ESG and Climate-related risk Management Policy

The Industrial Bank (IB) has incorporated the ESG and climate-related risk management into its overall risk management system, revised the Reporting Measures of Industrial Bank on Comprehensive Risk Management, and specified the duties of the Head Office’s Risk Management and Consumer Rights & Interests Protection Committee in the ESG and climate-related risk management. It has included the ESG and climate-related risks into the scope of reporting to the senior management and the Board of Directors, and explored to take into them account in the course of developing risk preferences. 

With reference to the suggestions proposed by the TCFD, IB paid close attention to the relevant impacts of climate risks, proactively evaluated the risks and opportunities of climate change, and integrated them with the current framework of risk management to regularly analyze, evaluate and formulate corresponding countermeasures.

Category of risks	Potential impacts
Physical climate risks	· Typhoon, drought, storm and other extreme weather events will damage the value of assets held by customers, causing the collateral to be damaged or devalued, or affect the supply chain, thus influencing the operations and profitability and viability of customers and resulting in the increase of default rates. · The rising of global temperatures and sea levels and the changing of climate conditions will affect the place where a company operates, cause extensive damage to physical assets and increase the costs from the impairment or early obsolescence and replacement of assets. · Extreme weathers will have a negative impact on the infrastructure, systems, processes and employees, disrupting the continuity of businesses.
Climate transformation risks	· Policy and law-related risks: Policies and regulatory measures that limit adverse impacts or promote adaptation or transformation will affect the profitability of carbon-intensive industries, and related assets may be stranded. · Technological innovation: Low-carbon technologies and products may replace the existing products and services, and increase the uncertainty of revenue and investment. · Market change: Climate change may trigger a shift in investors’ preferences and a decline in projected returns of carbon-intensive assets, exposing commercial banks to the risk of decreased valuations and increased investment volatility. · Reputation risk: If continuously providing financing to high pollution and energy-guzzling enterprises or holding a large amount of such assets, the reputation risk will be increased.
Relevant climate-related opportunities	· Product and service opportunities: The transformation of high-carbon industries and the development of low-carbon industries face large capital gaps, which will generate relevant demand for transformation finance; if innovative products and services related to green and transformation finance are developed to assist customers in green transformation, it will help increase business revenues through such products and services. · Market opportunities: The innovation and diversification of green finance products will contribute the company to expand emerging market opportunities and take the lead in the market; the improvement of environmental awareness among depositors and investors may increase their support to green finance businesses, which will promote the issuance of green/ESG-themed products. · Resource utilization efficiency: If a company can improve energy utilization efficiency, reduce water consumption and implement the digital transformation of businesses, it will cut the corresponding resource costs. · Energy source: If the renewable energy can be fully utilized, it will help reduce the dependence on fossil fuels and cut greenhouse gas emissions. · Climate resilience: It will improve the ability to cope with climate change, help the company manage risks more efficiently to seize opportunities and gain the recognition of stakeholders.

 

Since 2021, the Bank has carried out periodic climate risk stress tests to assess its resilience to transition risks under the goals of carbon peaking and carbon neutrality, voluntarily disclosed the results, and explored physical risk stress testing. In 2024, the Bank further expanded the industry coverage of the stress testing to include the upstream coal industry, in addition to the eight major carbon-intensive industries of power, steel, building materials, petrochemicals, chemicals, papermaking, aviation, and non-ferrous metal smelting. Meanwhile, by enriching stress scenarios and taking into account factors such as carbon emission pricing and energy consumption levels, the Bank assessed the impact on the repayment capacity of customers in carbon-intensive industries and analyzed subsequent effects on the quality of credit assets and capital adequacy. The stress testing was designed with three levels: mild, moderate, and severe, using the end of 2023 as the baseline, with the testing duration extending to 2030. Results indicate that if customers in the carbon-intensive industries fail to carry out low-carbon transition, their repayment capacities will decline to varying degrees under the stress scenarios, but the overall risk remains controllable. Under the severe scenario, by the end of 2030, the Bank’s capital adequacy ratio is projected to decline by approximately 0.44 percentage points, yet the capital adequacy indicators remain compliant with regulatory requirements across all scenarios.

Optimizing Control Requirements for carbon-intensive and high-risk industries

In 2024, the Bank developed the seventh edition of the Notice on Adjusting and Optimizing Control Requirements for Carbon-Intensive Industries. For nine key high-risk sectors, including coal, coal power, coal chemical, and petrochemical industries, the Bank continued to improve its control strategies and steadily advanced the approach of “reducing high risks and promoting green transition”, ensuring the optimization and stability of the carbon-intensive asset structure while strictly controlling new credit supplies to carbon-intensive and high-risk industries.

Formulation of ESG-related Credit Policies

The Industrial Bank (IB) implements differentiated ESG credit policies and overall risk control strategy in key industries and regions. By developing special ESG credit grant policies for 23 industries, such as the agriculture, forestry, thermal power, hydropower, nuclear power, PV power generation, chemical industry, coal chemistry, coal, mining, ship-making, textile, and sewage treatment, IB has evaluated the clients’ production process and capability of ESG risk management and green and low-carbon operation, actively guided the credit resources to flow into those business sectors that comply with the ESG requirements and feature low energy consumption, low emission, low pollution, high efficiency, and positive market prospects, so as to further enhance the refinement level of risk control policies and better serve the business development.
In terms of the content, IB focuses its ESG credit policies on the operation of emission reduction facilities of customers such as the flue gas desulfurization, industrial wastewater, sewage treatment and garbage treatment within its regional coverage, and timely prevents environmental risks caused by abnormal operation of emission reduction facilities and excessive sewage discharge. For enterprises that have many environmental violations or fail to meet the standards steadily, their existing financing limit will be gradually reduced or even removed. IB attaches great importance to the environmental risks triggered by heavy metal pollution, and strictly controls the credit access and financing of enterprises involved in the lead, cadmium, mercury, chromium and metalloid arsenic sectors.

ESG-related Credit Policies

Biodiversity Policy

Since 2021,IB has signed the Joint Declaration of the Banking Sector to Support Bio-diversity Conservation and the Global Joint Initiative on the Partnership of Bio-diversity and Finance, injecting the financial strength for ecological balance and global sustainable development.In November 2022, IB participated in the “2022 Annual Global Conference” on the Partnership of Biodiversity and Finance (PBF), and participated in finalizing the Working Guidelines for the Partnership of Biodiversity and Finance and the work plan for 2023 as one of the members of the PBF Executive Committee. At the same time, IB actively carried out research and product innovation related to biodiversity, and the “wetland carbon sink loan” was selected as a typical Chinese case in the Blue Book on the Partnership of Biodiversity and Finance and released during the second phase of the 15th Meeting of the Conference of the Parties to the Convention on Biological Diversity (COP15) held in Montreal.

The Bank has explicitly incorporated biodiversity protection into the overall credit policy and guided the entire Bank to increase support for key areas and key regions of ecological protection. It has actively supported major biodiversity protection projects, animal and plant resource protection, protection and restoration of rivers, lakes and wetlands, ecological environment restoration of mines, protection and restoration of the national ecological security shield, comprehensive management of key ecological areas, and other ecological protection and restoration projects. It has also continued to enhance the awareness of ecological protection in credit business, ensured that redlines for ecological conservation are not crossed, abided by the bottom line of environmental quality, resource utilization, eco-environmental access list and other requirements, paid close attention to the impact of project construction on ecological environment and biodiversity, continued to promote the low-carbon transition of the Bank’s asset portfolios and biodiversity protection, and mitigated environmentally sensitive risk exposure.

Embedded ESG in the whole process of Investment and financing credit business risk management

Relying on its rich practical experience as an Equator Bank, IB comprehensively applies the ESG-related risk assessment system to the process of investment, financing and credit in the three major business lines, namely, corporate finance, retail finance and interbank finance. According to the relevant risk assessment criteria, IB classifies its customers into four categories (Class A, Class B, Class C and Class D), adopts differentiated management strategies and integrates them into all links of the investment, financing and credit process, including due diligence, risk assessment, contract signing, financing issuance and duration management.
IB has formulated such systems as the Notice of the Industrial Bank on the Establishment of ESG Indicator System for Customers, the ESG-embedded Credit Process Scheme of the Industrial Bank for Corporate Finance Customers, the Notice of the Industrial Bank on Embedding ESG into the Credit Process for Small and Micro Enterprises, the ESG-embedded Credit Process Scheme of the Industrial Bank for Retail Credit Customers, the Notice of the Industrial Bank on the Issuance of ESG Indicator System for Interbank Customers, and the ESG-embedded Credit Process Scheme for Interbank Finance Customers.IB conducts targeted due diligence based on the ESG-related requirements to strengthen the collection and verification of basic information and data related to the ESG performance of customers, which covers 39 indicators such as energy consumption, water resource utilization, greenhouse gas emissions, corporate environmental credit evaluation, administrative penalties related to environmental protection, supplier management, customers’ complaints, employees’ social security data, debt repayment ability, information disclosure and negative news to ensure the authenticity, integrity and validity of the information. Meanwhile, IB formulates special measures and response plans for risk prevention and control, including but not limited to the following: Rectification of violations within a prescribed time limit, signing of special commitment letters, adjustment of credit plans, increase of capital ratios, enhancement of risk mitigation measures, suspension of newly added credit, and compression of stock businesses. In the process of examination and approval of credit, differential credit control shall be implemented.

Class A customers	Priority should be given to reviewing and approving credit applications used to support green, low-carbon and circular economy in terms of time or process.
Class B customers	Focus on, analyze and evaluate the potential risk of ESG, countermeasures and impacts.
Class C customers	Focus on and carefully evaluate the potential risks of ESG, response measures and impact, and actively seek appropriate ways to slow down the credit risk, including the above-mentioned risk mitigation measures.
Class D customers	In principle, new customers are forbidden to intervene, and stock customers are compressed and withdrawn in time. In the loan review process, it is necessary to review the implementation of ESG-related examination and approval requirements and the signing of legal documents.

Based on the ESG classification result, IB implements control measures for Class C and Class D customers and verifies the implementation of the environmental, social and governance risk control requirements in accordance with the notice of review and approval opinion. During the duration management, IB focuses on ESG risk monitoring and tracking management work, and conducts regular ESG assessments for Class C and Class D customers. What’s more, IB follows up the relevant management requirements in the notice of review and approval opinion and changes in ESG matters of customers, and strengthens its management reports. Risk control measures such as early warning, increased risk mitigation procedures and quota control will be taken against those customers who have violated the law and regulations but failed to actively make rectifications.

Climate Risk Management

In 2024, the Bank included requirements related to climate risk management in its credit policy, calling for efforts to properly carry out climate risk management, earnestly implement the Bank’s green credit policy requirements, continuously improve the ability and level of climate risk management of loans, focus on key industries and key regions, and actively guide credit resources to business areas with low energy consumption, low emission, low pollution, high efficiency and good market prospects. Meanwhile, the Bank strengthened communication and coordination with enterprises and competent government departments, paid close attention to controlling the total energy consumption and energy consumption intensity in the region, continued to track the pilot projects of ecological environment source prevention and control of energy-intensive projects with high emissions and environmental impact assessment of carbon emissions in key industries, analyzed the impact of carbon trading prices on customer assets, liabilities, profits, losses, etc., timely assessed customer climate risk, made plans in advance, and adjusted the credit structure in a steady and orderly manner.