Threats arising from adverse environmental change (mainly climate change) and their long-term impact are analysed at mBank Group horizontally.
It implies that we review their impact on the bank’s operations across the broadest possible spectrum. In particular we refer it to the other risks categories, including reputational risk and credit risk.
Environmental change, fast technological development, and resulting legal changes increasingly impact more and more business sectors. As a result, many clients have to redirect or align the profile of their activity. Reorganisation or alignment of clients’ businesses affects their relationship with the Group, which is exposed to client transition risk. We regularly monitor regulatory changes which address climate change and we assess their potential impact on the Group.
We have analysed the risk of mBank’s adverse impact on the climate and the risk of adverse impact of the climate on the bank. Our analysis was prepared on the best effort basis and with the use of currently available interpretation of the new regulation. We have prepared these disclosures with use of the non-binding EU Guidelines on non-financial reporting: Supplement on reporting climate-related information (2019/C 209/01),
The functioning of the bank has no material direct impact on the climate. The bank’s industry does not generate significant greenhouse gas emissions. In the opinion of the bank, its impact is mainly indirect through financing provided to clients. The bank’s impact on the climate derives from decisions to grant financing to clients in different industries. We can reduce the impact mainly by reducing financing for clients in industries relevant to the EU climate policy.
According to the Supplement on reporting climate-related information, the risk of adverse impact of the climate on a company is either physical risk or transition risk.
Physical risks are risks to the company that arise from the physical effects of climate change, e.g., weather-related events or longer-term changes in the climate, such as rising sea levels. Thanks to mBank’s business model, where the key customer service channels are remote channels, i.e., online and mobile banking, mBank is exposed only to the minor extent to direct impact of physical risks, which are typical rather for the manufacturing companies. Energy blackouts constitute potential physical risk identified. At mBank we manage this risk with use of adequate technical solutions, meaning redundancy of power supply and generators. For data center objects, mBank applies requirements of at least TIER III level, ensuring constant energy delivery from two independent sources, also linked to the generator. We manage this risk at mBank according to the Business Continuity Management System.
The geographic location of our offices and branches in Poland, the Czech Republic and Slovakia, in a moderate climate, limits the physical risk to a service provider’s operations. This implies an insignificant risk to the functioning of the bank’s branches and head offices. However, physical risks may have an indirect impact on the bank by affecting our clients. In particular:
- flood, fires, and rising sea levels may hurt the real estate industry (retail and commercial mortgage loans),
- floods and heatwaves may hurt agriculture,
- low water levels in rivers may hurt the chemical industry.
Climate change results in extreme weather events, including increasingly frequent strong storms and intensive rainfalls. In 2020, we reviewed the potential impact of flood on mBank Group clients from the perspective of our portfolio structure. We analysed the impact on our profits and equity under a broad macroeconomic scenario including a sharp long-term economic recession caused by COVID-19 combined with additional events such as flooding. We tested the impact of flooding of the place of business of our major corporate clients as well as two residential areas financed by the mBank Group, whose location may potentially be at risk. The flooding of the place of business combined with the potential difficulties of insurance claims and falling real estate prices would affect the repayment pattern of loans. That, in turn, would require additional loan provisions and higher capital requirements.
According to our analysis, the bank is mainly exposed to transition risks. Our analysis uses the definition of transition risk provided in the Supplement on reporting climate-related information. According to the Supplement, transition risks are risks to the company that arise from the transition to a low-carbon and climate-resilient economy. mBank’s transition risks mainly include climate risks related to our clients, particularly the corporate segment that we finance mainly with loans, leasing, and debt origination and investment.
Companies in industries with a significant impact on the climate may carry higher credit risk, i.e.:
- the risk of loss caused by counterparty default and
- the risk of impairment of credit exposures due to the counterparty’s deteriorating financial position, for instance, driven by rising costs of mandatory environmental investments.
Risks related to financing of companies in industries relevant to the EU climate policy may involve mainly:
- higher impairment on loans and advances at amortised cost
- negative value change of loans and advances measured at fair value through profit or loss
- attrition of some income.
The table below presents transition risks identified at mBank:
| Risk category | Description | Risk category according to the EU guidelines |
|---|---|---|
| Technology risk | Occurs if a technology with a less damaging impact on the climate replaces a technology that is more damaging to the climate. This may be driven by new regulatory requirements and the need for additional investments or higher costs. | Policy risks Technology risks |
| High capex requirements | Industries relevant to the EU climate policy often require higher investments due to large scale and concentration of projects. With weaker momentum in the business cycle for such industry, that could generate negative cash flows. | Technology risks |
| More eco-friendly competitors | Occurs if the choices of customers shift towards products and services of competitors that are more environmentally-friendly. | Market risks |
| Client’s reputational risk | Companies perceived as climate adverse could face challenges in customer acquisition and retention, raising funding, and the cost of financing. | Market risks Legal risks |
| mBank’s reputational risk | A company financed by mBank could face protests and criticism from the media and NGOs; it may lack environmental certificates or policies and publish no environmental reports; it may have no carbon footprint reduction strategy. That would affect the reputation of the bank as its financial provider. | Reputational risks |
| CO2 allowance costs | Companies in industries contributing to climate change are often required to acquire greenhouse gas emission allowances. The required number of allowances, price trends in the allowance market, and the client’s approach to buying allowances could impact the client’s financial results. | Policy risks Technology risks |
Climate change provides not only risks but also opportunities for mBank. The key opportunity related to climate protection is the opportunity to expand the bank’s offer to address changing needs of clients. For example, we finance projects involving renewable energy sources. mBank’s credit policy of financing of renewable energy sources (RES), introduced in 2018, provides PLN 4 billion for wind farms and photovoltaics (the initial target was PLN 0.5 billion, raised to PLN 4 billion in 2020). We were one of the first banks to credit wind energy. We are currently seeing a growing role of photovoltaics in the energy mix, which can be followed by offshore wind energy. The decision to increase the financing limit for renewable energy projects results, inter alia, from high interest in financing and good loan repayments, as well as promising prospects for the industry. We work, among others, on projects based on PPA (Power Purchase Agreement) contracts. In this model, an investor planning to build a green source, most often wind, first signs a ten-year contract for the sale of energy, e.g. with a production company.
To align its product range with changing needs of clients, mLeasing launched financing of photovoltaic panels in 2019. mBank’s leasing subsidiary finances companies’ photovoltaic systems worth up to PLN 250 thousand with a capacity up to 50kW. The leasing period is up to 6 years and the client’s required contribution is at least 10% of the value of the project. In 2020, mLeasing completed 198 transactions with a total volume of PLN 20 million. Clients whose photovoltaic systems are financed by mLeasing have access to preferential financing conditions under the EBI Climate Action programme.
Since 2019, mBank private banking clients are the first in Poland to invest responsibly in line with the ESG standards. With mBank’s ESG Balanced Strategies, private banking clients can invest in portfolios of equity and debt from issuers with a positive ESG track record. ESG strategy assets accounted for 45% of assets in investment strategies with a comparable investment risk level as at December 31, 2020.
The bank may also gain access to new forms of funding, including green bonds and other ESG-related debt.