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.
Analysis results:
According to current government regulations, none of our suppliers is subject to carbon fees, so there is no risk of cost shifting due to the imposition of carbon fees. However, considering that the government could adopt a comprehensive carbon levy in the future, we identified a total of 18 key suppliers of modules and inverters for solar power plants procured by Chailease Energy in 2023 and estimate that carbon emissions of the products provided by the suppliers would be approximately 10,500 tons based on the industrial carbon emission coefficients. Due to the advancement of PV process technology, the carbon footprint of the raw materials for the same installation capacity could continue to decrease as technology develops. The company estimates that if the 2023 build-out scale is maintained, the carbon pass-through cost for each scenario in 2030 and 2050 will range from $1.24 million to $1.94 million.
Risks of Transformation－Corporate Financing Credit Carbon-risk Exposure
Analysis purpose: 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.
Objects analyzed: Group Credit Facility for Companies in High Carbon Emission Industries
Analysis methods:
Background assumptions: Companies take no action to reduce carbon emissions and maintain Base Year GHG emissions.
Analysis results:
Inventory of investment and financing data (including equity investment, corporate bonds, general corporate credit, and auto loans) of Chailease Finance, FFTC, Chailease Auto, Chailease International Finance Corporation, and Chailease Vietnam, subsidiaries of the Company. The total number of companies that meet the criteria for analysis is 1,262 according to the five major high-carbon emission industries identified by Chalease in 2023. The company’s corporate clients’ carbon exposure is mainly in the cement industry and the iron and steel industry, with the cement industry being the key exposure industry in scenario 1. As the company’s credit customers accounted for approximately 45.98% of the capital in China, in scenarios 2 and 3, due to policy changes in China, the carbon price began to grow rapidly, so the company’s exposure to the cement industry showed a significant growth in line with the changes in the carbon price and 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 25% of the high carbon emission companies will experience high impact in 2030, and 86% 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.
Target of Analysis: The solar power plants built by the Company throughout Taiwan, and the suppliers.
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.
Analysis results:
In 2023, the Company has a total of 482 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 172 power plants located in high-risk areas under the RCP8.5 scenario, with a total installation capacity of approximately 15,6400 kW and a total exposure value of approximately NT$7 billion. Under the RCP2.6 scenario, there is 3 power plants in the high-risk area with a total installation capacity of approximately 444.76 kW and a total exposure value of approximately NT$20.1 million. In order to ensure the supply of suppliers, the company also conducts risk impact assessments on suppliers. A total of 7 suppliers were evaluated to be located in high-risk areas under the RCP8.5 scenario, accounting for approximately 43.78% of the total procurement value. Only one supplier are located in high-risk areas under the RCP2.6 scenario, accounting for approximately 2.40% of the total procurement value. 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$71.47 million. The impact of flooding risk under RCP2.6 scenario is approximately NT$220,000. 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.
Target of Analysis: 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.
Analysis results:
The Company has 60 financing cases with physical collaterals, and the total loan balance reached NT$3.676 billion in 2023. We analyzed the flooding risk of each collateral under base year, RCP2.6 and RCP8.5 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.
Considering that the current valuation results of physical collateral have reflected the climate risk in the base period, cases in which the risk rating has not changed as a result of the simulation are deemed to have no collateral impairment due to climate shocks. A total of 39 loans under the RCP8.5 scenario were assessed to have insufficient guarantee ratio due to asset impairment, with the exposure amount accounting for approximately 4.07% of the total loan balance. Under the RCP2.6 scenario, there were 39 loans with insufficient guarantee ratio due to asset impairment, and the exposure amount accounted for approximately 3.12% 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.
