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.

 

IB actively studied and explored the climate stress testing, and voluntarily disclosed the testing results. Based on the previous year’s climate stress testing in the three industries of thermal power, steel and cement, the testing this year was extended to eight high-carbon industries, including power, steel, building materials (including cement), non-ferrous metal smelting, petrochemicals, chemicals, aviation and papermaking, to evaluate potential impacts of the transformation of the carbon peaking and carbon neutrality goals on the quality of IB’s credit assets and capital adequacy. The testing was designed three stress scenarios——light stress, medium stress, and serious stress——for a term of 9 years with the end of 2021 as the base period, to quantitatively evaluate the impact of rising carbon emission costs on the repayment capacity of customers in high-carbon industries. The results show that if the customers in above high-carbon industries do not carry out low-carbon transformation, their repayment capacity in stress scenarios will be undermined to varying degrees. However, due to the low proportion of loans, the impact on the quality of IB’s overall credit assets will be limited, and the risk will be generally controllable. Because IB’s provisions were relatively sufficient, during the base period of the testing, to fully cover the new non-performing loans in stress scenarios without the need for additional provisions, its capital adequacy ratio remained unchanged under light, medium, and serious stress scenarios.

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 Industrial Bank (IB) has issued the Circular on Strengthening Biodiversity Conservation, which clearly identifies biodiversity conservation as a significant part of sustainable development strategy and sets out specific requirements for financial support measures, making it the first domestic financial institution to formulate and launch a biodiversity conservation program.
IB explicitly requires integration of the sustainable development concept into its business, investment and financing activities, formulates a bank-wide biodiversity conservation strategy, establishes and improves its eco-friendly credit policies, strengthen the biodiversity risk management, and actively explores biodiversity conservation and mitigation measures as well as stress tests. At the same time, it improves the financial service capacity for biodiversity conservation, develops and upgrades such financial products and services, enhances its professional capacity, and discloses the biodiversity information.At the same time, it is clearly pointed out in the Credit Policy of the Industrial Bank (2023) to promote biodiversity conservation.

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

IB has incorporated the relevant requirements of climate risk management into the Credit Policy of the Industrial Bank (2023). By implementing the requirements of green credit policy, it continuously improves the ability and level of climate risk management in credit grants and actively guides credit resources to invest in business fields with low energy consumption, low emission, low pollution, high efficiency and promising market prospects; IB also pays close attention to the implementation of the goal of controlling both total amount and intensity of local energy consumption, continuously tracks the pilot situation of the source prevention and control of ecological environment in energy-intensive and high-emission projects and the environmental impact assessment of carbon emissions in key industries, analyzes the impact of carbon trading prices on customers’ assets, liabilities, profits and losses, timely assesses climate risks of customers, and plans ahead to steadily and orderly adjust the credit structure.