Risk Management and Strategy Mercuries Life Insurance uses the TCFD classification to assess the climate transition risk and climate entity risk for both investment and operational activities.
Investment and financing activities - climate transition risk assessment
In order to mitigate and adapt to the impact of climate change, the governments of all countries have declared the vision of net zero and strengthened the control power related to carbon emissions, including the EU's "Carbon Border Adjustment Mechanism (CBAM)" and revised "Climate Change Response Law" in Taiwan. Greenhouse gas emissions will be reduced through the carbon tariffs or charges, which may affect the cost or revenue of the investment object. Mercuries Life Insurance conducts the risk analysis for specific industries or investments, taking into account the policy and regulatory factors.
High carbon emission industry exposure
As shown in the figure below, at the end of December 2022, portfolio exposure to high-carbon industries accounted for about 6.03%, among which exposure to oil, natural gas and coal products (integrated oil industry, exploration and production) was the main exposure, followed by cement manufacturing (cement and aggregate).
List of high carbon emission industries
The proportion of stocks and bonds invested in high-carbon industries
High carbon emission industry investment exposure - stocks
High carbon emission industry investment exposure - bonds
Risk situation analysis of negotiable security transformation
Considering carbon emissions and analysis on temperature paths for climate scenarios, based on the climate scenario published by NGFS, and established by central banks and financial regulators around the world, the scenario analysis is conducted on the invested companies in high carbon emission industries. The operating costs increased by carbon emission tax under the scenarios of orderly transition (Orderly - Zero 2050) and hot house world (Hot House World - Current Policies) are evaluated respectively. Assuming that the target company did not take carbon reduction measures, the future carbon fee of the target company was calculated based on the greenhouse gas emissions in 2021 and the global carbon fee parameters for 2030 and 2050 in the Downscaling REMIND-MAgPIE 3.0-4.4 model.
The Company's bond investments in high carbon emission industries are mainly oil and gas. Under an orderly transition scenario, the carbon charge of target companies in oil and gas mining and coal products in the years of 2050 is estimated to be up to US $927.09 billion. The overall carbon charge for companies investing in high-carbon bonds will be US $944.01 billion.
Steel manufacturing is the main stock of high carbon emission industries. Under the orderly transition scenario, it is estimated that steel manufacturing may bear a total carbon fee of about US$12.46 billion in 2050. The carbon charge for the overall high-carbon stock investment would be US$14.3 billion.
High Carbon Emission Industry Investment Estimated Carbon Emission Tax - Current Policies Bond
High Carbon Emission Industry Investment Estimated Carbon Emission Tax - Net Zero 2050Bond
High Carbon Emission Industry Investment Estimated Carbon Emission Tax - Current Policies Stock
High Carbon Emission Industry Investment Estimated Carbon Emission Tax - Net Zero 2050 Stock
Operating activities - climate transition risk evaluation
Scenario analysis on the risk of operating activities transformation
The electricity consumption of each operation site in 2022 was counted, while carbon emissions were converted according to the carbon emission coefficient of electricity in 2021, and the potential financial impact of carbon fee imposition in the future was assessed through scenario analysis. According to the evaluation, as the Company belongs to the financial and insurance industry, and its main source of carbon emission is the power use of office buildings, so there is no significant increase in operating costs temporarily assessed. In the future, ISO14064-1 will continue to be adopted to check the carbon emissions among operation sites and promote energy conservation and carbon reduction measures to ensure that the operation can meet the regulatory requirements of the competent authorities.
Estimated Carbon Expenditure at Operating Sites - Current Policies
Estimated Carbon Expenditure at Operating Sites - Net Zero 2050
Response to the risk of operating activities transformation
The Occupational Safety and General Affairs Department will take the following measures to respond and manage the risk of operation site transformation.
Investment and financing activities - climate entity risk assessmen
According to the Intergovernmental Panel on Climate Change (IPCC) issued “Impact, Adaptation, and Vulnerability" report, human-induced climate change has led to more frequent and more intense extreme events, such as extreme rainfall. There will be widespread negative impacts on Nature and human, and possibly irreversible impacts. The Company conducts the risk analysis of real estate distributions, taking into account the extreme weather factors.
Analysis of risk situations of investment real estate and mortgage entities
Considering the carbon emission and temperature paths, the climate scenario analysis was conducted, and future flooding hazard risk was also estimated by referring to the "Taiwan Disaster Risk Map" of NCDR. The risk level (relative risk) of an area is evaluated by considering the hazard (the probability of extreme rainfall), the vulnerability (the extent of flooding under specific rainfall conditions) and the exposure (the higher the population density, the higher the exposure) for a comprehensively assessing the subject floor and the age of house to evaluate the results of scenario analysis on real estate. The entity context hypothesis contains the following elements:
- Risk factor of flooding: According to the "Taiwan Disaster Risk Chart" of the National Center for Disaster Prevention and Rescue Technology (NCDR), the future flooding risk is divided into Risk1~Risk5 (the higher the value, the higher the risk).
- Target floor: The risk coefficient below the first floor is 3, the second to the fourth floor is 2, and the fifth floor and above is 1.
- The target age of housing: The risk coefficient is 1for an age of housing more than 31 years, 2 for 11-30 years, and 1 for less than 10 years.
Risk assessment and classification are carried out according to the subject matter information. A comprehensive score (multiplied by three factors) of more than 35 is considered high risk, 11-35 is considered medium risk, and less than 10 is considered low risk. Only five of the investment properties held at the end of 2022 were high climate risk cases; mortgage cases are distributed in all counties and cities in Taiwan, among which about 53% of cases are assessed as low-risk cases, about 42% are medium-risk cases, and only about 5% are high-risk cases, distributing in Taipei City, New Taipei City, Taoyuan City, Hsinchu City, Hsinchu County, Nantou County, Taichung City, Changhua County, Chiayi City, Tainan City, Kaohsiung City and Pingtung County.
Risk assessment results of investment real estate entity
Risk assessment results of housing loan entity
Risk response of investment real estate and mortgage entity
The Real Estate Department and the Loan Department will take the following measures in response to and manage physical risks.
Operational activity - climate entity risk assessment
Entity risk scenario analysis of operating sites
According to the evaluation, the Company's operation sites are located in all counties and cities in Taiwan, and a total of 248 data are recovered. Among them, only 3 office work locations are assessed as high Risk, and one of them is located in the Zhongshan district of Taipei City, which belongs to the Risk 5 area defined by NCDR, and is located in a basement with a house age of more than 30 years. While other two are located in Jongli district, Taoyuan City, and belong to Risk5 as defined by NCDR. They are located on the first floor and the first floor of the basement, with a house age is over 30 years.
Formulate continuous operation plans to improve system recovery time in response to operational disruptions caused by natural disasters such as extreme weather; Regularly assess the impact of natural disasters on operations and make improvements based on the assessment results to reduce the risk caused by extreme weather events.
Results of entity risk assessment on operating sites
Risk response to operating sites
The General Services Department of Labor and Safety will take the following measures to respond to and manage risks in operation sites.