We combine climate change risk with traditional financial stress testing, with financial risk as the primary focus and climate change as the secondary focus, to assess the impact of extreme economic events and to consider the impact of climate change. Traditional financial stress testing includes the credit risk of the Company’s financing. In terms of the setting of stressful situations, we mainly considered possible negative situations in the future, dividing them into two types of stressful situations, minor and severe, according to their degree. The risk components (default rate, default loss rate and default risk amount) of each asset portfolio under mild and severe scenarios are estimated by reference to aggregate economic indicators such as economic growth rate and unemployment rate, and then the loss value is calculated. The probability of default (PD) and loss given default (LGD) are estimated using internal historical probability of default parameters and models.
Following rapid changes in international climate change policies, in order to evaluate the impact of potential risks associated with different low-carbon transition paths and to fulfill the TCFD objective of disclosing the financial impacts associated with climate change, Chailease Holdings has worked with external consultants to further develop a qualitative assessment of climate change risks. In addition to the qualitative projections, we conducted further scenario analysis to make more accurate quantitative projections. We assessed the potential impacts of climate change in different scenarios through situational analysis of organizational operations and supply chain at the Company.
Transitional risks are mainly based on the climate change scenarios published by the Network for Greening the Financial System (NGFS), a global network of central banks and financial regulators, and the World Energy Outlook 2022 published by the International Energy Agency (IEA).Physical risks were calculated by referring to the disaster risk map simulated by the Taiwan Climate Change Information and Adaptive Knowledge Platform Project (TCCIP) at the Ministry of Science and Technology in Taiwan.This map is primarily based on Assessment Report 5 (AR5) of the Intergovernmental Panel on Climate Change (IPCC) at the United Nations, where the RCPs (Representative Concentration Pathways) were used to analyze the potential for future flatland flooding and slope hazards in Taiwan.
Risks of Transformation－Supplier carbon cost shifting
Analysis purpose: As the government imposes a carbon fee in the future, suppliers may pass the fee on directly, resulting in higher raw material costs.
Objects analyzed: Key suppliers of solar modules and inverters for the Company’s energy procurement.
Analysis methods:
Background assumptions: Assuming that all Taiwanese companies will be subject to a carbon fee in the future, the fee will remain unchanged at NT$300 per year, and the Company’s annual capacity target for solar power plant installations will remain unchanged.
Step1. Projected changes in solar power raw material procurement costs based on estimated solar power construction costs for each scenario.
Step2. Estimated total greenhouse gas emissions for each scenario based on the amount purchased by suppliers
Step3. Calculate the carbon cost passed on by suppliers based on emissions and assess the impact on the Company.
Analysis results: In 2022, there were 13 key suppliers of solar modules and inverters for the Company’s energy procurement. According to the industry carbon emission coefficient, it is estimated that the carbon footprint of products provided by the suppliers was about 28,000 tons, and the carbon footprint of the raw materials in the same installation capacity may continue to decrease with technological developments due to improvements in the solar power process technology. The Company estimates that if the 2022 construction scale is continued, the carbon cost pass-through in 2030 and 2050 will be approximately NT$3.76 million to NT$5.79 million in each scenario.
Risks of Transformation－Carbon Emission Limit Exposure
Analysis purpose: Through the estimated carbon reduction path and carbon price in each scenario, and expected implementation schedule of the Company’s green power, we can estimate the difference between the future greenhouse gas emission limits and the carbon reduction targets in each scenario, so as to understand the possible impact of carbon emission limits faced by the Company.
Objects analyzed: All of the Company’s domestic and foreign locations
Analysis methods:
Background assumptions: Assume that carbon emission limits may be promoted in the future, and carbon rights must be purchased to offset the amount exceeding the target.
Step1. Estimated emission limits for each scenario based on our 2022 GHG emission data.
Step2. The difference is calculated based on the Company’s planned carbon reduction path and emission limits for each scenario.
Step3. Estimated impact fee for exceeding the limits based on situational carbon prices.
Analysis results: In 2022, the Company emitted approximately 28,235.98 metric tons of greenhouse gases. Based on the Company’s green power introduction plan and net-zero emission target, the estimated carbon rights expense is based on the carbon emission limits of each scenario. In Scenario 2, the exposure in 2030 is approximately NT$420,000; in Scenario 3, the 2030 exposure is approximately NT$19.43 million. There is no exposure in 2050 as the Company is assumed to have achieved its net zero emissions target.
Risks of Transformation－Corporate Financing Credit Carbon-risk Exposure
Goal of Analysis: As the European Union's Carbon Boundary Adjustment Mechanism (CBAM) will start imposing carbon tariffs in 2026, and the Climate Change Response Act in Taiwan is expected to introduce a carbon tax in 2024, companies will have to bear additional carbon costs, which may result in higher default rates. The level of risk faced by financiers can be assessed through scenario analysis.
Target of Analysis: Group Credit Facility for Companies in High Carbon Emission Industries
Analysis Method:
Background Assumptions: Companies take no action to reduce carbon emissions and maintain Base Year GHG emissions.
Step 1: The excess carbon emissions of each company are estimated by assuming that the carbon reduction path of each scenario is the future carbon emission allowance of a given company.
Step 2: The carbon emission costs to be borne by each company are calculated based on the expected carbon price for each scenario.
Step 3: The expected carbon emission cost of each company and the annual operating income thereof are analyzed to assess the impact on each credit customer.
Analysis Results: Inventory of the Company included investment and financial data (including equity investment, corporate bonds, general corporate credit, and auto loans) from Chailease Finance, FFTC, Chailease Auto, Chailease International Finance Corporation, Chailease Vietnam, etc. According to the five major high carbon emission industries identified by Chailease Holdings, a total of 1,325 companies met the criteria for analysis of the credit customers in 2022. The Exposure to Carbon- Related Assets of our corporate clients are mainly on the cement industries and steel industries. In Scenario 1, the cement industry is the key exposure industry, since credit customers of the Company in the cement and steel industries account for approximately 46.82% of the capital in the PRC. In Scenario 2 and Scenario 3, carbon prices began to increase rapidly due to policy changes in the PRC. Therefore, the Company Exposure to Carbon- Related Assets for the cement industry showed fluctuating growth following changes in carbon price and different carbon reduction scenarios.
The impact of carbon exposure on a company is classified into three levels: low, medium, and high according to the expected carbon emission costs and annual operating income of each company. In Scenario 1, the carbon reduction path is not demanding and the carbon price is relatively low, so all companies are in the low impact category. In Scenario 2, the carbon price in the PRC will increase significantly after 2030; and therefore, some companies start to experience medium and high impact. In the highly transformative scenario 3, due to the carbon reduction path and a significant increase in carbon price, nearly 40% of the high carbon emission companies will experience high impact in 2030, and 85% of the high carbon emission companies will experience high impact in 2050.
The Company will require that future corporate clients should prioritize assessment of the carbon intensity of their greenhouse gas emissions. High-carbon emitters will be required to propose reasonable carbon reduction plans. In the future, the Company will also leverage our influence on the existing asset portfolio to gradually assist high carbon emission companies to transition, save energy and reduce carbon emissions, so as to continuously reduce Financial Carbon Exposure to Carbon- Related Assets at the Company.
Physical Risk－Solar power plant flooding potential analysis
Analysis purpose: In response to the goal of energy transformation, the Company has built a number of solar power plants throughout Taiwan to supply clean energy. Solar power plants are one of the Company’s major assets. To avoid extreme weather impacts on critical assets, the Company uses scenario analysis to assess the risks to solar plant operations and supplier supplies. The scope of impact is identified in advance to reduce impact losses.
Objects analyzed: Suppliers of solar power plants and solar power supplies established by the Company throughout Taiwan
Analysis methods:
Background assumptions: Flooding disasters have a direct impact on ground-based solar plants, while rooftop solar plants are assumed to be unaffected. Risk of flooding could also cause disruptions in supplier supply.
Step1. Analysis of the sites of solar power plants built by the Company, the type of plants, and the types and locations of suppliers’ supplies.
Step2. According to the TCCIP’s disaster risk map, the risk of flooding for each solar power plant and supplier is identified with reference to the hazard and vulnerability of each village/town/city/area.
Step3. Performed exposure analysis of our solar power plants and suppliers. The disaster may cause damage to some of the panels and broken cables in the plant and estimate the possible maintenance costs. Disruptions in supplier supply lead to lack of immediate maintenance, affecting generation performance.
Analysis results: The Company has a total of 2,886 solar power plants, of which 429 are ground-based solar power plants. We analyzed the flooding risk of solar plants located in villages/towns/cities/districts under RCP 2.6 and RCP 8.5 scenarios, and the simulation data classified the flooding hazard and vulnerability into five levels, and the areas with hazard x vulnerability >= 20 were defined as high risk areas. After comparing with the Company’s photovoltaic sites, there are 57 power plants located in high-risk areas under the RCP8.5 scenario, with a total installation capacity of approximately 26,000kW and a total exposure value of approximately NT$1.17 billion. Under the RCP2.6 scenario, there is only one power plant in the high-risk area with a total installation capacity of approximately 136.5 kW and a total exposure value of approximately NT$6 million. A total of five suppliers were evaluated to be located in high-risk areas under the RCP8.5 scenario, accounting for approximately 7.17% of the total procurement value. No suppliers are located in high-risk areas under the RCP2.6 scenario. Suppliers are highly replaceable and can we immediately find alternative suppliers in case of a related climate disaster.
In order to reduce the impact of climate risk hazards, all site locations have been adjusted in advance to meet the safest and most flood-resistant engineering options to ensure that even under the most severe climate conditions risk control requirements can be met. Relevant evaluation criteria have been incorporated into the Company’s internal regulations. All sites located on hillsides must pass a soil and water conservation assessment and be reviewed by competent authorities before being built. Site surveys and engineering opinions are required before the construction of a project. The Board of Examiners shall examine the information obtained from the current survey documents and the disaster potential map of the National Science and Technology Center for Disaster Reduction to ensure that site operations will not be affected by abnormal weather.
However, considering that the occurrence of flooding/slope disasters may still cause damage to some panels of the power plant, broken cables and other impacts, which in turn generate related maintenance costs. The estimated impact of flooding risk under RCP8.5 scenario is approximately NT$13.4 million. The impact of flooding risk under RCP2.6 scenario is approximately NT$66,000. In addition, in order to effectively transfer the impact of climate change disaster risk, the Company has taken out product insurance for each power plant and will be compensated 80% of any losses caused by disasters.
Physical Risk－Collateral Flooding Potential Analysis
Analysis purpose: Evaluate potential impairment of Company assets related to financial collateral due to physical risks, which in turn results in a shortfall in the guarantee ratio, resulting in the Company’s financial exposure.
Objects analyzed: Financing of physical collateral.
Analysis methods:
Background assumptions: Assuming that physical risk may have a direct impact on asset values and financing customers are unable to make payments for specific reasons.
Step1. The address, collateral value and loan balance of the Company’s financing cases with physical collateral are summarized.
Step2. Based on TCCIP’s disaster risk map, the risk of flooding of each insured item is identified with reference to the hazard and vulnerability of each village/town/city/area.
Step3. Performing collateral exposure analysis and assessing the likelihood of asset impairment due to risk, and compiling statistics on cases where the balance of financing exceeds the value of collateral.
Analysis results: The Company has 30 financing cases with physical collaterals, and the total loan balance reached NT$1.89 billion in 2022. We analyzed the flooding risk of each collateral under RCP 2.6 and RCP 8.5 scenarios in various villages/towns/cities/areas. The simulations classified the hazard and vulnerability of flooding into five levels and estimated the asset impairment ratio based on the hazard x vulnerability level. A total of 21 loans under the RCP8.5 scenario were assessed to have insufficient guarantee ratio due to asset impairment, with the exposure amount accounting for approximately 33.17% of the total loan balance. Under the RCP2.6 scenario, there were 21 loans with insufficient guarantee ratio due to asset impairment, and the exposure amount accounted for approximately 28.58% of the total loan balance. The Company has incorporated a physical risk factor into its financing evaluation. If the real estate collateral is located in a disaster-prone area, the value of the collateral will be discounted or not even provided. The financial impact on customers and the related derivative risk will be evaluated when there is an actual significant loss of the subject matter or collateral due to a natural disaster.
