenario analysis. In addition, TBB has devised and reviewed response strategies according to analysis results, and raised resilience against climate change.
Risk Management	To facilitate the design and execution of the internal control system, TBB follows a multi-level practice that establishes three lines of defense for internal control and clearly defined roles and responsibilities for each line. The practice helps the departments understand their roles in the overall risk (including climate-related risks) and control framework and strengthens communication and coordination in risk management and internal control related tasks in order to maintain an adequate and effective internal control system. TBB's own business operations and investment and financing activities are subject to various degrees and scopes of impact. To effectively understand the extent to which climate-related risks can impact TBB's operations, TBB establishes definitions for physical risk, transition risk and other climate risk factors and use them as a basis for classifying existing risks (credit, market, operational, and reputation risks), and build the definitions into the existing risk management framework to facilitate ongoing risk management, monitoring, and adaptation. In addition, risk response strategies are reviewed regularly to monitor their performance. In order to monitor the impact of climate change on TBB, the Risk Management Department has studied the Sixth Assessment Report (AR6) by the Intergovernmental Panel on Climate Change (IPCC) and the World Energy Outlook (WEO) and simulated climate issues under different climate scenarios. In addition, the economic and social impacts are also taken into consideration, and the risk and opportunity assessment matrix is used to assess the impacts on microeconomic and macroeconomic activities according to the type and characteristics of different climate issues. Correlations with existing traditional risks are established to assess climate-related risk and opportunity issues. The TBB board of directors approves the maximum limits for investment/financing in "high pollution/energy intensive industries" as management targets to monitor exposure in high climate sensitivity sectors. TBB will refine climate risk management on an ongoing basis and set stronger credit risk concentration limits, metrics, and differentiation thresholds.
Metrics and Targets	TBB started conducting ISO14064-1 greenhouse gas inventory and obtaining third party certification since 2018. Early inventories from 2018 to 2020 covered the head office building. To monitor carbon emissions across the entire bank, the scope of inventory was extended to cover all domestic locations, and overseas branches and subsidiaries from 2022. GHG inventory data over the years have revealed that purchased electricity is the main source of carbon dioxide in the operations. Therefore, a full inventory of old and energy intensive equipment is taken across all units in order to replace dated air conditioning equipment systematically year by year and improve energy efficiency. Furthermore, TBB actively follows the government’s 2050 net zero targets by taking the SBTi methodology and increasing use of renewable energies (green electricity supply and RECs), as well as setting 2040 net zero targets. TBB works in the banking sector and energy consumption derives mainly from electricity use in office buildings. Electricity use accounts for 91% or more of GHG emissions (Scope 1 + Scope 2). Therefore, Scope 2 GHG emissions were chosen to be the boundaries for implementation of internal carbon pricing. The implicit cost of operational carbon emissions is based on shadow prices. Air conditioning and lighting equipment, which are the two largest electricity users in the bank, are the first to be included in internal carbon pricing. In response to the Taiwan Roadmap to Net Zero by 2050, the Bank follows the Climate Change Response Act and sets the internal price for carbon at NT$300/tonne CO2e. When a purchase is to be made, the internal price for carbon will be used to assess carbon reduction provided by the equipment and to perform the cost and benefit analysis for replacement and calculate the payback period. The system is expected to optimize the purchase process and give priority to environmentally friendly products.. Financed carbon emissions to be amortized are calculated based on the Partnership for Carbon Accounting Financials (PCAF).TBB's short term carbon reduction targets were validated by SBTi in March 2024. TBB also promised to set a long term target to achieve net zero by 2050.

Climate Risks and Opportunities

The Risk And Opportunity Matrix consists of probability of incidence and degree of financial impact/benefit. Probability is divided into 5 levels (1 to 5) with a higher number indicating a higher probability; and the financial impact/benefit is also divided into 5 levels (1 to 5) with a higher number indicating a higher degree of impact. The product of probability and degree of financial impact/benefit provides a basis for ranking the materiality of an incident (high, medium, and low).

Identification of Climate Risk and Opportunities Issues

Matrix of Climate Change-related Risk Issues

Matrix of Climate Change-related Opportunity Issues

Carbon asset risk exposure

As the world moves towards net zero, carbon intensive industries will face the first wave of transition related policies and regulations as well as more severe challenges in fund utilization and market competition. TBB classifies printing and dyeing, leather manufacturing, paper manufacturing, oil and refinery, basic chemical materials manufacturing, manmade fibers, cement, steel, metal processing semiconductors and optoelectronic, power supply, and marine/air transport industries as high pollution/ energy intensive industries.

The outstanding balance of medium- and long-term loans to the high polluting/energy intensive industries was NT$79.9 billion in 2023, which accounted for 10.80% of the total outstanding balance of medium- and long-term loans. The investment is NT$26.261 billion or 18.29% of total investment and is classified as carbon asset exposure. The trend of the loan and investment balance and distribution for the Bank in the last three years are shown as follows:

Trend of balance of medium- and long-term loans to businesses

Scenario Analysis

To effectively monitor the risk and financial impacts of climate change, TBB follows the TCFD recommended disclosure framework for financial institutions and progresses from qualitative to quantitative analysis.

Transition risk climate scenario analysis

TBB considers including carbon fees as a factor in the internal credit rating assessment for borrowers, measuring changes in customers' default risk, and analyzing changes in expected losses from credit risk in the future.

Risk identification:
26 of the regulated businesses on the Mandatory Greenhouse Gas Reporting System of the Environmental Protection Administration of the Executive Yuan are borrowers at TBB.
Risk Analysis:
Carbon intensive industries will face increasingly restrictive low carbon regulations in the future, such as collection of carbon tax/fee and impact on operational and profit performance from production equipment replacement and other transition risks. They can lead to difficult debt recovery and have an impact on TBB's expected losses from credit risk.
Assumptions:
The assessment is based on the Network for Greening the Financial System (NGFS) model:
- 2050 net zero
- Delayed transition
- NCDs（Climate Change Response Act）
Assessment Results:
The degrees of financial impact of potential increases in credit losses are shown in the table below.

NGFS scenario (Financial impact amount: NT$ million)	2025	2030	2050
2050 net zero	Moderate (7.26)	Moderate (10.28)	Moderate (19.71)
Delayed transition	-	-	Moderate (18.84)
NCDs (Climate Change Response Act)	Mild (0.84)	Mild (0.84)	Mild (0.84)

Physical risk climate scenario analysis

For the purpose of understanding its exposure to physical risk in different regions, TBB performed physical risk scenario analysis on all business activities in 2021 based on the Taiwan Disaster Risk Map published by the NCDR climate change disaster risk mitigation platform. In order to refine the precision of climate risk analysis types, ranges, and hazards for an accurate overview of physical risk exposure, TBB adopted the UNEP FI recommended external climate risk database in 2022 and implemented climate physical risk database and damage models, which expanded the scope of physical risk quantification to cover all offices and real estate collaterals in Taiwan.

Risk identification:
- Offices: Conduct a physical risk analysis on all offices and own real estate in Taiwan.
- Real estate collaterals: Conduct a physical risk analysis on all domestic real estate collaterals.
Risk Analysis:
- Extreme heat, Coastal flooding, Land subsidence, River flooding, Extreme winds, Forest fire
Assumptions:
Enter parameters: Address of real estate, economic service life of building, material of building, and year of construction.
Analysis method:
- General Circulation Models：Choose IPCC AR5 CMIP5 and IPCC AR6 CMIP6 projection of global temperature increase.
- Regional Climate Models： Analyze regional climate models for specific physical risks and disasters.
Assessment Results:
1. Assessment Results:

2050 scenario	RCP8.5	RCP2.6
Financial impact (NT$ million)	42.86 Moderate	37.83 Moderate

2. 2. Real estate collaterals:

2050 scenario	RCP8.5	RCP2.6
Financial impact (NT$ million)	5,519.25 Extremely high	4,864.19 Extremely high
Change in LTV ratio (%)	0.40% Slight change	0.35% Slight change

Note: Real estate value impairment (%): based on UNEP FI recommended external climate risk database.

Overview of physical risk in offices and real estate collaterals in Taiwan under 2050 RCP8.5

Countermeasures for offices and buildings with potentially high physical risk :

Two offices located at Taichung are identified by the Bank with high physical risks, which will be possible business disruption caused by climate disasters (e.g. flooding disasters caused by extreme rainfall). However, they may only cause a mild financial impact, therefore, the Bank’s priority is to ensure the office’s operation as usual.

Short, and Medium-Long term Response Plan:
- Short term (within 2 years)
  - According to the notification of severe weather events (e.g. disastrous heavy rains, typhoons, etc.) from Central Weather Administration, the offices should immediately activate the response plan, including safety notifications, stacking sandbags, checking waterproof gates, and preparing water pumps, etc.
  - In order to reduce property losses, the supplementary measures will be adopted, such as temporarily closing underground parking lots and moving vehicles out of basements.
  - When the disaster loss reaches a certain amount or causes operation interruption, it will be handled in accordance with the Bank's “Disaster Emergency Response Countermeasures Manual”.
- Medium to long term (2-5 years)
  - Regularly conduct physical risk assessments of buildings and offices every year, and incorporate into the consideration of the facility repair plan.
  - Continuously collect the information about the type, frequency, and degree of financial impact of extreme weather events in buildings and offices, as a reference for building relocation.

Countermeasures for Real Estate Collaterals :

The Bank has formulated “Real estate location rating form” for the location of real estate collaterals, which is divided into four levels: A, B, C and D, and makes physical climate risk as one of change factors in the Bank's real estate location rating form.
For the collected collaterals, we consider the price impact factors of different regions during the appraisal process. Generally, real estate is less likely to be damaged or lost due to natural disasters caused by abnormal weather. For ecological reserves or environmental conservation area that are prone to the above-mentioned conditions, it has been stipulated in the Bank's “Guidelines for Real Estate Collateral Appraisal” and “Procedures for Real Estate Collateral Appraisal” that they shall not be taken as collateral.
For new applications, trends of physical risk in regions in which real estate collaterals are located are made one of the ESG risk factors. Those deemed a "high physical risk" are managed according to the Responsible Lending Guidelines and be required to undergo regular review of local climate disasters every year in order to monitor the physical risk exposure.
The physical risk information of the real estate collaterals location has been established in the Bank's collateral system. When conducting real estate appraisal operations, business units should introduce the physical risk information as a reference for the valuation of real estate collateral.

Carbon Emissions of the investment and financing portfolios

Carbon emissions from investment/financing activities are calculated according to the PCAF methodology to assess the potential impact of climate change risk on the investment/financing portfolios. TBB actively explores opportunities to reduce GHG emissions.

In 2023, total Scope 3 GHG emissions by the Bank was 1,571,133.96 tonne CO2e and total carbon footprint was 5.84 tonneCO2e/NT$ million investment or financing. The scope covered emissions from medium- and long-term loans, power generation project financing, commercial real estate loans, and equity and bond investment portfolios. The asset inventory categories will be expanded by the new PCAF methodology to better monitor overall carbon emissions from financial assets.

Carbon emissions from investment/financing portfolios

Item	2020	2021	2022	2023
Financed carbon emissions（tonneCO2e）	1,106,669.29	1,131,450.31	1,273,195.11	1,571,133.96
Carbon emission intensity (tonneCO2e/NT$mn investment or financing)	5.66	5.48	5.95	5.84
Data quality score	2.06	2.10	1.83	1.70
Total percentage out of investment/financing portfolios {Note 1}	12.45%	11.60%	11.69%	13.39%

Note 1: TBB sets carbon reduction targets based on the SBT approach and takes inventory of the asset categories that must be included. The scope covers TBB and its subsidiaries.

Note 2: Corrected data on financed carbon emissions for 2020, 2021, and 2022.

Financed carbon emissions by asset category

Financed carbon emissions by asset category （tonneCO2e）	2020	2021	2022	2023
Corporate loans	366,351.17	277,783.06	337,354.85	465,378.17
TWSE/TPEx-listed stocks and bond investment	678,213.95	804,296.16	869,638.53	1,047,261.23
Power generation project loans	13,089.69	12,401.39	11,884.66	38,262.13
Commercial real estate loans	40,014.48	38,969.70	54,317.07	20,232.44

Carbon emission intensity by asset category

Carbon emission intensity by asset category （tonneCO2e/NT$ million investment or financing）	2020	2021	2022	2023
Corporate loans	4.65	3.79	3.71	4.06
TWSE/TPEx-listed stock and bond investment	6.28	6.45	7.66	7.25
Power generation project loans	14.02	12.69	5.79	16.75
Commercial real estate loans	6.35	5.06	4.91	2.69

Data quality score by asset category

Data quality score by asset category	2020	2021	2022	2023
Corporate loans	1.97	1.98	2.17	2.05
TWSE/TPEx-listed stock investment	1.05	1.18	1.28	1.24
Corporate bonds	2.05	2.14	1.34	1.31
Power generation project loans	2.00	2.00	2.00	2.00
Commercial real estate loans	4.00	4.00	4.00	4.00

Financed carbon emission by industry

Financed carbon emission by industry （tonneCO2e）	2020	2021	2022	2023
Composite utilities	274,454.71	275,988.83	214,971.73	541,878.24
Building materials	294,972.66	402,737.92	538,039.51	446,569.31
Air transport	266,766.89	197,792.00	214,082.66	227,875.27
Electronic equipment, instruments and components	77,154.19	56,027.32	103,923.44	125,033.64
Semiconductor production	16,071.50	16,614.47	25,144.33	61,584.41
Other	124,145.17	130,918.69	110,831.71	109,698.54

Carbon emission intensity by industry

Carbon emission intensity by industry （tonneCO2e/NT$ million investment or financing）	2020	2021	2022	2023
Composite utilities	27.39	30.06	27.22	33.27
Building materials	19.21	23.71	28.04	17.60
Air transport	7.11	5.63	6.58	6.91
Electronic equipment, instruments and components	3.79	2.76	4.85	4.94
Semiconductor production	3.38	2.85	2.27	2.63
Other	1.08	1.12	0.91	0.81

Note: Calculation of financed carbon emission and emission intensity by industry does not cover "power generation project loans" or "commercial real estate loans".

Financed carbon emission by geographic region

Financed carbon emission by geographic region （tonneCO2e）	2020	2021	2022	2023
Taiwan	1,007,369.77	1,024,900.56	1,114,356.73	1,337,740.35
The United States	9,782.00	9,905.39	20,726.28	52,720.14
Australia	11,031.60	11,594.42	17,475.88	65,512.72
Japan	423.57	774.05	14,804.66	13,534.53
China	5,969.35	4,126.95	12,425.16	9,843.61
Other	18,988.83	28,777.85	27,204.37	36,288.06

Note: Calculation of financed carbon emissions and emission intensity by geographic regions does not cover "power generation project loans" or "commercial real estate loans".

Investment and Lending Portfolios Emissions Reduction Targets

Mid-term targets (2030)	Long-term targets (2050)
Financial emissions of investment and lending portfolios will keep global temperature increase to well-below 2°C.	Follow the "Taiwan 2050 Net-Zero Emission Pathway and Strategy" and move towards the net-zero emission goal.