Environmental Risk Analysis in a commercial bank: Intesa Sanpaolo’s approach

Intesa Sanpaolo, a leading banking group in Italy in all the market segments, is aware of its significant impact on the social and environmental context, thus choosing to act not only on the basis of profit, but also with the aim of creating long-term value not only for the Bank’s

shareholder, but also for its employees, customers, the community as a whole and last but not least, the environment.

Given both the macroeconomic scenario and the Group’s risk profile, the Intesa Sanpaolo risk management framework aims to achieve a complete and consistent overview of risks, by continuously improving the assessment and representation of the risk level of the Group’s activities and fostering a culture of risk-awareness. Proper risk management and control are essential conditions to ensure reliable and sustainable creation of value and protect the Group’s financial soundness and reputation. Therefore, with specific reference to the management of ESG risks, the Bank’s approach has been developed within the following streams:

• Management of Intesa Sanpaolo’s direct exposure to ESG risks;

• Identification and evaluation of business related ESG risks;

• Evaluation of ESG linked business opportunities.

Intesa Sanpaolo considers environment and, more specifically, climate change as a fundamental part of a wider management model of social and environmental strategy. To this end the Bank has joined important international initiatives and standards such as the United Nations Global Compact, the Principles on Responsible Banking of the United Nations Environment Finance Initiative (UNEP FI), the TCFD recommendations and CDP, aimed at promoting dialogue among firms, international organizations and society in general and to pursue with respect for the environment. Moreover, the Bank has developed and issued specific internal policies in this area (Group’s “Rules for the environmental and energy policy”).

To address more specifically the management of its direct exposure and reduce its direct ecological footprint, Intesa Sanpaolo has developed a Climate Change Action Plan, applied technological innovations for the modernization of its buildings and introduced more energy-efficient systems, promoted the purchase of electricity from renewable sources and has developed mobility management initiatives that reduce emissions due to commuting and business meetings.

The identification and evaluation of business-related environmental risks at present is performed mainly through:

• Risk clearing activities established within Intesa Sanpaolo’s Risk Management Framework aimed at granting a qualitative evaluation of ESG risks related to transactions, loans and counterparties belonging to sensitive sectors (e.g. mining, power & utilities);

• The adoption of Equator Principles (EP) guidelines for the assessment of social and environmental risks for project finance;

• Credit risk models that include “social” and “environmental” information in the qualitative and quantitative components of the corporate rating model (as discussed in the following sections).

Risk clearing activities have a strong focus on evaluating environmental risks, currently dealing with:

Integration of Climate Change Risk within RAF and ESG Assessment in Credit Risk Models

• MSTs, as defined in the internal Guidelines for the Governance of the Group’s Most Significant Transactions;

• Credit transactions with corporate clients, within the decision-making autonomy of the parent company;

• New partnerships related to financial and non-financial initiatives;

• Suppliers selections.

The risk clearing activity includes the evaluation, in line with the EP guidelines, of the technical forms of project finance from US$10 million and project-related corporate loans from US$100 million.

The risk assessment is performed through a qualitative analysis of the operation and the counterparty, taking under considerations relevant items of the reputational dimensions.

Special attention is given to the evaluation of the counterparty’s ESG risk profiles. The analysis is carried out by means of specialized info providers, public data, information gathered by the business functions that eventually propose further insights. The methodology (qualitative metrics) is tailored on the type of operation (e.g., credit transactions vs suppliers’ selection).

The risk clearing structure issues an advisory opinion resulting from the risk assessment, which assigns to the operation/counterparty a risk class and contributes to the decision-making process, empowering the appropriate evaluation of this type of risks. The risk clearing activity is supported by the ongoing implementation of self-regulated policies for the assessment and management of the social and environmental risks in sensitive sectors.

In order to strengthen its management of ESG risks and to ensure a constant and precautionary monitoring of possible changes to national and European regulations, Intesa Sanpaolo is presently involved in a number of international industry working groups on climate change issues. Furthermore, international studies show that climate change may also be a business opportunity. As an example, in order to achieve the EU’s climate and energy targets for 2030, the European Commission’s Action Plan on Sustainable Finance estimates supplementary investment of 180 billion euros per year. To this end, Intesa Sanpaolo is active in assisting its customers committed to reducing their environmental impact with green products and services.

In light of the above, Intesa Sanpaolo issued its first Green Bond for 500 million euros in 2017 and among the objectives of the 2018-2021 Business Plan, it included the support to the production system with an environmental perspective, with a specific plafond of up to 5 billion euros, aimed at companies which adopt a circular economy model.

Finally, the current framework for the governance of ESG risks and opportunities will be further developed in line with Intesa Sanpaolo’s adhesion to TCFD and the ongoing EU regulatory developments in the field of sustainable finance and climate change risk. Key enhancements to be implemented will therefore include:

• Consolidation and mapping of ESG risks to properly enrich ESG information available on counterparties/transactions and development of a common infrastructure (data and tools), thus enabling and supporting reporting, strategic planning and decision-making processes;

• Widening of the scope of the ESG risk clearing activities and strengthening of climate change risk evaluation within the decision-making process;

• Further enhancement of the ESG governance framework (e.g. RAF, roles and responsibilities).