Approach to climate risk management

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The KGHM Polska Miedź S.A. Group, as an organization aware of the impact of climate change on business activity, has fully integrated the Climate Risk Management process with the Corporate Risk Management Process of the KGHM Polska Miedź S.A. Group. These measures reflected the Company’s pursuit of operational excellence and the mission to act in accordance with the principles of sustainable business. As a result of this work, KGHM identified a new category: climate risk, with importance equivalent to other main risk categories, i.e. value chain, technological, external, internal and market risk.

The critical stages in the recognition of climate risks are the first stage (scenario analyses as part of Context Definition) and the second stage (taxonomy of climate risk as part of Identification and Evaluation). The remaining stages are consistent with the general corporate risk management process in the KGHM Polska Miedź S.A. Group.

The goals of Corporate Risk Management in the KGHM Polska Miedź S.A. Group are consistent with the adopted Strategy of the KGHM Polska Miedź S.A. Group. They are shaped by global megatrends and determine the environmental challenges faced by the KGHM Polska Miedź S.A. Group. The Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040 identified, among others, the climate objectives related to KGHM Polska Miedź S.A.’s emissions reduction (by 30% assuming reduction of Scope 2 indirect emissions and a gradual reduction of Scope 1 direct emissions by 2030 and achieving climate neutrality by 2050), which are consistent with the Climate Policy of KGHM Polska Miedź S.A.

Over the next ten or so months, KGHM Polska Miedź S.A. plans to introduce a number of organizational and process changes conforming to the Recommendations of the TCFD (Task Force on Climate-Related Financial Disclosures), among others in areas pertaining to corporate governance, strategic management, risk management and in respect to measures and objectives.

Scenario analyses in climate risks

In the first step of the risk management process (Definition Context), KGHM considered climate change by performing a scenario analysis, based on recognized reports of the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA). The above analysis is currently conducted on the basis of 5 baseline scenarios: Stated Policies Scenario (STEPS), Sustainable Development Scenario (SDS), Net Zero Emissions by 2050 (NZE2050), RCP4.5 and RCP8.5. In the scenario analysis, the assumptions are considered in three time horizons: short term (2023-2025), medium term (2030), and long term (2050), under a number of assumptions:

for scenarios examining transition-related risks, in terms of the implementation of the adopted climate policy and the resulting changes in parameters relevant from KGHM’s perspective: e.g. prices of emission allowances, energy consumption, changes in demand for copper,
for physical risk scenarios, the starting point for the analysis are the levels of greenhouse gas concentrations in the atmosphere and the resulting changes in the Earth’s temperature and their consequences.

Ultimately, KGHM Polska Miedź S.A. will work to develop its own scenarios as the basis for analysing the impact of climate change on the organisation. This way it will obtain the most suitable, tailored approach, which will constitute the basis for making business decisions regarding the assessment of the organization’s resilience to potential climate change.

The above analysis lays down the critical foundation for the identification and assessment of climate risks in the second stage of the process. According to the accepted classification of the climate risk category, the risks are divided into the following subcategories:

physical, which includes chronic and acute risks,
transition-related, which includes regulatory, reputation, market and technological risks.

Impact of climate change on KGHM Polska Miedź S.A.

Below we present a description of the identified key risks in the climate risk category associated with the adverse impact of climate change on the activities of KGHM Polska Miedź S.A.:

Category – Climate risks

Risk and description of risk factors	Mitigation
Acute physical risk related to sudden weather events resulting from climate change. In the corporate risk management process (which includes analysis of physical scenarios – medium and high emission), the following key factors have been identified that may cause materialization of acute physical risk: accumulated dry days heatwaves heavy rains Materialization of this risk may lead, among other things, to restriction of operations due to infrastructure damages, increase in costs, interruption of the supply chain, logistical disruptions, interruptions in the supply of utilities, limited access to water and increased consumption of water. The consequences of such materialization are examined for the individual elements of the Parent Entity’s value chain.	Appointment of task and expert teams in the area of counteracting the effects of the materialized extreme weather events on business continuity. Preventive management of key infrastructure elements affecting production continuity and application of crisis response procedures. Actively seeking technical and technological solutions that would limit the adverse impact of operations on climate. Application of solutions counteracting the effects of climate hazards using neutral measures and by using modern technology. The on-going monitoring of microclimate parameters and the introduction of remote control and visualisation systems and monitoring in working areas subject to particularly unfavourable climatic parameters.
Chronic physical risk related to permanent changes in weather patterns resulting from climate change. In the corporate risk management process (which includes analysis of physical scenarios – medium and high emission), the following key factors have been identified that may cause materialization of chronic physical risk: temperature (warm/cool) average temperature change of wind intensity Materialization of this risk may lead, among other things, to changes in the conditions in which the operations must be conducted, interruption of business continuity of the core production business, changes in the onerousness of work, power outages and higher consumption of energy for cooling processes. The consequences of such materialization may be presented for the individual elements of the Parent Entity’s value chain. Taking the above factors into account, KGHM also recognizes the opportunity associated with investments in its own renewable energy sources, which may reduce production costs and ensure business continuity while reducing greenhouse gas emissions.	Systematic limitation of energy consumption under the implemented ISO 50001 compliant Energy Management System and Energy Savings Program. Planned increase in the efficiency and flexibility of the KGHM Group in terms of its Polish and international assets, among others by partially satisfying the needs for electricity from its own sources as well as from renewable energy sources (“RES”) by the end of 2030. Development of own zero- and low-emission sources in the short and medium term including construction and acquisition of photovoltaic and wind power plants, supplemented in the long term by the use of small modular reactors (SMR). Diversification and efforts towards sustainable development through building own power capacity from low-emission sources is one of the main Pillars of the newly-adopted Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040, and one of its elements is for KGHM Polska Miedź S.A. to achieve the position of one of the leading producers of environmentallyfriendly electricity supporting Poland’s energy transition. Efficient risk management system for long-term/strategic risk, encompassing also climate risk management allowing for risk categorisation, identification, assessment and management as well as plans for its mitigation.

Risk and description of risk factors

Mitigation

Acute physical risk related to sudden weather events resulting from climate change.

In the corporate risk management process (which includes analysis of physical scenarios – medium and high emission), the following key factors have been identified that may cause materialization of acute physical risk:

accumulated dry days
heatwaves
heavy rains

Materialization of this risk may lead, among other things, to restriction of operations due to infrastructure damages, increase in costs, interruption of the supply chain, logistical disruptions, interruptions in the supply of utilities, limited access to water and increased consumption of water. The consequences of such materialization are examined for the individual elements of the Parent Entity’s value chain.

Appointment of task and expert teams in the area of counteracting the effects of the materialized extreme weather events on business continuity.

Preventive management of key infrastructure elements affecting production continuity and application of crisis response procedures.

Actively seeking technical and technological solutions that would limit the adverse impact of operations on climate.

Application of solutions counteracting the effects of climate hazards using neutral measures and by using modern technology.

The on-going monitoring of microclimate parameters and the introduction of remote control and visualisation systems and monitoring in working areas subject to particularly unfavourable climatic parameters.

Chronic physical risk related to permanent changes in weather patterns resulting from climate change.

temperature (warm/cool)
average temperature
change of wind intensity

Materialization of this risk may lead, among other things, to changes in the conditions in which the operations must be conducted, interruption of business continuity of the core production business, changes in the onerousness of work, power outages and higher consumption of energy for cooling processes. The consequences of such materialization may be presented for the individual elements of the Parent Entity’s value chain. Taking the above factors into account, KGHM also recognizes the opportunity associated with investments in its own renewable energy sources, which may reduce production costs and ensure business continuity while reducing greenhouse gas emissions.

Systematic limitation of energy consumption under the implemented ISO 50001 compliant Energy Management System and Energy Savings Program. Planned increase in the efficiency and flexibility of the KGHM Group in terms of its Polish and international assets, among others by partially satisfying the needs for electricity from its own sources as well as from renewable energy sources (“RES”) by the end of 2030.

Development of own zero- and low-emission sources in the short and medium term including construction and acquisition of photovoltaic and wind power plants, supplemented in the long term by the use of small modular reactors (SMR).

Diversification and efforts towards sustainable development through building own power capacity from low-emission sources is one of the main Pillars of the newly-adopted Strategy of the KGHM Polska Miedź S.A. Group to the year 2030 with an outlook to 2040, and one of its elements is for KGHM Polska Miedź S.A. to achieve the position of one of the leading producers of environmentallyfriendly electricity supporting Poland’s energy transition.

Efficient risk management system for long-term/strategic risk, encompassing also climate risk management allowing for risk categorisation, identification, assessment and management as well as plans for its mitigation.

Risk and description of risk factors	Mitigation
Regulatory risk related to changes in legal requirements concerning climate change and adaptation to the effects of climate change. The existing and increasing climate-related legal requirements may have direct and indirect impact on KGHM Polska Miedź S.A. This pertains to both European regulations as well as requirements at the domestic level, which will be effectively enforced. This may be materially impacted by the planned full implementation of the European Green Deal in domestic documents and climate/energy frameworks till 2030 and fulfilment of the EU’s climate neutrality objective by 2050. An incorrect interpretation or a failure to observe new regulations may potentially result in non-compliance with the law, exposure to court disputes or sanctions. New legal regulations may also cause interruptions in operations or the necessity to reorganize work and consequently may substantially impact the operations of the KGHM Group (among others, transition to the low-carbon economy, circular economy).	As part of the Corporate Risk Management process in the KGHM Group, each identified risk is assessed in terms of impact on Laws and Regulations – assessment of the compliance of occurrences with the applicable laws, the necessity to participate in proceedings before public administration authorities responsible for supervision and regulation and potential sanctions resulting from such proceedings. Having a consistent compliance system in the KGHM Group is an element of effective management as part of corporate governance through for example a more efficient response and readiness for regulatory changes, caring about reputation and building an ethical culture in the organisation as well as awareness raising and enhancement of the sense of responsibility for compliance among employees. Active cooperation with the academic environment, which issues opinions on changes to legal acts, and the on-going providing of positions and opinions with respect to numerous areas subject to legislative change (including as part of the membership of numerous organisations at the national and EU level). Taking preventive actions aimed at adapting to organisational, infrastructural and technological changes.
Reputation risk related to perception of clients and other stakeholders – how they view the activity of the KGHM Polska Miedź S.A. Group in the context of climate change. The KGHM Group is exposed to the risk of exposure to external factors involving the environment in which it operates and consequently, exposure to changes in the image of the organisation and its products or services. Risk of ineffective management of relations with stakeholders, which affects the willingness of the environment and the taking of actions towards the Group. Potential difficulties in attracting customers, employees, business partners and investors if the KGHM Polska Miedź S.A. Group’s activity is considered to be harmful to the climate. In extreme cases, the materialisation of this risk may lead to the blocking of development plans. The opportunity (positive risk) identified in this area is associated with investments in renewable energy, which support combating greenhouse gas emissions – an image- and market-related opportunity with respect to the industry, i.e. the image of a company caring for the natural environment and striving for limiting the global climate change (green energy / green copper / green KGHM); a change in the customer’s approach but also legislative changes in favour of KGHM Polska Miedź S.A.’s attitude.	Care and due diligence in identification of expectations and requirements of external stakeholders concerning the climate and environmental issues. Establishing commercial and business relationships with entities who declare an attitude of caring about environmental protection and compliance with existing laws in this regard. Increased awareness of climate change in the organization and improvement of communication with all stakeholders in this respect, among others through the higher quality of reporting on climate-related information after climate reporting was launched based on the 2017 Recommendations of the Task Force on Climate-Related Financial Disclosures.
Technological risk related to the technological progress towards a low-emission economy. The EU’s ambitious climate targets and the existing pressure on the implementation of new low-carbon solutions and the search for reduction of CO₂ emissions in order to achieve the approved emission goals may have a direct impact on KGHM’s activities. The need to make the necessary investments and/or a potentially sudden reduction in carbon dioxide emissions in a relatively short period of time may generate considerable costs and difficulties in adapting new solutions to the technology that is used currently. In the technology area an opportunity has been identified arising from increased consumption and capability to process a volume of copper scrap and copper-bearing materials by KGHM’s smelters and refineries, which results in improved efficiency of waste management in global terms in the context of resource use and longer copper life cycle – a change in the customer’s and the Regulator’s approach in favour of a circular economy and low-carbon economy.	Ongoing monitoring of policy changes intended to reduce CO₂ emissions and the potential tightening of regulations, analysis of market standards, technological innovations, opportunities for using alternative energy sources (RES). Taking pre-emptive actions to adapt to changes in the technological area. Since most of the technology is in early advancement stage, it is assumed that by 2030 KGHM will focus its efforts primarily on the continuation or launch of research and development work in selected areas, and on initiation of pilot projects. Full implementation of new innovative solutions, leading to achievement of the expected decarbonisation effects in the direct emissions area, will be effected in 2030-2050. The Climate Policy will be followed by the Decarbonisation Program of the KGHM Group, which will contain a detailed method for achieving the intended reduction targets and present all capital expenditures related to the implementation of GHG emission reduction measures. The Decarbonisation Program of the KGHM Group will be announced publicly.
Market risk associated with changes in demand for and supply of certain products and services Heightened expectations and awareness of stakeholders as regards climate issues may lead to increased operating and investment costs and, in extreme cases, to limitation of the business activity. Variable consumer requirements, which is also connected with paying attention to the manner of production, and not only to the quality and price of the final good. At the same time, KGHM points to the opportunity coming from increased demand for copper arising from the necessity to supply it to meet the needs of the low-carbon economy as a result of a higher level of electrification (through increased copper consumption for purposes related to manufacturing components for electrical vehicles and development of electromobility) and increased consumption of copper in power networks. A stable growth of the global demand for copper is expected by 2040. The forecast growth will be an effect of, among others, the dynamically increasing demand from industries associated with renewable energy sources.	Care and due diligence in identification of expectations and requirements of external stakeholders concerning the climate and environmental issues and consideration given to these issues in the long-term, strategic perspective. Ongoing analysis of technical and technological solutions, which satisfy stakeholder requirements concerning climate issues affecting changes in supply and demand.

Risk and description of risk factors

Mitigation

Regulatory risk related to changes in legal requirements concerning climate change and adaptation to the effects of climate change.

The existing and increasing climate-related legal requirements may have direct and indirect impact on KGHM Polska Miedź S.A. This pertains to both European regulations as well as requirements at the domestic level, which will be effectively enforced. This may be materially impacted by the planned full implementation of the European Green Deal in domestic documents and climate/energy frameworks till 2030 and fulfilment of the EU’s climate neutrality objective by 2050. An incorrect interpretation or a failure to observe new regulations may potentially result in non-compliance with the law, exposure to court disputes or sanctions. New legal regulations may also cause interruptions in operations or the necessity to reorganize work and consequently may substantially impact the operations of the KGHM Group (among others, transition to the low-carbon economy, circular economy).

As part of the Corporate Risk Management process in the KGHM Group, each identified risk is assessed in terms of impact on Laws and Regulations – assessment of the compliance of occurrences with the applicable laws, the necessity to participate in proceedings before public administration authorities responsible for supervision and regulation and potential sanctions resulting from such proceedings.

Having a consistent compliance system in the KGHM Group is an element of effective management as part of corporate governance through for example a more efficient response and readiness for regulatory changes, caring about reputation and building an ethical culture in the organisation as well as awareness raising and enhancement of the sense of responsibility for compliance among employees.

Active cooperation with the academic environment, which issues opinions on changes to legal acts, and the on-going providing of positions and opinions with respect to numerous areas subject to legislative change (including as part of the membership of numerous organisations at the national and EU level). Taking preventive actions aimed at adapting to organisational, infrastructural and technological changes.

Reputation risk related to perception of clients and other stakeholders – how they view the activity of the KGHM Polska Miedź S.A. Group in the context of climate change.

The KGHM Group is exposed to the risk of exposure to external factors involving the environment in which it operates and consequently, exposure to changes in the image of the organisation and its products or services. Risk of ineffective management of relations with stakeholders, which affects the willingness of the environment and the taking of actions towards the Group.

Potential difficulties in attracting customers, employees, business partners and investors if the KGHM Polska Miedź S.A. Group’s activity is considered to be harmful to the climate. In extreme cases, the materialisation of this risk may lead to the blocking of development plans.

The opportunity (positive risk) identified in this area is associated with investments in renewable energy, which support combating greenhouse gas emissions – an image- and market-related opportunity with respect to the industry, i.e. the image of a company caring for the natural environment and striving for limiting the global climate change (green energy / green copper / green KGHM); a change in the customer’s approach but also legislative changes in favour of KGHM Polska Miedź S.A.’s attitude.

Care and due diligence in identification of expectations and requirements of external stakeholders concerning the climate and environmental issues.

Establishing commercial and business relationships with entities who declare an attitude of caring about environmental protection and compliance with existing laws in this regard.

Increased awareness of climate change in the organization and improvement of communication with all stakeholders in this respect, among others through the higher quality of reporting on climate-related information after climate reporting was launched based on the 2017 Recommendations of the Task Force on Climate-Related Financial Disclosures.

Technological risk related to the technological progress towards a low-emission economy.

The EU’s ambitious climate targets and the existing pressure on the implementation of new low-carbon solutions and the search for reduction of CO₂ emissions in order to achieve the approved emission goals may have a direct impact on KGHM’s activities. The need to make the necessary investments and/or a potentially sudden reduction in carbon dioxide emissions in a relatively short period of time may generate considerable costs and difficulties in adapting new solutions to the technology that is used currently.

In the technology area an opportunity has been identified arising from increased consumption and capability to process a volume of copper scrap and copper-bearing materials by KGHM’s smelters and refineries, which results in improved efficiency of waste management in global terms in the context of resource use and longer copper life cycle – a change in the customer’s and the Regulator’s approach in favour of a circular economy and low-carbon economy.

Ongoing monitoring of policy changes intended to reduce CO₂ emissions and the potential tightening of regulations, analysis of market standards, technological innovations, opportunities for using alternative energy sources (RES). Taking pre-emptive actions to adapt to changes in the technological area.

Since most of the technology is in early advancement stage, it is assumed that by 2030 KGHM will focus its efforts primarily on the continuation or launch of research and development work in selected areas, and on initiation of pilot projects. Full implementation of new innovative solutions, leading to achievement of the expected decarbonisation effects in the direct emissions area, will be effected in 2030-2050.

The Climate Policy will be followed by the Decarbonisation Program of the KGHM Group, which will contain a detailed method for achieving the intended reduction targets and present all capital expenditures related to the implementation of GHG emission reduction measures. The Decarbonisation Program of the KGHM Group will be announced publicly.

Market risk associated with changes in demand for and supply of certain products and services

Heightened expectations and awareness of stakeholders as regards climate issues may lead to increased operating and investment costs and, in extreme cases, to limitation of the business activity. Variable consumer requirements, which is also connected with paying attention to the manner of production, and not only to the quality and price of the final good.

At the same time, KGHM points to the opportunity coming from increased demand for copper arising from the necessity to supply it to meet the needs of the low-carbon economy as a result of a higher level of electrification (through increased copper consumption for purposes related to manufacturing components for electrical vehicles and development of electromobility) and increased consumption of copper in power networks. A stable growth of the global demand for copper is expected by 2040. The forecast growth will be an effect of, among others, the dynamically increasing demand from industries associated with renewable energy sources.

Care and due diligence in identification of expectations and requirements of external stakeholders concerning the climate and environmental issues and consideration given to these issues in the long-term, strategic perspective.

Ongoing analysis of technical and technological solutions, which satisfy stakeholder requirements concerning climate issues affecting changes in supply and demand.