Global Citizenship Report 2017

Climate-Related Risk The numerous natural disasters around the world in 2017 — from wildfires to floods to hurricanes — led to widespread damage as well as economic and social costs. These natural disasters are stark reminders of the serious risks that climate change poses. As global temperatures rise, we are seeing rising sea levels, more extreme weather and growth in the frequency and severity of natural disasters. These changes are expected to affect nearly all sectors. As a financier of the global economy, we are keenly aware that climate change is a serious risk that affects many of our clients. In response, we are increasingly focused on how to assess the impacts of climate change on our portfolios. Climate Scenario Analysis Risk management is a core pillar of the Task Force on Climate- related Financial Disclosures (TCFD) recommendations. We have highlighted our thorough environmental and social risk manage- ment processes in this report and described how consideration of environmental and social issues, including climate change, are embedded in our decision-making around what to finance. We continue to enhance these processes to account for emerging risks, including climate-related risks, and will continue to transparently report on our ESRM efforts. Building on this work, we are partnering with other leading global and regional banks and the United Nations Environment Programme Finance Initiative (UNEP FI) to conduct climate scenario analysis to evaluate climate risks and opportunities under three different global warming scenarios: 1.5°C, 2°C and 4°C. As part of this pilot project, we are currently assessing both the potential physical risks of climate change and the transition risks that will arise from changing policies and tech- nologies for a segment of our energy and transport portfolios. We will use the learnings from this project to develop better tools, models and metrics to monitor and measure the impacts of climate change on our portfolio and adapt our Risk processes and business strategies as needed to ensure we are appropri- ately incorporating climate risks in our financing decisions. For further details on where content that directly relates to the TCFD recommendations can be found throughout the report, see the TCFD Index. Stranded Assets Analysis One important area of climate risk analysis is related to stranded asset risks, which is the potential for assets to lose value if they are deemed uneconomic because of a price on carbon or similar policy tool. Financial institutions are paying more attention to stranded asset risk, especially the potential for assets to lose value as a result of unburnable carbon. As the world transitions toward low-carbon solutions, fossil fuel industries may face lower earnings and increased costs. Clients in carbon-intensive sectors could receive downgraded credit ratings and become higher credit risks. To date through our own analysis we have found that larger companies would not be significantly affected in their ability to repay loans, but smaller service providers could be at risk if the price of oil continues to remain low and regulatory risks are not carefully managed. We expect issues regarding unburnable carbon and the related stranded assets to remain significant for our clients, especially in light of the Nationally Determined Contributions under the Paris Agreement, which provide clear signals about countries’ plans to combat climate change. In our ongoing assessment of risks related to climate change, we have identified the following estimated time- frames for potential impact. Risk Estimated Timeframe of Impact Likelihood Changes in precipitation extremes and droughts Unknown High Increase in tropical cyclones (hurricanes and typhoons) Immediate Virtually certain Stranded assets 3–5 years About as likely as not 58