Climate Risk Assessment using the Climabiz Tool

Piraeus Bank has developed the Climabiz Tool, to assess in monetary terms, the climate risk derived from the Bank’s business borrowers. It is centered around economic sectors that are material to the Bank in terms of loan exposure, and vulnerability to climate change. 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 °C, 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: is 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 of its business borrowers and supports their transition to a low carbon economy.

The economic sectors that that are most affected by the Physical Risk are: production of Energy (Hydro), accommodation, manufacture of food products, crop, and animal production, hunting and related service activities. While fishing and aquaculture, human health activities, activities of membership organizations, creative arts and entertainment activities show a moderate level of exposure to Physical Risk.

The sectors mostly affected by the transition (Transition Risk) to a low-carbon economy are: manufacture of other non-metallic mineral products, manufacture of basic metals, water transport, production of Energy (fossil fuel), manufacture of gas and distribution and steam and air conditioning supply. While air transport activities, mining of coal and lignite, manufacture of electrical equipment, water collection, treatment and supply, sewerage, waste collection, treatment and disposal activities, materials recovery, remediation activities and other waste management services as well as mining support service activities show a moderate level of exposure to Transition Risk.

The table below presents the percentage of physical risk and transition risk over total climate risk per each RCP climate scenario for the Bank’s corporate portfolio in 2022.

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.

Indicatively:

• For the RCP 2.6 the emissions allowance price used for the near-term period 2021-2030 climate risk calculation was 80€/t CO2
• For the RCP 4.5 the emissions allowance price used for the near-term period 2021-2030 Climate risk calculation was 73,50€/t CO2
• For the RCP 8.5 the emissions allowance price used for the period 2021-2030 climate risk calculation was 21.44€/tCO2

Piraeus pursues the enhancement of its climate-related and environmental due diligence processes, both at the inception of a client relationship and on an ongoing basis. The aim is to establish the necessary processes for the collection and verification of climate & environmental information needed to assess borrowers’ vulnerabilities to those risks, notably before concluding a loan agreement, in line with the Bank’s risk policies and procedures.