68. 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

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 the tolerance of this risk is the value of loans to customers in carbon-intensive industries divided by the value of the gross business loan portfolio. In 2022, the share of loans to customers in carbon-intensive industries was 0.38% with a tolerance limit for the Bank and the Group set at≤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 develops standards for defining green loans to non-financial enterprises with environmental objectives beyond the adaptation/mitigation of climate change.

Within the Group, a „green credit product” means financing renewable energy sources, measures to improve energy efficiency, reduce pollution of the environment and over-use of natural resources, to combat climate change, and support the on-going activity of entities pursuing the objectives of sustainable development.

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

• Taxonomy (Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 including delegated regulations) – the Bank and Bank’s Group are engaged in a project to operationalize the technical criteria of the EU Taxonomy;
• Implementing Technical Standards – Commission Implementing Regulation (EU) 2022/2453 of 30 November 2022 amending the implementing technical standards laid down in Implementing Regulation (EU) 2021/637 as regards the disclosure of environmental, social and governance risks in accordance with Article 449a of Regulation (EU) No 575/2013 of 26 June 2013 on prudential requirements for credit institutions and investment firms amending Regulation (EU) No 648/2012.

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

With regard to the insurance business 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)