The World Economic Forum released its Global Risks Report In February 2024, which highlighted that environmental risks continue to dominate perceptions of current, short-term, and long-term risks. The report noted that two-thirds of respondents identified "extreme weather events" as the primary risk most likely to cause significant crises in 2024. Section 2.3 of the report, titled "A 3℃ world," indicates that under current climate warming trends, it is highly likely that the world will reach a climate tipping point within the next decade. This tipping point could trigger long-term, potentially irreversible, and self-sustaining changes in the Earth's systems. The threshold for this tipping point could occur at a global warming level of 1.5℃ or even before reaching that level. As a result, social and environmental risks in many economies will significantly increase. The immense impact and substantial infrastructure demands will exceed the capacities of some countries, threatening the most vulnerable populations.

As the threat of global climate change becomes increasingly evident, governments worldwide are actively formulating regulations, enhancing climate change mitigation efforts, and setting net-zero emission targets. Financial institutions, serving as intermediaries of capital, play a crucial role in steering sustainable development. Beyond reducing their own operational carbon footprints, they have a responsibility to promote the rational allocation of capital through financial tools and mechanisms, guiding businesses towards achieving low-carbon transitions.

KTB, in response to global climate action, signed the Task Force on Climate-related Financial Disclosures (TCFD) in July 2021. Following the TCFD framework, KTB made its first related disclosures in its 2021 sustainability report and has continued to enhance its understanding and management of the financial impacts of climate risks each year. In 2022, KTB implemented and deepened its climate risk management and information transparency following the "2022 Climate Change Scenario Analysis for Domestic Banks" issued by Taiwanese competent authorities. In 2023, the Board of Directors approved the "King's Town Bank Climate Risk Management Guidelines" to enhance the Company's assessment of potential climate change risks and opportunities. This development includes measures for mitigating and adapting to climate risks, thereby improving the Company's capacity for climate change risk management.

Climate Risk Transmission Pathway

Strategy and Risk Management

KTB's climate-related management strategy mainly focuses on three aspects, which is taken as the direction for optimization year-by-year:
․Manage climate-related risks, including physical and transition risks
․Manage the impact of the Company's operations on the climate
․Support customers in their transition to a low-carbon economy with financing or investment products

Regarding climate risk management, we believe that climate-related risks are not standalone risk categories but rather impact financial institutions directly or indirectly through transmission to individual and macroeconomic levels. This exacerbates traditional financial risks such as credit risk, market risk, operational risk, and others.

Identification and Management Process for Climate Risks and Opportunities

In order to comprehend the impacts and effects of climate change on the Company, the Board of Directors serves as the highest decision making body for the Company's climate risk management framework. It determines comprehensive climate risk management guidelines and major decisions based on overall operational strategies and business environment assessments. Furthermore, within the ESG Team, a Climate Action Team has been formed to identify and evaluate the risks and opportunities associated with climate change. The Team also aids in the development of quantitative methods and indicators, as well as the implementation of effective management measures. Regular reports on climate-related matters are submitted to the Risk Management Committee, which is responsible for overseeing the comprehensive framework and execution of the climate risk management mechanism.

The Company follows the framework suggested by the Task Force on Climate-related Financial Disclosures (TCFD), identifying a total of 12 risks and 5 opportunities associated with our business. Each business unit evaluates the potential impact, likelihood, and timing of climate risks and opportunities on their operations. Then, the members of the Climate Action Team assesses the potential financial implications and creates a matrix depicting the significance of climate-related risks and opportunities for the Company.

Based on the assessment of probability and impact, KTB has identified R4, R9, and R10 as relatively significant. For significant climate-related risks, the Company has implemented the following risk management measures:

Based on the assessment of probability and impact, KTB has identified O3, O4, and O5 as relatively significant. For significant climate-related opportunities, the Company has formulated following action measures:

Assessing Strategy Resilience through Scenario Analysis

KTB follows Taiwan's regulatory framework "Scenario Analysis of Climate Changes by Domestic Banks in 2022," based on the scenario framework provided by the Network for Greening the Financial System (NGFS) in 2021. The system selects Net Zero 2050, Delayed Transition, and Current Policies as the main scenario factors for transition scenarios. These are aligned with the Representative Concentration Pathways (RCPs) from the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5) to identify physical risk factors. This integrated approach strengthens climate risk management and enhances transparency in information disclosure.

Scenario Analysis Result

Under the above climate scenario architecture, we used post-pressurization loss change circumstance of the credit risk parameters i.e. Probability of Default (PD) and Loss Given Default (LGD) evaluating domestic and foreign credit, domestic foreign-currency securities and equity investment of KTB, and demonstrated the evaluation result using capital at risk, which is calculated by dividing the expected loss amount by the net value of the base year.

General Corporate Credit Business
The scenario analysis results for general corporate credit are similar to the overall performance. By 2050, the capital at risk for general corporate credit business is higher across all scenarios compared to 2030, especially in Scenario 2. Demonstrate that by 2050, under a disorderly transition, higher transition risks will be faced simultaneously with physical risks.

Overview
Overall, the expected losses in 2050 are higher than those in 2030 across all scenarios, indicating that the overall climate risk intensifies over time. Comparing the differences between various scenarios, it can be observed that the expected losses in the no-policy scenario are lower in both 2030 and 2050. However, the expected losses in 2050 are slightly higher than those in 2030, mainly due to the greater impact of physical risks.

Individual Credit Business

In 2030, Scenario 2 had the highest value of capital at risk among the six scenarios. This is mainly due to that both Scenario I and Scenario II have transition action, but in Scenario II, it is assumed that relatively active action begins from 2030, and the impact of policy change on overall economy will always be the maximum during 5-10 years from the beginning of transition, and then decreased year by year, besides, the more active the action, the greater impact on overall economy. And also for this reason, the individual credit business is easy to suffer from a higher credit risk under the condition of low economic growth rate and high unemployment rate.

Investment business for non-transaction purpose

In 2050, the Value of capital at risk in Scenario 2 is the highest among the six scenarios, mainly reflecting the significant transition risks brought about by rapid policy adjustments in the short term.

Physical Risk Analysis

The Value of Real Estate Collateral Has Decreased as a Result of Flooding Caused by Heavy Rainfall

KTB primarily generates revenue from credit business, with real estate often used as collateral. Climate change has increased the frequency and intensity of extreme weather events, potentially reducing the value of real estate collateral associated with credit business. As a result, banks face an elevated credit risk. Consequently, KTB has recognized the depreciation of real estate collateral as a significant climate risk factor.

KTB analyzes the real estate collateral in Taiwan using climate risk analysis data and examines the distribution of risk levels, potential impairment amounts, and the capacity to withstand in the areas where the collateral is located in 2050, which was conducted under two scenarios of IPCC RCP 2.6 and 8.5.

Under scenarios RCP 2.6 and RCP 8.5, collateral tends to exhibit moderate to mild risk. Observing collateral located in "significant" risk areas, potential impairment amounts to approximately 14%, indicating that tail risks are also within manageable limits. The change in loan-to-value (LTV) ratio from approximately 55% to around 72% reflects an increased risk tolerance for credit cases using real estate as collateral across different scenarios. The assessment indicates a moderate financial impact from physical risks on this business.

Heavy rainfall and flooding have led to impairment of the value of owned operational sites

KTB's another major revenue source is related banking operations. If operational sites are flooded due to extreme weather conditions, it could result in business interruptions, asset and equipment write-offs, and potential impairment of owned asset values. This in turn increases operational risks for the bank. Therefore, KTB considers the depreciation losses from flooded operational sites as one of the significant climate risk factors.

KTB utilizes a climate risk analysis database to analyze all owned operational sites. It examines the risk levels, potential impairment amounts, and resilience of these sites under the IPCC RCP 2.6 and RCP 8.5 scenarios projected for the year 2050.

Under both RCP 2.6 and RCP 8.5 scenarios, KTB's operational sites are predominantly located in moderate to low-risk areas. The potential impairment amounts of owned buildings, measured as a percentage of net worth, are 0.1045% and 0.1046% respectively. This assessment indicates a low financial impact from physical risks on the Bank's owned fixed assets.

Transition Risk Analysis

The implementation of the carbon pricing system has led to increased costs for businesses

In February 2023, Taiwan released the "Climate Change Response Act," and announced for the first time that starting in 2024, carbon fees will be imposed on carbon emitters with annual emissions exceeding 25,000 metric tons of carbon dioxide equivalent. In addition to the costs of carbon taxes/fees, businesses must also comply with low-carbon transformation regulations. This requires making adjustments to production processes, supply chain management, or product design, which leads to increased expenses. As a result, the company's profitability is affected, and it may also impact the assessment of the company's repayment ability and the potential increase in credit risk by banks. Therefore, KTB has recognized the carbon pricing system as a significant climate risk factor.

Based on the NGFS climate change scenario framework, KTB analyzed the distribution of risk levels and the resilience of its domestic credit business in response to an orderly transition and a disordered transition in 2030 and 2050. The analysis was conducted under two scenarios: Net Zero 2050 (which involves an immediate and orderly transition to achieve net zero emissions by 2050) and Delayed Transition (where the transition is postponed until 2030, but the Paris Agreement goals are still achieved by 2050).

KTB categorized the transition risk of its domestic credit business primarily as Level 1 - "Mild," accounting for approximately 77.14%. If we analyze the changes in expected credit losses and capital at risk under scenarios of orderly and disordered transition, and further assess the risk tolerance for 2030 and 2050, the results show that the financial impact of transition risks on this business is low.

High-carbon emission industries and enterprises

Taiwan is scheduled to start implementing carbon fees from 2024, officially entering the era of pricing carbon emissions. In response to this policy, KTB has considered that the credit recipients are primarily domestic enterprises. Therefore, we have referred to the "Regulations for Gas Emission Inventory Registration and Inspection Management" and have classified the power generation industry, steel industry, petroleum refining industry, cement industry, semiconductor industry, and thin-film transistor liquid crystal display industry as "high carbon emission industries." In addition, we are tracking the total of 25,000 metric tons of carbon dioxide equivalent in direct emissions and indirect emissions from electricity for credit recipients. This is to enhance monitoring and control of transition risks under the carbon pricing system.

As of the end of 2023, there are a total of seven credit recipients in the aforementioned category of KTB. Based on the methodology of the climate change competent authority, an analysis was conducted to evaluate the performance of value of capital at risk in 2030 and 2050. The analysis considered regulatory changes, the impact of natural disasters, and both orderly and disordered transitions. The results are as follows:

Scenario Analysis of High Credit Concentration Industries

KTB primarily relies on credit business as its revenue source. To manage climate-related risks arising from industry concentration, industries with loan proportions exceeding 8% are further screened for analysis. The industries with concentration exceeding 8% at KTB are financial services and real estate development. The value of capital at risk performances in various scenarios for the years 2030 and 2050 are as follows:

Climate-Related Indicators and Targets

KTB implemented the ISO 50001 Energy Management System in 2018 and the ISO 14064-1 Greenhouse Gas Inventory in 2022. In line with the global objective of achieving net-zero emissions, KTB has integrated greenhouse gas emissions as a crucial climate-related metric and goal. For further information, please refer to 4.3 Operating Environment Sustainability.