ESG risks

ESG risks – their identification and assessment – are a key element of strategic ESG management. This approach makes it possible to set courses of action in the social and environmental areas, assessing them in terms of effectiveness or possible risks and opportunities.

Effective and consistent management of risks in the areas of sustainability, i.e. social, environmental or governance, is a prerequisite for the sustainable development of an organisation, especially in such an important economic sector as energy. ESG risk management is currently crucial from the perspective of ensuring both the PGE Group’s resilience to change. Proper ESG risk management is also important from a financial perspective. Elevated levels of ESG risk can directly affect companies’ operational capabilities, costs and profits, as well as ratings based on ESG ratings.

The ability to identify and address risks plays an important role in governance and fits in with the expectations of not only investors, but also customers. And integrating environmental and social issues into the risk management framework is crucial to ensure the long-term sustainability and success of the company.

Identified risks and management options in the area of climate and environmental issues:

Global warming, changing precipitation patterns, rising sea levels and extreme weather events are increasingly posing serious challenges to the resilience of electricity systems, thus increasing the likelihood of disruptions. Climate change directly affects every segment of the electricity system: generation potential and capacity, heating and cooling demand, the resilience of transmission and distribution networks, as well as demand patterns.

The PGE Group is aware of the risks posed by climate change, mainly in the form of climate hazards related to temperature, precipitation and wind. The PGE Group’s key business activities undergo an assessment with respect to significant physical climate risks and their negative impact on operations, which supports climate change adaptation and enhances resilience to climate risks.

Significant climate risks were assessed, in terms of physical climate hazards (mainly related to temperature, precipitation and wind) that negatively impact the key operations of the PGE Group.

The assessment of climate risks related to physical hazards in the PGE Group was carried out for the current perspective and the long-term perspective, using scientific models describing possible climate scenarios, i.e:

RCP 4.5 – the optimistic scenario, which assumes the introduction of new technologies to achieve a higher reduction in greenhouse gas emissions than today; the increase in average global temperature will be around 2.5°C at the end of the 21st century relative to the pre-industrial era; and

RCP 8.5 – the pessimistic scenario, which assumes a continuation of the current rate of increase in greenhouse gas emissions, on a business-as-usual basis; by the end of the 21st century, the average global temperature will have risen by 4.5°C compared to the pre-industrial era.

Current perspective

The assessment of the impact of the physical climate risks was carried out for the current perspective.
Long-term perspective

The assessment of the impact of the physical climate risks was also carried out based on climate models, using climate scenarios (RCP 4.5 – optimistic scenario and RCP 8.5 – pessimistic scenario).
Mitigating measures
- Implementing measures to increase the resilience of electricity systems to climate change, for example:
  - Utilising more weatherproof solutions, e.g. in the form of underground cabling
  - Maintaining ongoing monitoring of the climate situation, including water levels in the areas at risk
  - Ensuring preventive management of key infrastructure elements affecting business continuity
  - Providing regular maintenance of the technical infrastructure
  - Taking out insurance against events related to weather phenomena
  - Using protective mechanisms, e.g. electric shock protection
  - Applying emergency response procedures
  - Ensuring thorough analyses of land for new investments

resulting from non-compliance of the PGE Group’s activities with the applicable environmental regulations in all aspects, in particular the standards for emission of pollutants to the atmosphere, water and soil

Current perspective

Risk that legal requirements relating to climate protection will not be met
Long-term perspective

Risk of tightening environmental restrictions related to
electricity and heat generation as well as mining activities
Mitigating measures
- Monitoring continuously environmental laws and regulations, with particular attention paid to:
  - the BAT Conclusions, IED Directive, ETS Directive
  - water and wastewater management
  - waste management
  - measurement of emissions
- Analysing interrelations between environmental aspects and activities of particular companies of the PGE Group as well as products and services offered by them (The list of environmental aspects together with the risks and opportunities analysis)
- Reducing interference with the natural environment:
  - adjusting installations to the requirements of the BAT Conclusions
  - using the most efficient solutions for wastewater treatment, flue gas treatment, water abstraction
  - working on a new concept for the utilisation of combustion waste and by-products
  - ensuring supply of coal with appropriate parameters (lower ash and sulphur content)
  - implementing an environmental management system allowing, among other things, the monitoring and supervision of major air pollutant (SO₂, NO_x, dust) emissions from individual installations

resulting from the consequences of inadequate water and wastewater management activities or the possibility of extraordinary events

Mitigating measures
- Developing emergency plans for floods
- Introducing changes to the business continuity plan (if necessary)
- Monitoring laws and regulations and ensuring timely compliance with new legal requirements
- Improving pollution control to comply with the conditions set out in applicable administrative decisions
- Improving infrastructure maintenance and, where necessary, carrying out required upgrades
- Taking preventive measures and failure prevention, ensuring compliance with the provisions of the equipment operating instructions

resulting from the modification of the emissions trading scheme (ETS), allowance price volatility
and exchange rate fluctuations

Current perspective

Risk related to uncertainty of future level of market commodity prices in the context of open positions of the PGE Group
Long-term perspective

Risk of fluctuations in macroeconomic indexes and prices of raw materials affecting the PGE Group’s operations
Mitigating measures
- Optimisation of generation assets with the development of production scenarios for updated electricity and CO₂ market parameters
- Monitoring of energy, CO₂, gas, coal and certificate markets as well as sectoral trends
- Monitoring of risk exposure, determination of risk limits and hedging strategies for trading activities

resulting from reduced generation capacity or interruptions in electricity production

Current perspective

Electricity generation volume risk
Long-term perspective

Risk related to technological changes
Mitigating measures
- Generation planning taking into account facilities failure rates and greenhouse gas emission limits
- System for real-time monitoring of the status and operating parameters of generation units
- Service agreements for efficient and rapid repair of breakdowns and failures
- Business continuity plans
- Qualified staff with required qualifications

resulting from the use of insufficiently tested new technologies and an insufficient level of competence in this field

Current perspective

Risks associated with the direction and process of investing
Long-term perspective

Risk related to technological changes
Mitigating measures
- Long-term development plan
- Investment-specific risk analysis
- Public consultations
- Cooperation with central and local government authorities
- Monitoring of expected available connection capacities for generation sources
- Safeguards in agreements with contractors
- Analyses of impact of installations on the environment

resulting from unattractive sales offers and poor customer service

Current perspective

Risks related to customer retention and acquisition
Long-term perspective

Risks arising from changing ways of electricity sales and offers development
Mitigating measures
- Customer needs surveys
- Differentiation of the product offer
- Customer satisfaction surveys
- Monitoring of products and prices offered by competitors
- e-commerce development as an opportunity to use additional ideas for implementing new product solutions
- Counterparty credit risk management system

resulting from adverse events and negative information published in the media, as well as from inadequate brand management and information policy in relation to the internal and external environment

Current perspective

Risks related to reputation and management of the PGE brand
Long-term perspective

Impact on PGE’s reputation is one of the criteria for assessing each of the long-term risks. Examination covers the extent of the impact on reputation and image and the strength of the impact that risk materialisation may have on these aspects
Mitigating measures
- Cooperation with the media and monitoring of the media environment, including social media
- Crisis communication procedure
- Assessment of effectiveness of communication channels
- Brand strategy and its monitoring
- Systematic internal communication
- Meetings between managers and employees
- Dialogue with social partners

Identified risks and management options in the area of labour issues:

arising from the consequences of companies’, employees’ and other persons’ non-compliance with occupational health and safety regulations and rules

Mitigating measures
- Inspections of the working environment
- Training of employees in occupational health and safety and provision of job-related instructions before an employee is allowed to work in a specific position
- Employing staff with qualifications and health conditions appropriate for the needs of the company
- Initial and periodic medical examinations
- Periodic assessment of the technical condition of buildings, equipment and installations
- Regulations governing the use of protective equipment and work tools

related to failure to reach an agreement between the companies’ governing bodies and social partners, which could lead to strikes/collective disputes

Mitigating measures
- Organisation of meetings regarding the market situation of the PGE Capital Group
- Meetings to present information on the manner and scope of planned changes
- Conducting employee surveys
- Ongoing analysis of trade union activities
- Dialogue with social partners

resulting in an undesirable personnel turnover

Mitigating measures
- Competitive remuneration system in comparison to other employers
- Regulations applicable to the recruitment process
- Employee development management
- Cooperation with secondary schools and universities providing education in relevant subjects
- Mentoring
- Training on the Code of Ethics

Identified risks and management options in the area of social issues:

relating to the possibility of material, personal or financial damage resulting from the core business of the companies

Mitigating measures
- Monitoring of technical condition of equipment and installations
- Inspections of the working environment
- Measurement of noise emissions and electromagnetic fields
- Use of protective measures that reduce threats to the environment
- Employee training
- Appropriate preparation of the workplace
- Periodic inspection of the state of security of facilities and individual assets

resulting from a possible lack of due diligence in the field of competition and consumer protection

Mitigating measures
- Use of judicial decisions of the Court for Protection of Competition and Consumers and opinions of the President of the Office for Protection of Competition and Consumers
- Compliance with internal standards on information marking
- Ensuring easy access to company regulations
- Employee training
- Verification of the legality of contracts
- Verification of existing internal regulations for possible abuse of the dominant position
- Legal consultations
- Monitoring of the regulatory environment

resulting from adverse events and negative information published in the media, as well as from inadequate brand management and information policy in relation to the internal and external environment

Mitigating measures
- Cooperation with the media and monitoring of the media environment, including social media
- Compliance with procedures for managing internal, external and crisis communications
- Assessment of effectiveness of communication channels
- Brand strategy and its monitoring
- Systematic internal communication
- Meetings between managers and employees
- Internal training for the management

Identified risks and management options in the area of human rights issues:

related to the possibility of material, personal or financial damage resulting from the actions of employees

Mitigating measures
- Training for employees and managers
- Whistleblower function – possibility to report irregularities observed in the organisation
- Shaping a friendly working environment, appropriate rules of social coexistence and respecting the dignity and personal rights of employees

resulting from possible commission of unlawful acts

Mitigating measures
- Work regulations
- Employee training
- Internal standards for reporting irregularities and providing information

Identified risks and management options in the area of anti-corruptions issues:

resulting from possible commission of unlawful acts

Mitigating measures
- The Code of Ethics of the PGE Capital Group
- The anti-corruption policy of the PGE Capital Group
- Employee training
- Monitoring of business activities to identify and explain incidents that are unusual for a reasonably run business
- An implemented fraud reporting system ensuring confidentiality of persons reporting irregularities
- Internal monitoring (compliance control) of the company’s processes and internal regulations
- Easy access to regulations concerning the functioning of the company (codes, rules, principles)
- Employees’ declarations of the absence of conflicts of interests

resulting from possible errors in the process of purchasing materials and services

Mitigating measures
- The purchase policy of the PGE Capital Group and the General Purchase Procedure of the PGE Capital Group
- The Code of Conduct for Business Partners of the Companies in the PGE Capital Group
- Obligation to comply with the provisions of the Good Purchase Practices and the Code of Ethics
- Analysis of the provisions of the Terms of Reference before their approval, in particular the conditions for participation and the General Purchase Procedure
- Communication and employee training
- Application of the system for the assessment and qualification of contractors
- Additional random verification of individual purchase procedures and the purchasing plan
- Exemption declarations by participants in procedures
- Documentation of the course of purchase procedures

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ESG risks

Identified risks and management options in the area of climate and environmental issues:

Physical climate risks resulting from climate change

Mitigating the risk of illegality of activities in the context of climate protection

Risks associated with water and wastewater management

Risk of impact of volatility of CO2 emission allowance prices

Risk of fluctuations in electricity generation

Risk of technological revolution

Risk of changes in customer behaviours and preferences

Reputational risk

Environmental protection risk

Identified risks and management options in the area of labour issues:

OHS risk

Social dialogue risk

Human resources risk

OHS risk

Social dialogue risk

Human resources risk

Identified risks and management options in the area of social issues:

Third party damage risk

Risk of infringement of consumers’ collective interests

Reputational risk

Third party damage risk

Risk of infringement of consumers’ collective interests

Reputational risk

Identified risks and management options in the area of human rights issues:

Risk of bullying and harassment incidents

Risk of discriminatory actions against employees

Risk of bullying and harassment incidents

Risk of discriminatory actions against employees

Identified risks and management options in the area of anti-corruptions issues:

Risk of fraud and corruption

Purchase risk

Risk of fraud and corruption

Purchase risk