Climate Risk Assessment using the Climabiz Tool

Piraeus Bank uses it propriety Climabiz Tool, to assess in monetary terms, the climate risk derived from the Bank’s business borrowers. The estimation of climate risk is based on the borrowers’ turnover and the general operational and technical features of their respective field of activity (NACE code).

To assess climate related risks, the Climabiz Tool uses climate scenarios, which simulate for different geographical areas of the country, both for the historical (period 1971-2000) and the future (period 2021-2050) climate. The Climabiz Tool is based on a set of RCPs, (three out of four pathways adopted by IPCC), each of them offering a plausible and internally consistent description of the future:

• RCP2.6 is a "very stringent" pathway and is likely to keep global temperature rise below 2°C by 2100
• The intermediate IPCC stabilization scenario RCP4.5, is more likely to result to a global temperature rise between 2 and 3 degrees Celsius, by 2100
• The high emission pathway, RCP8.5, is generally taken as the basis for the worst-case scenario (with a global mean temperature rise round 5°C).

Given the variety of different characteristics between economic sectors/sub-sectors, for the estimation of climate related risks of the economic sectors/sub sectors included in the Climabiz Tool, we have constructed Typical Units (TU). Typical Units correspond to representative production units of economic sectors, appropriately adapted to the Greek economy. In other words, the Typical Units are illustrations of an "average" Greek company operating in a specific economic sector / sub-sector.

Main climate risk categories assessed with Climabiz Tool

A. Physical Risk: Ιs the financial impact that a company may have due to the change of climatic conditions, owing to either long-term shifts in climate patterns (chronic) or to the frequency and magnitude of extreme events (acute).

• Chronic effects: The long-term effect of changes in parameters such as temperature, rainfall, wind speed, cloud cover, sunshine and wind speed affecting the production unit (e.g. agriculture, RES), product demand (e.g. ice cream), raw material prices, heating needs- cooling, attractiveness of tourist destinations etc.
• Acute effects: the following extreme events are taken into consideration: floods, heat waves, strong winds-storms-waves, forest fires and their impact on production (e.g. agriculture) and infrastructure.

B. Transition risk: incorporates the additional costs faced by a company in the context of its transition to a low-carbon economy. Transition risks are driven by reform of the regulatory framework (policy and legal), introduction of new low carbon technologies (technology), changes in market operating conditions, consumer preferences, etc.

Considering the large number of risk components during the climate risk calculation with the Climabiz tool, the Total Climate Risk of the business loan portfolio is estimated based on the following approach:

• The chronic and acute physical risks for a selected climate scenario are summed for the estimation of total physical risk.
• The transition risk is initially estimated as the minimum of (a) direct and indirect emissions cost and (b) low carbon emissions cost. Then it is adjusted based on the sector/sub-sector’s product elasticity and pass-through capability.
• The Total Climate Risk is estimated for each Typical Unit as the sum of Total Physical Risk and Adjusted Transition Risk.

Climate Risk Assessment of the Bank’s Business Borrowers

The Bank estimates through the Climabiz Tool, the climate related risks (both physical and transition) of its business borrowers (bottom-up approach) based on their general operational and technical features (i.e. field of activity), for those economic sectors considered to be mostly affected by climate change and translates climate change impact to monetary terms.

The calculation methodology is based on the utilization of three climatic Representative Concentration Pathways (RCP) scenarios of the IPCC (Intergovernmental Panel on Climate Change).

TThe table below presents the percentage of physical risk and transition risk over total climate risk per each (RCP) climate scenario for the Bank’s FinRep (category: Non-Financial Cooperations) corporate portfolio for 2023.

The key differences concerning the climate risk outputs between the climate scenarios are primarily attributed to the fluctuations of the transition risk components, with major driver the carbon emissions allowances prices. For the cost of direct and indirect emissions, three different prices of carbon emission allowances €/tCO2, for each of the periods 2021-2030 / 2031-2040 / 2041-2050 were used, per RCP climate scenario.

Piraeus seeks to improve its climate and environmental due diligence processes, both at the start of a customer relationship and on a regular basis. The aim is to establish the necessary procedures to collect and verify the climate and environmental information needed to assess the borrowers' vulnerability exposure to those risks, notably before entering into a loan agreement.